The Nasdaq has re-entered a bear market after last week's drop put this index 20.4% below its November high in price. At this time, the index is 2.6% above its next area of downside support, which is its February lows.
Below is a weekly chart of the Nasdaq, where I highlight the characteristics present just as this index turned bullish after its last two bear markets. I will continue to screen for these criteria and alert subscribers to my MEM Edge Report, just as they were alerted when the markets turned positive in 2019 and 2020.
WEEKLY CHART OF NASDAQ COMPOSITE
Until then, investors should focus on cultivating a watchlist, as moves out of a bear market can be quite powerful. For your watchlist, you'll want to focus on stocks that are exhibiting relative outperformance. In addition, you'll want the stock to be in a non-defensive area of the market, such as Staples or Utilities.
These are just two items to focus on when screening for stocks that lead a new bull market; there are also other characteristics that I'll review below.
The current selloff in the markets has been sparked by fears of aggressive action from the Federal Reserve, as they try to tame high inflation that's currently running at a 40-year high. This inflation is expected to last at least through the year-end, as the recent war in Russia has put further pressure on gasoline and food prices.
Earlier this year, I was asked to join other stock market experts and submit my top stock idea for this year. While the markets were in a much better position at that time, I'm sharing my response below, as it's on my watchlist, and I still believe this stock will head higher once downward pressure on the markets subsides. It's a stock that can outperform during periods of high inflation as, historically, companies that increase their dividends the most considerably have gone on to outperform the broader markets.
The company is IBM (IBM), which was my top pick. They offer a generous 4.7% yield, as well as awesome growth prospects. IBM reported their first quarter results last week, with earnings and revenue coming in ahead of estimates.
DAILY CHART OF INTERNATIONAL BUSINESS MACHINES (IBM)
The growth came on the heels of the company's pivot to a focus on the cloud and artificial intelligence, which is paying off. Investors responded by pushing IBM 9% higher for the week during a very difficult period for the broader markets.
The stock has additional characteristics that will make it an ideal candidate once the markets turn positive. In particular, there's the fact that it's trading at 17 times its past 4 quarters of earnings, which is well below the average of all stocks in the S&P 500. Lower multiple stocks fare well during periods of elevated inflation.
As the markets progress, my screening process for new leadership names for my watchlist may shift, as the economic backdrop evolves and different factors take on more importance. At the base of my screening, however, is a need for relative outperformance during the bear phase, coupled with strong growth prospects for the company. This combing for leadership names was how I was able to capture 12 of the top 14 performers emerging from the 2020 bear market, with half of the names going on to post triple-digit returns for subscribers to my MEM Edge Report.
If you'd like to be alerted to any shifts in market sentiment and which stocks are best positioned to benefit, try my twice weekly MEM Edge Report for 4 weeks for a nominal fee. Currently, there are pockets of strength that remain in place despite last week's selloff and you'll want to be aware of those as well. Use the link above to have access to insights that will guide you during these treacherous times for investors.
Next week, I'll be starting my 8-week mentorship, which will include eight 2-hour weekly classes followed by a 2 hour live trading session later in each week. The mentorship is designed to teach you how to outperform the markets during any period. There are a number of additional bonus offerings with this mentorship and you can read all about it here. Hurry and register, though, as there are only a few spots left!
On this week's episode of StockCharts TV's The MEM Edge, I review what triggered last week's sharp selloff and what to be on the lookout for going forward. I also identify pockets of strength, as well as ETFs to hedge against the current market.
Mary Ellen McGonagle MEM Investment Research