When the Market Starts Dropping, Don’t Just Yell. SELL!

When the market starts dropping, don’t just yell about it. SELL!

I’m not trying to be glib here. I’m being dead serious. Selling has become a lost art form for all too many investors thanks to the nine-plus-year bull market. The vast ocean of funny money created by the world’s central bankers washed away a lot of investor sins. It helped paper over bad investment decisions, carrying even lousy stocks along for the ride higher. So, many people just decided to let their junky plays ride.

But in a BEAR market, that kind of behavior will kill your portfolio! Not only will your good stocks go up less, or maybe even decline. But your bad stocks will get absolutely crushed.

Consider this: The Nasdaq Composite Index made a marginal new high about three weeks ago. So, I dug into our vast Weiss Ratings database and created this Worst 20-Day U.S. Stock Performers Screener.

The Screener includes all U.S.-based SELL rated stocks (“D+” or lower on our scale). I eliminated names with a market cap of less than $1 billion, a closing price of less than $5, and 30-day average daily trading volume of less than 50,000 shares. Then I sorted the list in descending order by 20-day returns.

Data Date: April 2, 2018

Look at how much money these mangy mutts have cost investors! You have retailer and erstwhile cryptocurrency play Overstock.com (OSTK, Rated “D”) with losses of 40% in less than three weeks. It’s followed by the drug companies Spectrum Pharmaceuticals (SPPI, Rated “D”) and Biohaven Pharmaceutical Holding Co. (BHVN, Rated “D”), with declines of 25.4% and 24.2% respectively.

Next up is the chip stock MACOM Technology Solutions Holdings (MTSI, Rated “D”), followed by Enbridge Energy Partners (EEP, Rated “D+”). That’s two more 20-percent-plus drops. And sure enough, there’s the heavily indebted auto company that’s been in the headlines for all the wrong reasons lately — Tesla (TSLA, Rated “D”). It’s down more than 20% in 20 days (Side note: Our Ratings model has consistently graded TSLA a SELL since October 2017).

Whereas you might have gotten away with holding on to stocks like these during the long bull market, that approach won’t cut the mustard anymore. So, I urge you to start a project right now. As in today:

“Scrub” your entire investment portfolio using our Weiss Ratings data. Look up the Ratings for every stock, every mutual fund, and every ETF you own. If an investment is in SELL territory, and it’s costing you money, get rid of it. There’s no reason to keep lugging the dead weight around.

That only exception would be things like inverse ETFs or bearish funds. Many of them dropped into SELL territory due to negative price momentum driven by the bull market. But if we’re transitioning from a bull market to a bear market ... something that looks increasingly likely to me ... that’ll change fast. You’ll need the downside protection inverse funds provide.

So, what are you waiting for? Stop yellin’ and start sellin’!

Until next time,

Mike Larson