Here’s the thinness to navigate a rotating bear market

The cycle of bear and bull markets is inevitable, but each cycle has unique characteristics. Understanding these characteristics gives you an edge in achieving superior returns.

One of the most notable and most important features of the current corrective cycle is that it has been highly rotating and uneven. Many stocks topped out in February 2021 and were in long, arduous downtrends. The big indices and heads haven’t started to get under pressure until recently, and we still don’t have technical bear markets for the S&P 500 and Dow Jones Industrial Average.

By comparison, the bear market in 2020 was very coordinated and happened at record speed. It was due to the sudden appearance of the epidemic. The current bear market had more complex catalysts, primarily a tighter Fed, brisk inflation, supply chain issues and heightened concerns about economic growth.

The biggest mistake people make in the current market environment is assuming that the S&P 500 or worse yet, the Dow Industrials, is a reversal of the entire market. The truth is that these indicators are very deceptive and do not reflect the action in the majority of stocks.

A good example of this is the conditions that led to the current market rebound. While indices were hitting new lows, the number of individual stocks that were hitting new lows was dropping rapidly. This disparity was a clear indication that many secondary stocks that have been under pressure for over a year have finally found support and are ready to bounce back. This bounce has started to gain some steam over the past couple of weeks after the number of new lows hit an astonishing 3,000 names.

The crucial point here is that the market corrects in a circular fashion. I referred to it as a hidden bear market for a very long time because it was hidden by indicators. It is very likely that we will see a hidden bull market in market areas now as indicators struggle.

There will be times when the action is highly correlated with all stocks moving in tandem, but look at the charts of individual stocks and compare them with the indexes charts. Those names that show relative strength and better production patterns are the ones to focus on while indexes do something else.

You don’t have to worry about indexes. Monitor stocks and individual sectors and track new lows and widenings. This is where the opportunities lie.

We’ve got some follow-through momentum at first, but it’s temporary. Trading is often thin and has a positive bias before the three-day weekend, but it can be very random. I am looking for more upside but will manage positions tightly and take some profits to consolidate.