It looks like we are in a bear market. There are a few indicators that point to that conclusion but I'm going to look at just two of them today.
The first indicator is a chart showing the percentage change in the prices of the Dow Jones components over the past four weeks. Notice that IBM (NYSE: IBM) and Apple (NASDAQ: AAPL) are near the bottom. Procter & Gamble (NYSE: PG) and McDonald's (NYSE: MCD) are at the top.
In bear markets, investors tend to like McDonald's. At the worst point of the 2008 bear market, MCD was only down about half as much as the S&P 500. Over the full course of that bear market, the stock lost just 7%.
This chart shows investors are shifting to defensive stocks. That can be seen in the next chart, which looks at the changes in different sectors over the past three months.
Consumer staples, healthcare and utilities are the classic defensive sectors. These include companies like Procter & Gamble in the consumer staples sector, drug companies in the healthcare sector and your local power company in the utilities sector. These are the kind of businesses that offer "recession-proof" products, since few of us can go without heat, prescriptions, or toothpaste.
This shift in the market leadership is typical of the action at the beginning of a bear market. Many large investors must remain fully invested no matter what the stock market does. This could include pension funds, which generally allocate a certain percentage of assets to stocks to benefit from long-term trends.
While they must remain invested in stocks, many managers will try to reduce their losses. That's because in a bear market, losing less than the market earns managers a bonus. So, they tend to overweight consumer staples, large-cap healthcare companies and utilities.
It makes sense to duplicate that strategy. As more large investors continue to move into "recession-proof" stocks, it should push the price higher and deliver a profit. This is what led me to recently recommend a trade in Procter & Gamble (NYSE: PG) to readers of my premium income service, Maximum Income.
During the 2008 bear market, it only lost about two-thirds as much as the broader S&P 500. And even though McDonald's was the winning choice the last time around, PG is outperforming the burger giant right now and is set to potentially be the best-performing large cap in the next bear market.
How To Trade PG
Now, investors could simply buy this defensive name and pocket the 3% annual yield. Nothing wrong with that.
But my Maximum Income subscribers and I had a better plan.
Now, you should know that this strategy involves using covered calls -- one of the safest, most conservative methods for earning extra income to be found in the market. By using this strategy, we can reduce our cost basis for this defensive stock, which will further protect us if the overall market continues to slide. Not only that, we'll be able to earn even more income (using what I like to call "bonus dividends") than the stock already pays.
If everything goes according to plan, my subscribers and I will earn a $110 in 39 days for every 100 shares of PG we own. If we can repeat a similar trade every 39 days, we'd earn 11.1% on our capital in a year.
All that has to happen is for PG to trade for $95 or less by January 18.
If PG trades above $95 in late December, we'd keep the income we received from selling the call and collecting the dividend, but we'd have to sell the stock at $95 per share.
In this case, we'd realize a profit of 2.7% in 39 days. Now, I realize that may not seem like much -- but remember, we're betting that defensive stocks like PG are going to hold up much better than the rest of the market. Plus, if we can repeat a similar trade every 39 days, we'd earn a 25.3% return on our cost basis in 12 months.
Not bad. In fact, it's about as close as you can get to a win-win when it comes to investing.
Want to know more about how this works? My research staff and I have prepared a detailed briefing that explains everything you need to know. Simply click here to get started on collecting your first "bonus dividend" within as little as 48 hours.