This Story Is An Important Reminder Of Market History

When will the next big bear market start?

I could point you to a few things… technical indicators, analysis of the Federal Reserve and its effect on the markets and money supply… I could even point to examples of “irrational exuberance” — the phrase coined by former Fed Chair Alan Greenspan.

But I’ve already done those things.

Another indicator? History says it starts when frauds funded in the late stages of the bull market start being identified.

In 2000, accusations of fraud made their way to companies like Cendant, Waste Management, and MicroStrategy, among others. And those were identified near the top of the dot-com bull market. In 2008, we discovered Bernie Madoff’s years-long grift, and many financial firms unraveled as prices fell and questionable business practices were brought to light.

True, this is just an anecdotal indicator of market tops. But it’s been on my mind this week as the news about Nikola (NASDAQ: NKLA) broke.

I wrote about this story last week, noting that the deceptive video of its truck in motion was weighing on the stock.

Nikola’s potential fraud isn’t a definitive sign of a top. However, as financial conditions weaken, more and more companies that have engaged in aggressive or fraudulent behavior will be flushed out into the open.

Nikola is just another example of a phenomenon I’ve talked about recently — where a lot of new traders have entered the market. And lately, they’ve been treating it like a game. Remember what I said last week:

There are new traders who have never seen extended declines. If media reports are accurate, there are overleveraged traders and many new traders who are not well diversified.

At a minimum, Nikola’s saga will be entertaining. But be cautioned: It could also be a sign that the stock market is in for a year or more of tough sledding in the stock market. Why could it take that long? Well, these things can take time.

How I’m Trading Right Now

Keep in mind, though. My intention isn’t to cause a lot of worry. As I always say, there can and will be profitable opportunities in this type of market.

In fact, I recently I identified an opportunity in Lowe’s Companies, Inc. (NYSE: LOW).

Lowe’s is benefitting from the current “stay at home” environment. Reports indicate many people are fleeing cities for suburbs and doing touch-up work to homes as they settle in. Those staying in their existing homes are also repairing and making home improvements to make their time at home more enjoyable.

Homeowners are finding more cash for these projects as they cut back on travel, entertainment, and dining out.

This trend led to strong financial performance last quarter. Lowe’s reported that same-stores sales were up 34.2% in the quarter. Same-store sales are an important measure of retail performance since they show growth from stores that were open a year ago. High same-store sales growth indicates the company is meeting consumer demand instead of simply seeing growth due to rapid expansion.

The numbers in the quarterly report were so good they immediately led to the question of what future quarters will look like. No one expects rapid growth like this to continue, but analysts do expect earnings growth to average more than 21% a year. That means LOW is attractive at its current price.

Now, buy-and-hold investors could find this a good time to get in on the stock. If that’s you, then more power to you. But I’m recommending a short-term trade to avoid the volatility that is likely to happen when the company reports results for the current quarter in November.

And if you’re looking for a proven trading strategy to help you navigate volatile markets, then I recommend turning to my colleague Jim Fink…

For those who don’t know Jim, he’s a multi-millionaire and an investing legend… And by deploying his trading methodology, his followers are getting rich, too.

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