By Jeff Clark, editor, Advanced Income

Saturday, April 12, 2008

Making money in a bear market takes unconventional thinking.

The best way to profit during a bull market is often to buy the strongest stocks in the strongest sectors and then ride the momentum to riches. But that doesn’t work so well when the bear is in charge. Just ask anyone who bought Apple or Google back in December.

The best way to make money buying stocks in a bear market is to buy the weakest stocks in the weakest sectors, and play them for a short-term bounce.

I know it sounds crazy. After all, it goes against all of the best-known Wall Street clichs. Buy the best and ignore the rest. Don’t try to catch a falling knife. It’s better to buy a good company at a bad price than a bad company at a good price, etc. But in a bear market, everything turns upside down. None of that stuff works.

Look at the best-performing stocks of the past few months. The list is full of homebuilders, banks, and brokers the industries with the absolute worst headlines. Meanwhile, the sectors with the best press and the stocks that should be firing on all cylinders like gold stocks have fallen on tough times.

Like most abnormalities, this upside down condition should only last a short while. But while it lasts, we ought to at least make it pay off.

And so far, we’ve proven we can with a little-known strategy I use in my Advanced Income newsletter. I’m going to show you this strategy today, which you can use to your benefit immediately .

Since I started writing Advanced Income in September, we’ve sold out four positions for gains of 7% and 8% in two months, 13% in six months, and 17% in three months. We’re sitting on three other positions with current gains of 23%, 18%, and 4%. And we did it taking on very little risk.

Let me show you how this strategy works.

Back in December, I told Advanced Income subscribers to buy shares of the S&P Homebuilders ETF (XHB) and sell the March 21 call options against the shares. The stock was trading at $19.73 at the time, and we sold the calls for $1.80.

Put another way. we bought XHB at $19.73 per share. We then entered into an agreement to sell the stock to someone else for $21 per share in March. We were paid $1.80 per share for agreeing to these terms. This strategy is called covered call writing.

It’s not nearly as complicated as it might sound, and it does a terrific job generating income in a very short time.