This Market Rally Can Dissipate Quickly

This market rally may just be a fake out. Here’s how you can prepare and take advantage of a coming market crash.

Volatile market, stock volatility

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It’s easy for investors to get excited about the market rally that we just had. The TSX index has rallied 25% from its low! However, the market rally seems to be losing steam.

We’re not exactly out of the woods with the COVID-19 situation. Moreover, we do not know the repercussions it will have on the economy and how extensive the damage will be.

Investors may hope for a V-shaped recovery, but other scenarios of a U-shaped or W-shaped bottom are more likely. Investors need to be prepared.

Here are three things you can do to take advantage of another market crash.

Market rally: Have some dry powder

You don’t want to buy stocks at the top of this fake-out market rally and be stuck with the positions, unless you have a super long-term investment horizon.

The next earnings results that companies will report will reflect the COVID-19 damage done to their bottom lines. Even though the damage is generally expected to be temporary, it can drag down the market again.

Save as much money that’s coming into your pockets as possible! It’s better to save your paycheques and dividends over the next few months and add to stocks you’ve been eyeing on dips instead of buying now.

Market rally: Take some profits

In fact, I’ll go as far as taking profit on some more speculative holdings in this market rally. For example, take profit in oil and gas producers like Whitecap Resources that have rallied more than 80% from its bottom. Likewise, book some gains in speculative high-growth stocks like Lightspeed POS.

You can use the proceeds to organize how you will allocate money for your stock shopping list.

Here’s your chance to switch to quality stocks. You don’t necessarily need to take higher risk on speculative investments, though some investors might allocate 10% of their portfolios as “play money” to aim for quick gains in their Tax-Free Savings Accounts.

Will you allocate your cash to long-term core holdings or speculative investments with the potential of big gains or losses?

Review your stock shopping list

With cash on hand, it’s the perfect time to review your stock shopping list before the short market rally turns into another market crash.

You can take the conservative approach by focusing on quality companies.

To be even more defensive, start buying dividend stocks first. This way, you receive passive income that can roll into your pool of investment funds.

Recent high-yield dividend stocks I bought are BNS stock, H&R REIT, and Brookfield Property. I expect the bank’s dividend yield of 6.4% to be rock solid.

However, I’m prepared for a temporary cash distribution cut of up to 50% in H&R REIT and Brookfield Property. Whether a cut (or how severe a cut is) will happen depends on how long retailers and businesses need to close down or run at limited capacities to fight COVID-19. Currently, H&R REIT and Brookfield Property offer yields of about 14%.

Should the market rally dissipate, investors should also consider companies with strong growth potential. Growth stocks I’d love to buy more of are Alimentation Couche-Tard and Brookfield Asset Management. They will surely make a strong comeback when the economy recovers.

Decide how much you will allocate to sectors on your shopping list and the price ranges of the stocks you would buy. Here are three ways to buy stocks safely in a market crash.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of ALIMENTATION COUCHE-TARD INC, Brookfield Asset Management, Brookfield Property Partners, H&R REAL ESTATE INV TRUST, and The Bank of Nova Scotia. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool owns shares of Lightspeed POS Inc. The Motley Fool recommends ALIMENTATION COUCHE-TARD INC, BANK OF NOVA SCOTIA, BROOKFIELD ASSET MANAGEMENT INC. CL.A LV, and Brookfield Property Partners LP.

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