Don't Get Burned by Bear Market Rallies

Editor's note: In today's Weekend Edition of Empire Financial Daily, we're continuing our series of insights from our friend and colleague Dan Ferris at our corporate affiliate Stansberry Research... Over the past week, we've been sharing warnings from Dan about what investors could be facing as this market unfolds. As regular Empire Financial Daily readers […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily Weekend] Editor's note: In today's Weekend Edition of Empire Financial Daily, we're continuing our series of insights from our friend and colleague Dan Ferris at our corporate affiliate Stansberry Research... Over the past week, we've been sharing warnings from Dan about what investors could be facing as this market unfolds. As regular Empire Financial Daily readers know, we're more optimistic about the market's prospects... But regardless of where stocks head next, investors would be wise to follow Dan's advice to "prepare, don't predict." In today's essay, Dan has words of caution regarding rallies in the midst of a bear market... --------------------------------------------------------------- Don't Get Burned by Bear Market Rallies By Dan Ferris --------------------------------------------------------------- [Warning: Massive supply crisis ahead... ACT NOW]( Even as inflation continues to cripple investors, and the economy heads into a recession... demand for one critical element is set to soar. In fact, some countries have already begun stockpiling it to get ahead of the curve. The last time supply and demand of this key element got slightly imbalanced, savvy investors could've made 30 times their money in less than six years. Before you buy a single share of stock to take advantage of this event, [see what's causing this massive shift right here](. --------------------------------------------------------------- 'Now what?' The S&P 500 Index hit a new two-year low earlier this month. Since then, stocks have risen about 8%. And you might be asking yourself what's next... My regular readers know that I normally avoid this type of question. I hate the whole idea of basing an investment strategy on trying to predict the future. As I've often said, it's better for investors to prepare for the future than try to predict it. I'm unlikely to change my mind about that. But in today's essay, we'll look at some historical data. As you'll see, I believe it can help you prepare for a scenario that has broken too many investors – and avoid a trap that's becoming more dangerous by the day. History can be an excellent guide to the future... That's why I often refer to past market cycles as guides to understanding the present. I recently saw two interesting charts of bear markets from two key historical eras – the dot-com bust from 2000 to 2002, and the great financial crisis from 2007 to 2009. Researchers at financial-services company Piper Sandler (PIPR) looked at the number and size of bear market rallies from both eras. And the results reveal an intriguing trend... Piper Sandler identified six bear market rallies in the dot-com bust and five rallies during the Great Financial Crisis. In comparing the two sets of data, a striking pattern emerges... The bear market rallies later in the cycle – toward the bottom of the table – were noticeably larger than the initial ones. Investing is an art, not a science. So I'll just give you my artistic interpretation of the earlier rallies in each bear market... The early rallies were small for a simple reason. In each bear market, investors had become indoctrinated into being bullish. They were used to buying every dip for several years leading up to the top. So in the start of the downturn, Evil Mr. Market didn't need to work hard to entice stubborn bulls back in before punishing them again. As a result, the early bear market rallies were shallow. But after burning investors too many times, Evil Mr. Market had to work harder... The later rallies needed to be larger in order to keep luring in beleaguered, increasingly bearish investors – before crushing them again. Sooner or later, investors capitulate. Evil Mr. Market gets the best of them. And many folks give up on stocks for years. That's when stocks finally hit bottom. --------------------------------------------------------------- Recommended Link: [The single best place to put your money right now (not gold)]( If you'd tapped into this "account" during one of the worst times to invest in history... You could have set yourself up for 796% gains and trounced the S&P 500 in the process. Today, investors are flocking to this "account" again, as the market continues to fall. It's the perfect time to tap into this opportunity. [Check out our full briefing right here](. --------------------------------------------------------------- Bear market price action is characterized by a series of lower highs and lower lows... Without getting into technical gobbledygook, I imitated Piper Sandler's method of measuring bear market rallies to see what has been playing out this time. Here's what that looks like... I don't think it's reasonable to expect all great bear markets to be identical. History rhymes more often than it repeats, after all. That said, it certainly appears to be rhyming today... Several times this year, investors were fooled into thinking the bottom was in. We've even seen some bigger rallies already – including the 11% climb in March and the 17% run-up that began in June. However, importantly, we haven't yet seen a bear market rally of 20% or more. I don't do predictions, but I like to understand risks... and prepare for a wide set of outcomes... And today, we need to consider the risk that this bear market will play out similarly enough to the most recent two bear markets (not including the one-month crash due to COVID-19 in early 2020). If so, we could see more bear market rallies to come... and a lot more pain for investors who fall for Mr. Market's tricks. Our two historical episodes suggest investors who had reaped big gains for years behaved a certain way when the trends went into reverse. And human nature being what it is... I believe folks will repeat those behaviors this time as well. It's like a moth flying through a flame again and again. So if I'm right, you'll need to know what to do about it... Most folks should focus on survival and adopt my "prepare, don't predict" mantra. If you've done that, you're probably following the basics of a solid defensive strategy... You're probably already selling garbage assets, holding plenty of cash, holding gold and silver, and continuing to hold great businesses for the long term. The recent rally we've seen changes nothing. Stay the course – steady as she goes. Regards, Dan Ferris October 29, 2022 Editor's note: It has been a painful year for investors. But according to Dan, the worst may be yet to come. In short, he believes the biggest mega-bubble in stocks in history is about to burst... and what comes next will surprise most Americans with money in the market – potentially ruining the retirements of millions. Get the full story – and what Dan says to do to prepare – [right here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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