Is the Bear Market Really Over?

Last week’s rally in the Nasdaq marked a 21% rise from its June 16th closing low and, according to widely-followed criteria, this signals the end of its bear market status. The gains occurred following news of a slight easing of inflation in July and, if we continue to see inflation drop, the bull market trade should gain further momentum. 

This is great news for growth investors, as many Technology and Retail stocks are well-priced after lengthy declines from their November peaks in price. Not all stocks have the criteria for a continued move higher, however, and below, I’ll review what’s needed.

My work centers around uncovering leadership stocks that go on to far outpace the markets, and it’s based on my many years working with William O’Neil, the founder of Investor’s Business Daily. A recent alert for subscribers to my MEM Edge Report was to purchase ON Semiconductor (ON) on July 20th, and it‘s a prime example of exhibiting the characteristics needed to outpace the markets.

DAILY CHART OF ON SEMICONDUCTOR (ON)

Below are the criteria that put ON on my short, but select, list of buy ideas, and I’ll continue to use these proven criteria to add more stocks as the markets trade higher.

First up, ON was trending higher before the Nasdaq broke above its 50-day moving average in late July. When searching for leadership names, relative outperformers during a bear market or correction will often go on to far outpace their peers.

Second, you want to make sure that your stock has solid growth prospects, as this will draw institutional investors who will bid the stock higher. ON was estimated to report 65% earnings growth for this year when we added it to our buy list.

Last, reported earnings and industry group improvement will help propel the stock higher. ON reported earnings on August 1st that were 113% greater than last year, with management guiding estimates higher due to expected growth. In addition, the Semiconductor group bullishly broke above its 50-day moving average the day we added ON.

The company’s very positive earnings report helped push the stock even higher. ON provides semiconductor components that are instrumental in the electrification of automobiles, which is a huge area of growth. In addition, the stock is trading at 15 times trailing 4-quarter earnings, which is another attractive characteristic.

ON has gained 18% since we added it to the MEM Edge List’s Suggested Holdings List 3 weeks ago. That’s 80% better than the Nasdaq, and we think it’ll trade much higher from here. As you can see in the chart above, the stock broke out of a 7-month base on volume today.

DAILY CHART OF NASDAQ COMPOSITE

As for the Nasdaq having its bear market label removed, I’m continuing to treat the current market uptrend with a touch of caution, with a break above the 200-day moving average providing further conviction. Most of the recent gains in the market have occurred due to rallies in beaten-down companies that have reported mostly tepid earnings reports. With over 90% of S&P 500 stocks having released 2nd quarter results, it will be left to economic data alone to propel the markets higher. As you can see in the chart above, any considerable rise in interest rates could easily stall the current rally in growth stocks.

Of course, continued reports of lower inflation, such as last week’s PPI and CPI data, could easily push us into a new bull market phase. For now, I’ll continue to put money to work as the markets climb the proverbial wall of worry — particularly high-quality names that are in a position to greatly outperform.

You can gain access to the other Growth stocks that are my MEM Edge Report’s Suggested Holdings List by using this link here. You’ll also gain broader market and sector analysis not found anywhere else. Use the link above to receive a 4-week trial of my twice weekly report for a nominal fee.

On this week’s edition of The MEM Edge, now available to watch on demand at StockChartsTV.com and the StockCharts YouTube channel, I review why select stocks are trading higher than the markets. I also highlight the rotation into small-caps and share ways to capitalize.

Warmly,

Mary Ellen McGonagle , MEM Investment Research