Money can be made in bull markets, but fortunes are made in bear markets.
Thus is because the U.S. stock market has a strong upward bias. Over time, it goes up. Bear markets happen. But they always turn into new bull markets. Those new bull markets always push stocks to new highs. And the biggest gains in those bull markets always happen in their earliest stages – when bear markets end, and bull markets begin.
To test this idea of “fortunes are made in bear markets,” we ran an analysis that counted the number of “fortune-making” stocks in any given year and contextualized those numbers with trailing market returns. We defined a “fortune-making stock” as a stock that rises 10X in any given year.
The idea is that if fortunes are indeed made in bear markets, then the number of 10X opportunities in the market should soar right after bear markets, or right after stocks crash.
This is exactly what tends to happen.
As it turns out, the number of stocks that rise 10X in any given year is about two to four. Basically, in a “normal” year, around three stocks rise 10X in value that year. You have three opportunities to 10X your money.
But in the years after the stock market crashes, that number grows exponentially.
In the wake of the COVID-19 stock market crash, the number of stocks that rose 10X soared to 25 in 2020 and 17 in 2021.
In the wake of the Great Financial Crisis in 2008, the number of stocks that rose 10X soared to 25 in 2009.
After the Dot-Com Crash of 2000-2001, the number of stocks that rose 10X hit six in 2002, 13 in 2003, and 10 in 2004.
In other words, our analysis suggests that the number of 10X opportunities presented in the stock market any given year tends to soar in a bear market. Remember: If all these stocks soared 10X in 2009, then that means the investors who bought those stocks in 2008 were the ones who scored those 10X gains.
The data proves the saying to be true: Fortunes are made exactly during times like the one we’re in today.
The End of the Bear Market May Be Near
Fortunes are made in bear markets – when those bear markets turn into bull markets. Fortunately, we appear to be turning the corner into a new bull market right now.
Stocks are rallying, with the Dow Jones, S&P 500, and Nasdaq all up more than 6% over the past month. Importantly, this rally doesn’t represent a straight-line-up rally, which is what your typical bear market rally looks like. Instead, this rally has two-steps-forward, one-step-back characteristics – it looks sustainable from a price-action perspective.
We’re also seeing some really healthy volume behind the recent rallies, and hedge funds, institutions, and insiders appear to be healthily participating in the rally, while the VIX isn’t spiking – all bullish signs.
On the sentiment side of things, it looks like we’ve capitulated. Risk sentiment levels have hit record-low levels on par with previous market bottoms (like late 2008). Economic pessimism levels have hit record-high levels on par with previous market bottoms (also like late 2008 and early 2009). Cash balances have hit record highs also consistent with equity market bottoms.
Meanwhile, over in the bond market, yield spreads have collapsed over the past few weeks in a manner that they only do when market selloffs turn into market rallies.
There are bullish signals flashing everywhere. This bear market appears to be coming to an end. Next up? A new bull market – and lots of 10X investment opportunities.
Adapted from Luke Lango
