By Dr. Steve Sjuggerud
Trying to make money as the market goes down is difficult, but under the right circumstances, it is possible. For most people, it’s not worth even attempting.
In short, making a bet that stocks will fall goes against the grain. Thanks to earnings and inflation, stocks have an inherent upward bias, particularly in the U.S.
The market does crash by 40%-plus from time to time. Stocks fell 57% from 2007 to 2009. And the stock market dropped 49% from 2000 to 2002. But these kinds of spectacular falls are the exception, not the rule. They’re hard to time just right.
Today, I’ll share with you when the time is right.
If you’ve read my work for any amount of time, you know my investment prism – I want an investment that is 1) cheap, 2) hated, and 3) in the start of an uptrend. I always want to make investments that are good values… that most investors aren’t interested in… and that are trending up in price.
That’s the ideal setup for an investment to go up. If you see the opposite setup, then you have a recipe for lower stock prices. We need to look at both the trend and value to find the best time to short stocks (to bet on lower prices).
The simplest way to think of opportunity in the stock market is to think of it in four different states, based on trend and value.
The easiest way to visualize this is the graphic below. Take a look…
This is simple. The market has four distinct states based on trend and value. (Thanks to our good friend Mebane Faber for coming up with the simple “four states of the market” principle.
Through testing dozens of different systems to determine what REALLY works, we found that each state of the market leads to significantly different returns. Here are the basic states and how we want to be invested in each: 1. Cheap and in an uptrend – We REALLY want to own stocks. 2. Expensive and in an uptrend – We keep owning stocks despite valuations. 3. Cheap and in a downtrend – We’re not long OR short. 4. Expensive and in a downtrend – The only time we want to bet against the stock market.
There’s only one state of the market in which you’d want to bet against stocks… And that’s when they’re expensive and falling in price.
Today, stocks are somewhat expensive. But they’ve rebounded from their August lows and are NOT in a downtrend. That means we’re not in the “red” mode right now… which means shorting stocks today is a bad idea.
Personally, I’m still bullish on stocks. And I believe we could see significant gains over the next 18 months in what I’ve been calling The Melt Up.
Stocks will certainly fall at some point. And when we finally fall into the red in the box above, we’ll bet against some stocks for the first time in a very long time.
We’re not there yet. But now you know the principle for success.
Don’t bet against stocks until we’re in “the red.”