The current stock market has had a torrid time recently and last week was no different. Stocks did manage to rise by the end of the week, aided by Federal Reserve Chair Jerome Powell’s guarantee that larger rate hikes are off the table for the time being, despite recent high inflation readings.
Powell’s statements calmed frayed nerves and sparked a rebound in beaten-down risk assets in a market plagued by fears that more aggressive monetary tightening may tip the economy into a recession.
Despite the significant gains on Friday, many traders are skeptical that equities have struck a bottom following a selloff that saw US stock values plummet by $10 trillion in 18 weeks.
Instead, they warn that investors should expect volatility since the Fed’s capacity to combat price pressures without causing a hard landing may be hampered by circumstances beyond its control. Investors can do a lot to protect themselves against the volatility through swing trading and if you’re interested in protecting your long-only portfolio my swing trading course might be of interest.
The easy money period appears to be coming to a close. With that, the global bull market seems to be fading. It remains to be seen how far inflation will increase and whether central banks throughout the world will be able to control it. Rising yields indicate that interest rates will remain positive for the foreseeable future.
Is it the Right Time to Invest in the Current Stock Market?
This may be the first time investors have seen a bear market since the pandemic – during 2021, we saw a relentless uptrend.
While the market dynamics have changed, this doesn’t mean that investors should ignore stocks until things stabilize for one or two days. Instead, investors should look for several weeks of prices forming a base but whether that means these prices are the bottom, only time will tell.
Here’s what Scot Johnson, Principle and CIO at investment management firm, Adell, Harriman & Carpenter Inc said,
We won’t pretend to be able to predict exactly what’s going to happen in the market. Given how back-and-forth the market has been, we’d recommend investors focus on quality. By that we mean consistent profitability, regular dividend hikes, durable cash flows and a rock-solid balance sheet. A number of names in Healthcare certainly fit our quality criteria. Given dynamics pushed by the geopolitical climate, higher quality names in old-school Energy probably merit consideration as well.Scot Johnson, Adell, Harriman & Carpenter Inc
If you are tempted to venture into the market, here are five key principles you should keep in mind.
1) The Significance of the VIX at 36
Volatility is the defining aspect of the stock market currently, and the VIX volatility index is the clearest indicator that the selling has been exhausted. A VIX at 36 is two standard deviations away from its mean. We are well and thoroughly oversold when the VIX reaches 36. That is, we have got the hardcore panic mode. However, during the most recent selling episode, the VIX has not yet reached that level.
In reality, the stock market has only seen one VIX closing of 36 or higher this year. That happened on March 7, and it was a good entry point for traders because stocks went on to soar by 11% before the situation worsened again. You have to be nimble even if you bought so close. The VIX indicates that the stock market’s washout is not yet complete.
Short-term bounces are frequently the result of short squeezes rather than an all-clear signal. Short squeezes in bear markets are terrible, and trading is easier than being short.
2) Don’t Fall in Love With Stocks Even if it’s Apple or Tesla (They Will Not Return Your Affection)
Investors who made a fortune riding Apple or Tesla higher during the previous bull market should be “very selective, and remember that even the stocks you love don’t love you back.
Another approach to reminding investors of the most crucial guideline for investing in times of volatility is to remove emotion from the equation. “Trade the market you have, not the market you want.” Apple, which has lost more than 6% in the last week alone, taught many investors that lesson the hard way. Before Friday’s rally, Apple had sunk into its own bear market for the year.
Apple was seen as “the one excellent place to be” by everyone from small investors to Warren Buffett, and its rapid decline illustrates that the stock market’s closest version of a safe haven trade is over. It doesn’t matter if Apple is a terrific firm; we have gone from mild risk-off to extreme risk-off.
The financial assets people are seeking are the safest things out there, and Apple is still a terrific company, but it’s a stock. Liquidity isn’t excellent, and there’s a flight to safety across whatever asset class you can think of.
To invest in the tech sector, especially with valuations as high as they are, it’s not where one could easily dive in and where success or victory will be easily achieved.
3) S&P 500 Sectors Are In a Better Position to Rally
Healthcare stocks have historically received higher bids during periods like these because growth investors jumping out of tech need to cycle into another sector, and their options have narrowed over time. For example, there are “growth” retail names that investors would resort to during periods of market volatility not long ago, but the rise of online retail put an end to that trade.
There is no evidence that growth investors are now investing in anything. We haven’t seen health care yet,” but there aren’t many other sectors as growth investors raise their heads again. On a sector level, energy is preferable because “it’s still working,” and health care is the best “safety trade,” albeit with a caveat. Based on its relative valuation and weight in the S&P 500, it is a good place to be if we get a rally and do not lose much.
4) What Does Cathie Wood Buying a Blue-Chip Mean?
There is always a case to be made for blue-chip companies in a bear market, even if a company like Apple has been sold off. Automobiles are an example of how long-term investors should think about blue chips.
The first lesson from Ford in this market may be that it dumps Rivian shares at the first opportunity. Ford excels at one thing: staying alive. Whatever happens to Rivian, Ford and GM are likely to survive, and guess who just bought GM for the first time: Cathie Wood of Ark Invest.
This doesn’t mean Wood has given up on her favorite stock, top-holding Tesla, but it does point to a portfolio manager who understands that not all stocks recover in the same way. ARK, whose flagship fund Ark Innovation is down as much as the Nasdaq between 2000 and 2002, has some catching up to do.
Many in the market disagree with Wood right now about her belief that the multi-year disruptive themes on which she bet heavily are still in place and will be proved right in the end. Buying a blue-chip company like GM, on the other hand, can help to extend the life of that disruptive vision. In some ways, GM is a second-order stock to buy “without having to risk everything on the ones that aren’t profitable.
5) Where Wall Street Will Still Get More Bearish
There are many reasons to be skeptical of any rally, from the Federal Reserve’s ability to manage inflation to the growth outlook in Europe and China, all of which have such a wide range of outcomes that the market must factor in the possibility of a global recession to a greater extent than it would normally.
However, earnings projections for the S&P 500 are one significant market data point that has yet to be added. The fact that forward price-to-earnings ratios aren’t falling tells investors that the market still has work to do in terms of lowering figures.
Currently, Wall Street expects the S&P 500 to raise earnings by 10% consecutively, which is unrealistic in this environment. “Not with inflation ranging from 7% to 9% and GDP growth ranging from 1% to 2%.” The street is incorrect, the numbers are incorrect, and they must be corrected.
- The Swiss National Bank (SWX: SNBN) increased its holdings in Apple (NASDAQ: AAPL) by 8.2 million shares to 71 million. In the first quarter, Apple shares fell 1.7%, compared to a 5% loss in the S&P 500 index. Shares are down 16% in the second quarter, while the index is down 11%.
- Tesla’s (NASDAQ: TSLA) stock has also been hammered in the second quarter, falling 29% after rising 2% in the first. Large share sales by CEO Elon Musk, apparently to pay part of his purchase of social media platform Twitter (NYSE: TWTR), have roiled the stock recently.
- Twitter Inc. (NYSE: TWTR) shares fell after Elon Musk tweeted that his $44 billion cash purchase for the social media network was “temporarily on pause,” pending data on the platform’s proportion of fraudulent accounts.
- According to Refinitiv Lipper, investors liquidated global equity funds worth $10.53 billion in the week ended May 11, compared to $1.65 billion in net selling the week before.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas has no positions in the stocks, ETFs, cryptocurrencies, or commodities mentioned.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
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