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Is it a bear market or a bull market?
Stocks just posted a three-day rally with 21% gains this week. It was the biggest three-day comeback since 1933. And some news headlines read . . .
“Stocks Are Now in a Bull Market.”
However, a new bull market can ONLY occur when stocks are up over 20% AND above the previous all-time high (click here to see how to win 100% of these trades).
It would be far more accurate to say we’ve seen a bull rally WITHIN the current bear market.
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So, what’s next for stocks?
Let’s start with a refresher on the three phases of a bear market.
Phase #1: Denial
This is when the market begins retreating. Stocks begin selling off and institutional investors and traders react quickly. They sell stocks and initiate short positions. The decline begins rather slowly and accelerates.
Phase #2: Concern
As the news gets worse – and stock prices are falling – more investors get concerned. They begin selling stocks and moving into safer assets such as cash, bonds or gold. Business conditions typically continue to deteriorate. And as the news gets worse, the selloff continues.
Phase #3: Fear and Capitulation
This is the final phase of a bear market. It’s when regular investors “throw in the towel.” They stop looking at their account statements. They never want to buy another stock, ever again. And the last thing on their mind is getting back into the stock market. Once this has happened, the market can begin its recovery.
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The Current State of the Bear Market
Right now, it appears we are in the middle of Phase 2.
Last week, I asked +1,000 investors what they’re doing with their investments.
44% told me they are BUYING stocks at a discount.
That’s right: nearly one-half of investors are taking cash and buying stocks at these levels.
I’ve asked this same question every week over the last three weeks. And I’m consistently hearing that 40% – 50% of investors are BUYING stocks as the prices fall.
This shows me that we have not yet entered Phase 3 of a bear market. And therefore, there will be more rocky days ahead for the stock market.
During a bear market, stocks typically “bottom out” in a process. This includes making new lows and then re-testing those new lows. It’s unusual to see the market hit rock bottom and immediately bounce back.
Frankly, I hope that Monday’s low was the rock bottom of this stock market crash. Yet history and investor psychology tell me that the market will re-test Monday’s low in the coming weeks.
It would be a bullish sign if the S&P 500 finds support at the 2,220 level.
The market will bottom. And when it does, we’ll begin buying stocks at a deep discount. However, it seems like we’re not quite there yet.
That’s why it’s crucial that you protect your wealth. Keep your powder dry. And make trades that let you profit – even when stocks drop again.
Yours in Health & Wealth,