2Bear Market Game Plan

ContentsOverview 3

Strategic Lesson #1: Crucial Warning Signs the Bear is Coming 4

Strategic Lesson #2: Four Bear Market Blunders You MUST Avoid 6

Strategic Lesson #3: Key Actions to Make the Bear Pay YOU 7

Strategic Lesson #4: Preparing for the Return of the Bull 8

Wrapping Up the Bear 11

What to Do Next 12

3Bear Market Game Plan

OverviewAre you ready for the next bear market? I mean really ready.

Do you know how to spot the bear coming and what to do before, during, and after he is unleashed on your portfolio?

This special report will prepare you not just to survive a bear market, but to actually thrive in the midst of it!

How? By giving you a solid understanding of The Bear and his dynamics – so that you can act decisively and even make wild profits during the 40% stock slide while most investors scream for mercy, or just walk around in a zombie daze.

In addition to giving you the telltale warning signs and a strong action plan, I will also tell you what NOT to do – plus how to eventually capitalize on the death of The Bear while all around you shell-shocked investors have thrown in the towel.

Confident knowledge and strategic plans are the weapons you will learn to master so that you can defeat The Bear’s attempt to maul your portfolio.

Join me now for the 4 most-important strategic lessons you will read this year…

4Bear Market Game Plan

Strategic Lesson #1: Crucial Warning Signs the

Bear is Coming

Economic Slowdown Points to RecessionThis is the primary cause of a bear market because without fundamental economic momentum, there can be little earnings momentum for companies. One key marker of past recessions has been an inverted yield curve, when short-term rates rise above the middle part of the curve from 2 to 10 years out.

Even a slowly “flattening” yield curve, which suggests the probability is increas-ing for an “inversion,” can be a warning sign of economic trouble ahead. When money gets tight, but investors are still piling into long-term Treasury bonds, it doesn’t say good things about the outlook.

Two other economic signposts to watch are the ISM surveys (Manufacturing and Services) slipping below 50, the expansion/contraction dividing line, and Retail Sales going negative on a year-over-year basis for two months in a row.

This ISM data is essential to watch because it tells you about the “risk appetite” of America’s purchasing managers, and thus how corporations view the health of the economy and its investment opportunities. And the consumer cutting back on spending will show up quick and harsh in the Retail Sales numbers if the economy and job market have taken a turn for the worse.

I take these data points every month and calculate my own back-of-the-enve-lope “recession probability.” For my money, I’m “concerned” when my reces-sion probability gets over 20%. And I’m really worried when it gets over 40%. Triggering these levels will find me paring back stock market exposure quite a bit, possibly even going Net Short in the latter scenario.

More on going Net Short in Strategic Lesson #3.

5Bear Market Game Plan

Valuations Get BubblyBull markets don’t die of old age or go out with a whimper. They tend to go out with a bang of euphoria as everybody and their brother are buying stocks with irrational exuberance.

The last six bull market tops saw the S&P 500 trailing 12-month (TTM) P/E ratio hit an average peak of 30 times earnings. I doubt we get that high again after the lessons learned in the two bear markets of the last decade, but it’s certainly still possible.

What I’ll be watching is a TTM P/E level of 20 and higher. For example, if the S&P earned $125 in 2015, an index level of 2300 would be only 18.4X. But if the index moves to 2500, that’s a 20X market multiple.

This is a time to at least be on the lookout for signs of market mania where too many stocks are sporting P/Es of 25 and higher.

Market Trend and Breadth Throw in the TowelThere are two simple technical measures of market health: trend and breath. While the economy, earnings, and P/E multiples will give early clues about the bull market getting weak, stock breadth often gives early warning signs of trouble and longer-term trend markers can confirm them.

Market breadth is all about measuring how many stocks are participating in the rally, or not. A very easy way to watch this is to keep tabs on the NYSE Composite, our broadest stock index, and the Russell 2000 Small Cap index.

If either of these stay below their 200-day moving average for a quarter and/or head towards a 20% correction, trouble is probably brewing. This will also manifest in the new highs vs. new lows and advance/decline data rolling over.

And a simple way to watch the longer-term stock market trend is to plot the 20 and 40-week moving averages on the S&P 500. Below is a 10-year chart where I put a black dot on the bearish cross of these two moving averages in December of 2007.

This long-term trend change indicator has worked with a high degree of accu-racy for over 50 years. Yes, there will be false signals as in 2010 and 2011, but overall it is a key warning of the loss of price momentum that we haven’t seen

6Bear Market Game Plan

during the terrific bull run since 2011.

Strategic Lesson #2: Four Bear Market Blunders

You MUST Avoid

Even if you correctly detect the onset of The Bear, you’ve only just begun to prepare for a battle with him. Let me tell you where most people go wrong, making common mistakes even after they’ve been warned and informed. Here are the four most common blunders that you must avoid…

Hope It’s Just a Correction to BuyThose who ignore the warning signs of The Bear are often in denial. And they are applying a fatal strategy of hope.

Freeze in Fear as 40% of Your Money DisappearsPossibly worse than the “strategy of hope” is becoming frozen in fear during those big market declines that tend to mark the start of The Bear’s first few weeks. If money is tied up in high-beta growth stocks, plan on losing 50-60% of your portfolio.

7Bear Market Game Plan

Downgrade to “Defensive” Stocks and Still Lose 20%Some investors have a plan to shift out of high-beta growth stocks and into sectors like Utilities and Consumer Staples. The trouble is, even these areas can burn your money just at a slower pace than more aggressive stocks.

Run to Cash and Earn Virtually Nothing Finally, a small percentage of investors have seen this movie before and they liquidate stocks and shift it to cash as their only safe choice. Obviously, playing it safe like this can preserve your wealth, but you won’t get ahead.

What if you could take advantage of the folks making the first three blunders and ride The Bear to exceptional returns of +20% to +40%?

That’s what the next lesson is all about.

Strategic Lesson #3: Key Actions to Make the

Bear Pay YOU

Sell, Sell, Sell Right away, once The Bear is confirmed, you want to finish the process of cashing-in the bull market winners you still hold. Of course, the dead weight and losers should already be gone because, as you probably know, the later stages of a bull market have little tolerance and few rewards for all but the most fundamentally-strong stocks.

Sure, some stocks will still rise during The Bear. But the odds of you picking the right ones are slim. No sector or industry is safe when institutions go into sell mode on recession fears.

Long story short, sell all your stocks to avoid future losses.

8Bear Market Game Plan

Get NET SHORT and Ride the Bear to 40%+ ProfitsThe way to play The Bear is to grab inverse index and sector ETFs. This is the way to essentially make gains by whatever percent the market goes down.

Bear markets, on average, see a 34% decline in the S&P 500. So if you time this approach well, you could come out with a 30-40% gain.

Those of you who are more aggressive can consider leveraged inverse ETFs that offer you 200% and 300% exposure. Meaning you could potentially make 2-3 times more than the approach noted above. (Obviously this increased poten-tial reward comes with increased risk. So this approach is only for the most bold amongst you).

Learn to Short Stocks Using the Zacks Rank Using inverse index ETFs, like the approach above, is a simple and profitable approach. However, when you play broad market indices like the S&P 500 or Nasdaq, you end up with just average market returns. So now let me share with you an alternative, and potentially more profitable approach.

Shorting the stocks that will go down the most will create the most profit for you. Gladly it is not too hard to spot those stocks with the Zacks Rank as your guide. Just focus your attention on the worst 5% of the stock universe that are Zacks #5 Rank (Strong Sells). Broadening out your search to Zacks #4 Rank (Sell) stocks will also yield outsized gains.

Note that full access to the Zacks Rank for all stocks can be found in our Zacks Premium service. Learn more here

Strategic Lesson #4: Preparing for the Return of

the Bull

How to Spot the Bottom Each recession and its bear market are always a little different. So you have to look at what caused them to see what might bring us out. In the 2008-2009 crisis it was all about housing and the banks. Once the Fed got behind

9Bear Market Game Plan

programs to shore-up those two areas, investors regained lost confidence. And economic data points started to improve.

If an inverted yield curve helped forecast a recession -- or tipped us into it -- then when the Fed gets the reins back and reintroduces low, accommodative rates we can start seeing business confidence recover.

Looking at all these fundamental data points is a bit like being a weather forecaster. You don’t have certainty, but if you put together a picture of 2 or 3 positive forces and compare them to past recoveries, you can begin to see the seeds of a new expansion and bull market taking root. And keep in mind that the average bear market only lasts 13 months.

Finally, pay attention to the small and mid-cap stocks. When those groups get oversold to dirt cheap valuations, they will begin to rally hard off of the bottom before everyone has figured out the economy is turning.

This “technical weather” is a sign of market breadth returning and money flowing into valuable businesses that most investors were treating like they were going out of business. But the smart money knows the cycle will turn up again and they know which businesses will survive and thrive in a leaner econ-omy.

Remember: stocks will begin to take off again before all the economic data shows up to prove they should. And measures of market breadth, combined with the “fundamental weather,” will tell you when it’s time to load up and push the gas pedal down.

Shifting Gears Back to the Long SideOnce you have identified the end of The Bear, it’s time to jump into action again with 2 primary objectives:

1. Take Profits on Bearish Positions

If you used any inverse ETFs to capture bear market profits, be sure to use a trailing stop to lock in some of those gains, especially when the “turn-around”

10Bear Market Game Plan

conditions just mentioned above are showing improvement. Plus those of you who decided to use the Zacks Rank to short stocks should now cover those positions to lock in gains.

2. Get Long Zacks #1 Rank Stocks

And when you have all those conditions -- Fed support, economic stability, positive EER, and market breadth – then you really want to start using the Zacks Rank to pick fundamentally superior stocks. The more #1 and #2 Ranked stocks you own, the higher your potential gain.

You can even use bullish leveraged ETFs for indexes and sectors to get long exposure quickly when you are not sure what stocks you want to buy yet. This is what institutional fund managers do all the time, whether they are just buying the SPY and IWM, or their bullish 3X leveraged versions UPRO and TNA.

Accumulate Stocks and ETFs When Fear and Doubt Still ReignThe bottom line is that you want to have a plan ready to anticipate the market turn and pull the trigger on the long side again. And you don’t need to catch the bottom exactly to profit hugely when the bear is over.

If you have any doubts about that, just look at this chart of the strong rallies in 2009 and 2010 when many investors stared in disbelief as the market recov-ered so strongly.

11Bear Market Game Plan

By the summer of 2009, I started calling it “the bull train you can’t catch” because investors didn’t believe stocks were or could come back. They would just wait for a pullback that never came. It’s times like this when you need to be bold because that’s when the big profits are made on being early.

Wrapping Up the Bear

We’ve covered a lot of ground here in this report. I’ve made all this knowledge and all the action steps sound simple, but they are not necessarily easy.

As any professional investor will tell you, preparation and planning are more than half the battle to win in the markets over the long run.

There are no perfect investors with flawless timing who grab the exact top and the exact bottom of big market cycles. Our goal is to use our knowledge and strategies to catch the bulk of The Bear so that we (1) avoid steep losses, and (2) maximize gains to profit from the Bear.

And you MUST do both of the above to have (1) the cash, and (2) the confi-dence for buying at the bottom and doubling, tripling, or even quadrupling your wealth again.

While other investors are crying at the bottom, you’ll be smiling when you learn to master these 4 strategic lessons as part of your “bear market game plan.”

See you at the top, and the bottom… smiling all the way.

12Bear Market Game Plan

What to Do Next

Move yourself way ahead of the crowd when it comes to being prapared to tackle any market environment with the following:• As part of this free report, you will now receive our free daily e-newslet-

ter, Profit from the Pros. It’s the perfect way to continue the conversation about when the next Bear knocks on our door. That’s because each morn-ing, Executive Vice President Steve Reitmeister will summarize the market, what it means for investors and what to do next. Plus you get links to arti-cles featuring some of our top stock, ETF and mutual fund recommenda-tions. Be sure to look for it in email inbox before the markets open every day.

• Now you should bookmark our homepage to take advantage of one of the most complete investment websites around. Go there now:

www.zacks.com

• Even better, get all Zacks’ private buys and sells through our Zacks Ultimate program. Watch our trades and market insights from all of Zacks’ private portfolios from growth to value to momentum stocks, from insider moves to big earnings surprises, from options to ETFs, even trades EVP Steve Reitmeister makes in his personal account, and much more. This see-every-thing arrangement is unique: one month, one dollar, not one cent of further obligation.