The bear stock market is by no means over, but we’re seeing signs (albeit shaky) that perhaps we can expect a risk-on rally in the fourth quarter. You can find opportunities in a bear market rally; below I pinpoint a few.

Legendary investor Sir John Templeton once asserted: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Amid today’s pessimism, are we witnessing the birth pangs of a new bull market? It’s hard to say whether we’ve reached maximum pessimism (i.e., market capitulation).

However, one hopeful sign is the “double bottom” chart pattern that stocks apparently have formed. A double bottom describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and then another rebound.

September was the worst month for the U.S. stock market since March 2020, the nadir of the pandemic-induced crash. After a grim performance last week, the market closed the books on a third consecutive quarterly decline.

And yet, equities started October with a rally, although it was brief and volatile. The S&P 500 rallied +2.6% on Monday and +3.1% on Tuesday to make up some of the losses racked up in September, which the index ended by declining -9.3%. Both the Dow Jones Industrial Average and the tech-heavy NASDAQ posted similar gains during those two days, giving us a tantalizing suggestion that perhaps the market was rebounding.

However, the S&P 500 slipped Wednesday by -0.20% and on Thursday by -1.02%. And then on Friday, the latest U.S jobs report provided mixed news that sent stocks reeling for the third straight day.

The U.S. Labor Department reported Friday that jobs growth in September cooled and fell short of expectations, but remained strong. Nonfarm payrolls rose 263,000 for the month, a modest decrease from the 315,000 in August. The consensus estimate had called for a rise of 275,000 in September.

The unemployment rate dipped -0.2 percentage points to 3.5%, versus the forecast of 3.7%. The labor force participation rate fell to 62.3%, down slightly from 62.4% in August. Average hourly earnings came in at 0.3% month-over-month, but eased to 0.5% year-over-year.

A positive week…

On Friday, the major U.S. stock indices closed sharply lower, as follows: the Dow -2.11%; the S&P 500 -2.80%; the NASDAQ -3.80%; and the Russell 2000 -2.87%. Interest rate sensitive sectors, such as utilities, real estate, and technology, got clobbered the worst. The main culprit was the jobs report released that day, which seemed to cement further rate hikes. European and Asian markets also closed lower.

That said, despite the roller coaster ride, U.S. stocks managed to notch overall gains for the week, the first positive week over the past three.

Paradoxically, the upward momentum of stocks earlier this week had been driven by bad news. The travails of struggling investment bank Credit Suisse (NYSE: CS), disappointing manufacturing growth, a slump in construction spending, the worsening Russia-Ukraine war, and a huge cut in crude oil production by OPEC+ combined to buoy hopes that the Federal Reserve might ease up on monetary tightening after all.

In recent weeks, investor expectations about the Fed’s intentions have frequently bounced between hope and despair. It’s as if Mr. Market has a mood disorder.

Will 2022 end with stocks in the green? That’s unlikely. What’s more, Friday’s jobs report dampened sentiment all over again.

Investors could certainly use some relief in the fourth quarter, because as it stands, the stock market is on track for its worst year since the Great Financial Crisis of 2008. So far this century, only twice has the S&P 500 finished the year down more than -20%, in 2002 and 2008 (see chart).

Stocks may hover in a narrow range next week, as investors await crucial data, notably the consumer price index (CPI) on October 13, and retail sales and consumer sentiment on October 14.

Third-quarter corporate earnings season also kicks off October 14, with reports from major banks such as JPMorgan (NYSE: JPM), Citigroup (NYSE: C), and Morgan Stanley (NYSE: MS).

According to research firm FactSet, the estimated earnings per share (EPS) year-over-year growth rate for the S&P 500 is 2.9%.

If 2.9% turns out to be the actual growth rate for the quarter, it would represent the lowest EPS growth rate reported by the index since Q3 2020 (-5.7%).

If you’re a value investor looking for bargains, now may be the time to pounce. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 is 15.4. This P/E ratio is below the five-year average (18.6) and below the 10-year average (17.1).

Patient investors with a long-term horizon should consider companies with promising futures that have been caught in the bear market’s downdraft. The battered tech sector is a good place to start, especially among companies that specialize in such overarching trends as the cloud, 5G, and collaborative workplaces.

I also like energy and aerospace/defense stocks right now, which have rallied lately on OPEC+ oil production cuts and worsening geopolitical tensions.

Another shrewd tactic is to pinpoint inexpensive but intrinsically sound stocks whose companies are ripe for a takeover. That’s where my colleague Nathan Slaughter comes in.

Nathan Slaughter is chief investment strategist of our premium publication Takeover Trader. He has an uncanny knack for finding opportunities among pending mergers and acquisitions.

In this era of war and inflation, corporate consolidation is the name of the game. Even the whisper of a “mega-merger” can hand investors enormous returns.

Nathan just pinpointed a potential takeover deal that could dwarf them all. Click here for details.

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon: