How to weed out a solid stock during a bear market

For this article, I’ve picked Etsy as an example of a solid stock to look out for during a bear market. Just a brief introduction; ETSY (Etsy.com) is an e-commerce business that connects buyers with sellers of handmade/vintage items, as well as craft supplies. Products listed on its website, Etsy.com, ranges across jewelry, clothing, furniture, toys, and more. As of today, Etsy receives majority of its sales from the USA and Canada with plans to expand its service into other continents in the near future.

Why is ETSY a solid example for this?

While a company’s fundamentals may contribute plenty to how its stock value performs, the price action on its chart is equally as important. There are times when we, as retail investors, find ourselves clueless as to why a stock is suddenly bullish or bearish. This is most likely due to insider trading and/or institutional investors moving a huge amount of capital in or out of that stock. And this is where technical analysis of its chart comes in — studying a stock’s price action to determine if a large enough volume of capital is flowing in or out so that you can make a decision in the early stages of a bull rally or correction.

And for this, I’ve picked ETSY (a stock which I’m invested in) as an example where large volume of institutional capital has been flowing in during early September 2021. Below are both the daily charts of ETSY vs the S&P500 (SPY) as of 23rd September 2021:

ETSY daily chart 23rd Sept 2021.
S&P 500 (SPY) daily chart 23rd Sept 2021.

The first chart belongs to ETSY while the second one belongs to SPY. So, why am I comparing ETSY to the S&P500?
It has been historically proven that most of the time when there’s a sell-off in SPY, majority of stocks on Wall Street will be in the red, too. Especially when there has been more than a week of heavy selling volume on SPY. While some investors will choose to stay out of the market until the selling slows down and the buying volume picks up, there may be a few stocks that will outperform the SPY during its sell-off period. And that’s a good sign for said stocks.

As seen in the ETSY chart above…
Item A: Outlines a very bullish trend that has been building an upward momentum with majority of its daily candles in the green while the red candles are lesser and shorter. It even broke above ETSY’s USD210 resistance level without much effort and converted it into its current support (and has proven to be strong). Also, it has been able to stay above the EMA20 (red) line and is now testing its USD224 resistance.

And when you compare ETSY vs SPY…
Item B (on both charts): For 2 weeks straight since 7th September 2021, the S&P500 (SPY), QQQ, Nasdaq (NDAQ), and Dow Jones (DJI) has seen heavy selling volume across the board. Most stocks on Wall Street struggled to fend off this bearishness and followed the downward momentum.

On the other hand, there were a few stocks that were resilient towards this sell-off in the general market, and even went on to form solid green candles on its daily chart. One example of this is ETSY. While SPY was on a downtrend for two weeks in a row, ETSY managed to stay above its USD212 support and even tested its USD224 resistance while most of the market were breaking support levels. This alone shows that there’s heavy buying volume confidently pouring into ETSY. Not to forget, this was happening during a period when there were bearish news such as inflation fears, tension between China vs USA, global supply chain struggles, etc. For a stock to be bullish during a period such as this is definitely good news for its investors.

Takeaway

ETSY is just one of many examples of resilient and/or bullish stocks that you can look out for during a bear market. However, this doesn’t guarantee 100% that the stock will continue to be just as bullish in the long run. As investors, we should do our homework into ensuring that our investment meets the basic criteria of a solid company so we can be more confident that said company will have a high chance to survive through a bear market and come out on top in a bull market. Here’s what satisfies my criteria of a solid company to invest in:

(1) it has a strong moat vs its competitors
(2) its business is inflation-proof or has a history of overcoming inflation fears
(3) it has been beating earnings estimates for the past 4 or more earnings calls
(4) its management is known to be solid and is good at handling PR matters
(5) isn’t a penny stock (low trading volumes in a stock will allow for pump and dump schemes)
(6) and of course its stock’s chart needs to be in a bullish trend as described earlier on in this article.

At the end of the day, we’re in the stock market to invest in great companies. Thus, with ETSY’s bullish scenario as explained above, investors should only pick great companies that meets the above mentioned criteria, and also it exhibits a similar bullish scenario during a bear market.

Bear Market Around The Corner?

A tweet by veteran trader, Mark Minervini, on warning signs that a market correction is coming to the US stock market.

The US stock market has seen heavy selling volume during the first week of September 2021. This is due to a combination of post-earnings season profit-taking, unfavorable economic indicators coming out of the US and China, rise in Covid-19 cases in developed countries, and more. As advised by Mark Minervini on his Twitter post (shown above), it is currently safer to take profits if you have any, and lighten or close your positions if you recently got into a trade. If you’re not doing any short selling it is best to have capital on the sidelines while you wait for the selling and downward trend to fade away.

What is the gameplan after this market correction is over?

If you’re doing mid to long-term trades, the first thing to look for are trades among megacap stocks that have strong financials and/or ETFs like S&P 500 (SPY), QQQ, or Nasdaq (NDAQ). Growth stocks such as Apple (AAPL), NVidia (NVDA), Shopify (SHOP), and more, tends to go on a bull rally whenever the overall market is recovering. I’ll post an update when there are signs that the selling has slowed down and the market in general are recovering. Until then, remember to take profits and protect your capital during a market correction.