How to buy stocks on the verge of a bear market

Everyone seemed to be in the mood to buy on Friday, except Elon Musk. the Industrial average of the Dow Jones broke a six-day losing streak, the Nasdaq composite shot in its second consecutive positive session, and the S&P 500 it rose more than 2%, a small step back from the brink of a bear market, ending the week 16.50% lower than its 52-week high. But any one-day stock gain in this market is tenuous. The Dow fell for its seventh consecutive week for the first time since 2001.

“We saw exactly the same thing in 2000 and 2001,” says Nicholas Colas, co-founder of DataTrek Research. “You knew asset prices were going down, but the trading action has always given you enough hope. … I’ve had so many flashbacks up to 2000 in the last three months. … If you’ve never seen it before , it’s very difficult to deal with, and don’t forget that. “

For many investors who were inundated with stocks after the pandemic when the bull market again seemed to be in one direction again, this may be the first time they’ve been dancing with the bear in a long time. For Colas, who worked at Steve Cohen’s former hedge fund SAC Capital early in his career, there are some lessons he has learned from those years that “saved a lot of pain.”

People with umbrellas walk past a bull and bear outside the Frankfurt stock exchange during heavy rain in Frankfurt, Germany.

Kai Pfaffenbach | Reuters

To begin with, the trading company’s lifelong philosophy was to never sell a new high and never buy a new low. While investors who have only experienced a bull market are now learning, momentum is a powerful force in both directions. This doesn’t mean that investors should take any particular stock off their radar, but stock stabilization won’t be measured in a day or two of trading. Investors should monitor stocks for signs of stabilization within one to three months. One exception: an action that bounces back with bad news can be one where the market is signaling that all bad news is already priced.

But for now, Colas said, making a big bet on a single stock as a buying opportunity isn’t the best way to go. “Rule # 1 is as loose as possible,” he said. “This is the goal, because it’s not that you’re going to kill it and invest to lose as little as possible … when we get to the turn, you want to have as much money as possible.”

Here are some other principles he has at the top of his stock buy list right now and how they relate to the current market environment.

The importance of the VIX a 36

Volatility is the defining feature of the stock market right now, and the clearest sign that investors can look to until they run out of sales is the IX volatility index. A VIX at 36 is two standard deviations from its mean since 1990. “This is a significant difference,” Colas said. “When the VIX hits 36, we’re really oversold, we’ve had extreme panic mode,” he said. But the VIX still hasn’t reached that level during the last sales period.

In fact, the stock market only recorded a close of over 36 VIX this year. It was March 7th and it was a viable entry point for traders as stocks ended up rising 11% before the situation deteriorated again. “Even if you bought so close, you had to be nimble,” Colas said. The VIX says the stock washout isn’t over yet. “We are dancing in the raindrops of the storm,” he said.

Short-term rebounds are often more a reflection of short compressions than a clear signal. “Short squeeze in bear markets are vicious and it is easier to trade than to be short,” she said.

Look at some of the recent actions in pandemic “meme stocks” like GameStop and AMC, as well as consumer pandemic winners like Carvana, and Colas says buying those rallies “is a hard way to make a living, a way difficult to trade, “but in 2002 traders looked to heavily short stocks, the best-selling stocks as earnings.

Whether it’s Apple, Tesla, or any other, the shares won’t reciprocate you

For investors who have made a fortune in the recent bull market by taking Apple or Tesla higher, it’s time to be “incredibly selective,” says Colas, and even with the stocks you’ve come to love the most, remember they don’t. I do not love you.

This is another way to remind investors of the most important rule for investing amid volatility: take the emotion out of it. “Trade the market you have, not what you want,” she said.

Many investors learned that lesson the hard way through Apple, which fell more than 6% in the last week alone. year to date, Apple it had fallen into its bear market prior to Friday’s rebound.

“Apple had a job to do in this market, and it wasn’t imploding,” Colas said.

Everyone from mom-and-pop investors to Warren Buffett has seen Apple as “the only great place to be” and seeing it collapse so quickly shows that the closest stock market equivalent to a safe haven trade is over. “We’ve gone from mild risk reduction to extreme risk reduction and it doesn’t matter if Apple is a big company,” Colas said. “Liquidity is not great and there is a flight to safety through whatever class of assets you can name … the financial assets that people seek are the safest things out there and Apple is still a great company, but it is. an action”.

And with valuations in the tech sector as high as they’ve been, it’s not a dunk to dive into.

“You can buy it for $ 140 [$147 after Friday] and still has a market cap of $ 2.3 trillion. It is worth even more than the entire energy sector. It’s hard, “Colas said.” The technology still has some pretty crazy ratings.

The sectors of the S&P 500 in a better position for the rally

At the sector level, Colas looks more to energy, because it “still works,” he says, and as far as growing traffic is concerned, health care is the best “safety trade,” even if that comes with a caveat. Based on its relative rating and weight in the S&P 500, “It’s a good place to be if we get a rally and don’t lose that much,” he said.

History says that during times like this, healthcare stocks will receive bigger offers because growing investors saving the technology have to move to another industry and over the years the options they have at their disposal have shrunk. For example, not long ago there were “growing” retail names that investors would turn to amid the volatility, but the rise of online retailing has killed that trade.

Colas pointed out that there is still no evidence that growing investors are getting any closer to anything. “We’re not seeing healthcare yet, but as growing investors keep raising their heads, there aren’t many other sectors,” she said.

What does Cathie Wood mean to buy a blue chip

Even though Apple has capitulated to the sale, Colas said there is always a reason for blue-chip stocks in a bear market. Cars, which Colas has covered on Wall Street for ten years, are an example of how to think about blue chips for long-term investors.

The first lesson from ford in this market, however, it could be yours dumping of Rivian shares the first chance he had.

“Ford does one thing well, and it’s staying alive, and right now it’s lowering the hatches,” Colas said. “You hit the sell button and get some cash. They see what’s coming and want to be prepared to continue investing in the electric vehicle and ICE business.”

Whatever happens RivianoFord and GM they are likely to hang around for a while, and in fact, guess who it is bought GM for the first time: Ark Invest’s Cathie Wood.

That doesn’t mean Wood necessarily soured for her all-time favorite stock, the first Tesla company, but she does suggest a portfolio manager who might recognize that not all stocks bounce off a similar timeline. ARK, whose flagship bottom Ark Innovationit’s down as much as the Nasdaq peaked between 2000 and 2002, it has some ground to catch up.

“I don’t have a view on whether Cathie is a good or bad stock picker, but it was smart of her to look at a GM, not because it’s a great stock … I wouldn’t touch it here, but regardless, we know which will be around in 10 years apart from some catastrophic failure, ”Colas said. “I don’t know if Teladoc or Square will do that,” he added of some of Wood’s best actions.

A big disconnect between many in the market and wood right now is his belief that the multi-year disruptive themes he has bet a lot on are still in place and will eventually prove to be correct. But buying a blue chip like GM can help extend the life of that disruptive vision. GM, in a sense, is buying second-rate stocks “without having to bet the farm on the ones that aren’t profitable,” Colas said.

Even in a market that doesn’t like stocks, there are names to trust in the long run. After the Nasdaq hit bottom in 2002, Amazon, Microsoft and Apple ended up being among the big exchanges of the 2002-2021 period.

Bear markets don’t end up with a “V”, but rather an exhausted flatline that can last for a long time and stocks that end up working don’t all work at the same time. GM could benefit earlier than Tesla even though Tesla will be at $ 1.5 trillion in three years. “This is the value of a portfolio at different stages and there are going to be things wrong,” Colas said.

The GM purchase could be a signal that Wood will take more trades to diversify the duration of his funds, but investors will need to watch where the portfolio takes in the coming months. And if it remains a firm bet on the most disruptive and money-losing companies, “I like QQQs,” Colas said. “We don’t know what’s going to be in ARK, but we know what QQQs will be,” he said. “I would much rather own the QQQs,” Colas said, referring to the Nasdaq 100 ETFs.

This too must come with a warning at this time. “I don’t know if the big techs will be back to the way they used to, because the ratings are so much higher,” Colas said. Microsoft is worth more than several industries with the S&P 500 (real estate and utilities) and Amazon is worth more than two Walmars, “but you don’t have to bet on Teladoc and Square,” he said.

“We knew they were good companies and who knows where the stocks are going, but the fundamentals are solid and if you have to trust that you have chosen the next Apple and Amazon, it’s a tough job,” he added.

Where Wall Street will become even more bearish

There are many reasons from a macroeconomic perspective to remain skeptical of any upside, from the Federal Reserve’s ability to manage inflation to growth prospects in Europe and China, all of which have such a wide range of outcomes that the market must incorporate the possibility. of a greater-than-normal global recession. But one key point in the market data where this has not yet been incorporated is the earnings estimates for the S&P 500. “They are just too high, ridiculously too high,” Colas said.

The fact that the forward price-to-earnings ratio is not declining is telling investors that the market still has work to do to reduce the numbers. Currently, Wall Street expects sequential growth of 10% in earnings from the S&P 500, which, Colas said, does not occur in this environment. “Not with 7% -9% inflation and 1% -2% GDP growth. The road is wrong, the numbers are wrong and they have to go down.”

You may also like...