The Best Bear Market Stocks to Buy When Markets Are Falling

The risk of an upcoming bear market continues to grow as we reach the end of 2015. That's why we're recommending some bear market stocks that are perfect when markets fall.

A bear market is when a market falls 20% from its high point. At today's opening price of 17,225.93, the Dow Jones has fallen 6.1% from the high it set in May. So we still have a ways to fall before hitting a bear market - but these drops can happen quickly.

During the financial crisis of 2008, the Dow dropped more than 22% in less than one month between September and October.

Here are the three biggest warnings signs we've seen that a bear market could be closer than a lot of Wall Street experts think - plus the best bear market stocks to buy before it happens...

The 3 Biggest Bear Market Warning Signs We've Seen

The first indication of a bear market in 2015 is the dismal outlook for Q3 earnings.

According to FactSet, S&P 500 aggregate earnings for Q3 are expected to drop 5.5% year over year. And that's much worse than the initial estimate from July, which called for a drop of just 1% in aggregate earnings.

Aggregate earnings fell 0.7% in Q2 2015, meaning another drop in Q3 would constitute an "earnings recession." An earnings recession happens when you have two or more straight quarters of year-over-year declines.

Things don't look much better for Q4 either. FactSet estimates earnings will drop 0.4% year over year.

But an earnings recession isn't the only indication of an approaching bear market...

Slowing economic growth in China has also put pressure on global markets. In fact, a new report from the National Bureau of Statistics this week shows that China's economic growth was just 6.9% in Q3. That was the first time it dipped below 7% since 2009.

The Chinese economy has been responsible for nearly one-third of all global growth over the past seven years. The International Monetary Fund lowered its 2015 global growth forecast to 3.1% this month from its 3.3% estimate in July. The IMF cited China as a key reason for the revision.

China has had a major impact on U.S. markets in 2015. Between late-July and late-August, the Dow Jones dropped more than 13% as China's stock market crashed.

Money Morning Capital Wave Strategist Shah Gilani says the entire market is changing directions right before our eyes...

"The market shows it's weakening when breadth declines. When the market's moving up but fewer and fewer stocks are participating in that up-move, which can be generated by a handful of big stocks with heavy weightings in a market index, a change in direction is usually on the way," Gilani explained.

"Another way to see directional change happening is when the trend of more stocks making 52-week highs reverses and fewer stocks are making new highs, while the number of stocks making 52-week lows is increasing."

Because of these three glaring indicators, we've compiled the best bear market stocks to buy when the markets start falling. Not only will these investments protect your wealth, they'll also help you profit when others are panicking...

The Best Bear Market Stocks to Buy Now

At Money Morning, we recommend having a list - ready at all times - of quality, must-have shares to pick up at "fire sale" prices during sell-offs. So we asked Money Morning Executive Editor Bill Patalon which stock tops his must-have list now that shares are on sale.

"I like the stocks of companies that are tied into long-term trends and whose share prices are poised to benefit from multiple catalysts," Patalon said.

Patalon recommends picking up shares in a company like General Electric Co. (NYSE: GE) when they are discounted.

"Some of the most important forces forming up under GE shares are 'growth triggers,' and the sheer volume of 'insider buying' that's been happening," Patalon said.

"GE is in several growth segments: Aircraft engines, medical-imaging equipment, power generation, water treatment and, as a great special 'kicker' - the 'Internet of Everything' (IoE)," he continued. "Demand in each of those sectors is only going to grow, so GE can take comfort in knowing there will be plenty of demand for its wares long term."

Another strategy for investing during a bear market or stock market drop is buying inverse ETFs...

There are three funds specifically that each track a different stock index and deliver on the inverse of that index's performance.

"I like these three funds - I refer to them as the 'Big Three Inverse ETFs' - because they're super easy to buy, are cheap on account of their low expense ratios, and have very tight spreads all day long," Gilani said.

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To bet against the S&P 500, Gilani recommends the ProShares Short S&P 500 ETF (NYSE Arca: SH). To profit as the Nasdaq falls, buy the ProShares Short QQQ ETF (Nasdaq: PSQ), which tracks the Nasdaq. And to play the inverse performance of the Dow, use the ProShares Short Dow30 Fund (NYSE Arca: DOG).

And you don't have to just bet against a certain broader market.

"If you're worried about a specific industry, a business sector, or even a geographic market, you can bet there are inverse ETFs available to protect that portion of your portfolio," Gilani said. "There are even inverse ETFs that will let you hedge things besides stocks - other classes of assets. We'll get into all of those in the weeks ahead."

By investing in these inverse ETFs when the bear market strikes, you not only hedge your positions in the market, but you end up making a profit.

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