The Best Corner of the Market— It Will Be Where You Probably Aren’t Now

By Lynn Carpenter

Rick Pendergraft’s got it right. If you didn’t read what he said on Monday about your high odds of making 42% in the next six months, read it now. "If History Repeats Itself, You Will Want To Be In The Market For The Next Six Months". I totally agree with Rick’s direction and spirit because I’ve seen the same history. I might trim the expectation a bit, that’s all.

You ought to be in stocks now to catch the wave. And even if you don’t know exactly when the rebound will start, remember that it was the active investors who made 84% during the Great Depression, not the people who quit. "Can You Really Dare to Buy Low?... Most Can't, Everyone Should".

But make big returns in what? If the market is going to rebound, do you invest in the whole market, index funds, small caps, dividend stocks, what? There are complications this time around that mean some bargains won’t be bargains after all.

As it happens, I did some research on the subject recently. It was the lead idea in last month’s Rising Tide, and the stock pick got off to a fast 18% in its first two weeks.

In fact, the pick of the month before was also this kind of stock, and it did even better. And Rising Tide stocks got battered this past year just like everyone else. But stocks of this type are already doing better than the market since mid-November.

We can’t guarantee you a recovery market will take off with a rocket’s red glare on January 1, though I think we are in the earliest stage, already on the platform. History does strongly favor it. And, as I’ve learned, certain approaches are especially likely to do well in the beginning of a recovery market.

A “recovery market” is my own term to take in the rise off the bottom of the previous bull market until the point where the last, old high is met and you can truly celebrate a new bull market. This timing offers a clue. What does best in a recovery market is the opposite of what did best right before it—it’s the stocks that got thrown overboard long ago.

Here’s the cycle: When the market is falling and people decide it’s really a bear market, not just a normal blip, they flee to safety. At that point, standard value stocks and large caps tend to do well. Most writers will tell you it’s “defensive stocks.” I think it’s more the case that defensive stocks belong to the value and old-reliable-blue-chip categories that people find reassuring.

That’s a generality that fits all bear markets. In each of them, one or two other sectors may also do particularly well. For instance, this time water and biotechs did much better than most other groups.

In the depths of a bear market, this shifts again. When nearly everyone is discouraged, safety means cash. Either investors trade shares for cash investments like T-bills or they expect cash from their stocks in the way of dividends.

Then comes the recovery market, which begins quietly. And what excels then is a new, broad category, a different focus—growth stocks.