3 Stocks You Can't Own During a Bear Market

If you thought last Thursday was bad, how’d you like Friday?

The major averages went to Hell in a handbasket. As our Dow Theory sell signal flashed neon, the big index cratered 530 points. The S&P plunged 3.2% on the day. And the Nasdaq took the most damage, closing 3.5% lower.

When the dust finally settled, here’s what was left:

RDP Map

Do not attempt to adjust your monitor. Those gaudy red numbers you see are real. Looks like the market needs a massive blood transfusion…

So what happens next? Here’s the answer: It’s impossible to tell. But what we do know is that we can no longer give stocks the benefit of the doubt. During a roaring bull market you can throw darts at stocks and make money. That ain’t the case right now, pal.

Even before Thursday and Friday, we’ve seen some nasty action in stocks this summer. The Dow is now 10% off its highs, while the S&P is 7.5% off its high water mark. And even if we do see an oversold bounce heading into this week, we have to keep the current market conditions front and center.

You have to know what kinds of stocks to avoid when the market’s this vulnerable. And today, I’m showing you three kinds of stocks you’ll want to cut loose while the market throws its temper tantrum…

1. “Story stocks”

When it comes to the stock market, there’s no shortage of compelling stories out there. We have the speculative biotechs with new and exciting drugs nearing potential approval. Then there are the innovative solar companies (some of my personal favorites, by the way) that are looking to change how we get our energy.

But right now, you have to toss these sunny tales out the window. These stocks had no trouble finding new investors during favorable market conditions. But they’ll probably take the most punishment as folks run for the exit.

Want some evidence? Take a look at the Guggenheim Solar ETF:

Blackout

In late April, this solar ETF was up 45% on the year. But a black cloud’s been hanging over it ever since. It’s off by more than 17% year-to-date as of Friday…

2.  Recent IPOs

Earlier this year I said the next time you’re tempted by a red-hot IPO, go shackle yourself to the basement floor until you think better of it.

I hope you took my advice…

Most IPOs are just cash grabs for up-and-coming companies and underwriters—especially in trendy sectors and industries.

But when the market starts to crack, investors tend to dump these speculative stocks first. They can fall fast— and hard.  And the market didn’t just crack last week… investors tore it to shreds.

Check out what’s happened to chicken restaurant El Pollo Loco (NASDAQ:LOCO) recently:

Crazy Chickens

Not a good look. How’s your chicken taste now?

3. Fresh Bargains

There’s nothing wrong with bargain hunting. And I know value investors have been dying to see a hard market reset so they can find some new names for their watch lists…

But many of these so-called bargain hunters show up to the party way too early. You gotta let the market settle down a bit before hunting for cheap stocks, folks. A few days of big losses probably isn’t gonna do it…

I’ll often see folks jump the gun when it comes to defending their positions that sink like stones during market drawdowns. Instead of honoring their stops, they make excuses about why they should hang on a little longer.

Well, here’s a tip for you…

If you’re unsure about a stock, remember this: A chorus of “look at this undervalued stock” is usually code for “run”.

Like I said on Friday, we’re seeing a lot of panicked moves right now. Let’s not make any of our own.

Regards,

Greg Guenthner
for The Daily Reckoning

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