Download now: The Downfall of Cable, and the Rise of 5G!

Best Stocks during a Recession

Recession, Theories, and Statistics Point to Further Downside: Here's Where the Smart Investments Are

Written by Brian Hicks
Posted January 22, 2008

While the Dow Jones continued to push to new 13K-plus highs in 2006, the move came as no surprise to Dow theorists, who called for 16,000.

On May 10, 2006, the theory signaled an immediate buy, as the Dow Jones Industrial Average and Dow Jones Transports both hit significant highs. And by April 25, 2007, the Dow shattered the 13,000-point barrier for the first time ever.

DJIA and DJTA uptrend

By July 18, Dow Theory was confirmed again as the DJIA crossed a new high of 14,000 in conjunction with the Dow Transports’ move above 5,500 for the first time.

The last time the Dow Theory signaled the start of the greatest bull market in history was May 23, 1997, right before the Dow Jones Industrial went from 5,800 to 12,000 and the NASDAQ went from 1,500 to 5,200.

You see, when Charles Dow put these averages on charts, he speculated that if they both hit a significant high (or low) around the same time, you can declare the start of a bull (or bear) market.

But that was then . . .

Sure, the index raced above 14K. But it happened as sub-prime lending began wreaking economic havoc, which was ignored by the bulls, government officials, talking heads, banks, hedge funds and speculators who are now suffering for their ignorance of reality.

Dow Theory and Recession

The only thing the Dow Theory tells us these days is . . . we’re headed down in a big way, thanks to a recession, which we may or may not be in (it depends on who you ask). (Read below to review my new, best stocks to own during a recession ... and learn why I picked them.)

Though, I wouldn’t depend on the economists. Three months into the last recession, not one economist accurately predicted a recession in a survey. And, unfortunately for their credibility, later evidence pointed out that a recession had begun at the time of the survey.



DJIA and DJTA downtrend


Note: On average, based on Citigroup data going back to 1953, recessions last 216 days, or just over seven months, sending stocks down an average 8.64%.

Recession Proof your Portfolio... Because the Bull Market Is Over.

Just how fearful are investors that a recession may be underway? Take a look at Google traffic figures.



Google trend regarding recession


The fear is palpable, as early indications show that a recession may have already begun. Look at what we’re dealing with.

Factory activity plunged sharply in January, as December homebuilding fell to its slowest pace since the 1990s, reinforcing recession fears. The Philadelphia Fed manufacturing index fell to negative 20.9 in January from negative 1.6 in December, which puts it firmly in recession territory.

Consumer spending is in the toilet, according to the Wall Street Journal:

“The retail industry appears to be skidding toward its first big wreck in 17 years.

“Chains are slamming the brakes on store openings, cutting back on inventory and girding for leaner times as consumer spending chills. The speed with which sales slowed during the holidays caught even cautious retailers off-guard, prompting a flurry of profit warnings.

“And while data on December consumer spending won’t be released until the end of the month, plummeting sales suggest consumers are snapping shut their pocketbooks.”

The National Bureau of Economic Research’s most important number used for determining recession is non-farm payroll. And according to The Bureau of Labor Statistics, December non-farm payrolls rose by a scant 18,000, the smallest gain since 2003. Slow job growth like that has historically been a recession warning sign. Worse, even the anemic 18,000 non-farm gain can’t be taken at face value. Reportedly, during periods of slow growth, there’s a tendency to overstate gains initially, and reduce later. Let’s hope that didn’t happen this time.

We’re seeing weakness in the Chicago National Activity Index:

“The Chicago Fed National Activity Index was –0.27 in November, up from –0.89 in October. Three of the four broad categories of indicators—employment, consumption and housing, and sales, orders, and inventories—made negative contributions to the index in November, while the production and income category made a slight positive contribution.”

New home sales and home prices are coming down. Corporate profits are being drained. Spending trends are down. And Q4 GDP is expected to have grown only 0.4%. The only surprise we’re seeing is the uptick in consumer confidence, as a result of a “stimulus package” shot in the arm.

Sure, the consumer confidence spike is enticing, but overall we’re in real trouble.

The Best Recession Stocks and Investments: Bonds, Sin, Drugs, and Booze . . .

One way to trade economic downside is to buy recession proof stocks , including:

  • Pharmaceutical stocks such as Johnson & Johnson (JNJ:NYSE), Anavex (AVXL.OB), Dendreon (DNDN:NASDAQ), and Merck (MRK:NYSE)
  • Weapons-related stocks such as Smith & Wesson (SWHC:NASDAQ)
  • Sex-related stocks such as Rick’s Cabaret (RICK) and New Frontier Media (NOOF:NASDAQ)
  • Alcohol-related companies such as Anheuser-Busch (BUD:NYSE)
  • Cigarette stocks such as Altria (MO:NYSE)

Or for those of you that seek the shelter of bonds, given further Fed loosening of the fed rate (possible 3% by year’s end), I’d recommend this investment: The iShares Lehman 20+ Year Treasury Bond (TLT) January 2009 100 calls (VJLAV).

Take care,

Ian L. Cooper

Buffett's Envy: 50% Annual Returns, Guaranteed