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How to buy stocks on the brink of a bear market


Elon Musk was the only one who seemed in an buying mood, but it looked like everybody else. It was the Dow Jones Industrial AverageA six-day losing streak was broken, Nasdaq CompositeIt turned in its second positive session consecutively, and the S&P 500It was up by 2%. This is a slight improvement from the bear market brink. The weekly high ended the week at 16.50% below its 52-week average. However, any gains of stock in this market for a single day are fragile. The Dow dropped for the seventh consecutive week, marking the first decline since 2001.

Nicholas Colas co-founder DataTrek Research, says that “we saw exactly the same thing in 2000” and “2001”. Although you knew asset prices were falling, trading actions gave us just enough hope. … In the last three months, I have had flashbacks back to 2000 so many times. … You won’t be able to forget what you saw the first time you see it.

Investors who bought stocks in the aftermath of the bull market pandemic may have never danced with the bear before. Colas was a former employee of SAC Capital, a hedge fund founded by Steve Cohen. He says he has learned a lot from that experience which saved him a lot of heartache.

In heavy rains, people with umbrellas walk by the bull and bear at Frankfurt’s stock market.

Kai Pfaffenbach | Reuters

For the first time, there was a firm belief that you should never miss a new high or buy another low. Investors who only have ever seen a bull market know that momentum can be a strong force in either direction. Investors shouldn’t be ignoring stocks, but stocks can’t stabilize in just a few trading days. Investors need to monitor stocks over a period of one to three weeks for signs that they are stabilizing. One exception is a stock which rallies upon bad news. This could be a sign that the market has already priced all of the negative news in.

Colas stated that for now, it’s not a good idea to place a large bet on one stock in a buy-in the-dip situation. “The No. “The No.1 rule is to lose as little money as possible,” he stated. That’s because you don’t want it to die, so investing to make as few losses as possible is the goal. When the turn comes, however, it’s important to keep as much as you can.

Below are some more principles that he considers to be his top stock-buying strategy and their relevance in today’s market.

At 36, the importance of VIX

Volatility is the main feature of the stock exchange right now. The clearest indicator that investors can view as far as selling exhaustion is the VIXVolatility index. At 36, the VIX is 2 standard deviations below its 1990 mean. Colas explained, “That is a significant difference.” He said, “When VIX hits 36, we’re well and truly undersold.” The VIX is still at a low level during this latest round of selling.

Actually, this year’s stock market close has been 36 or less. That was on March 7, and that was a viable entry point for traders because stocks ended up rallying by 11% — before the situation again deteriorated. Colas explained that it was important to have agility, even if you buy so close. VIX says that stock market turmoil is not over. He said, “We are dancing between the raindrops of the storm.”

Sometimes, short-term bounces reflect the effects of short squeezes more than they are a signal. He said that bear market short squeezes are brutal and trading is easier than being short.

You can see some recent pandemic “meme stock” action, such as AMC and GameStop. Colas also says that those rallies are “a difficult way of making a living and a tough trade.” However, in 2002 traders still looked at heavily-shorted stocks as they were most easily sold to earnings.

Stocks won’t be your friends, no matter how much you love Apple or Tesla.

Colas advises investors that made money riding Apple or Tesla higher during the bull market to remember to choose carefully.

Another way to remind investors that volatility can be a good thing is to take emotion out of investing. He said, “Trade only the market that you own and not the one that you desire.”

Investors are numerous learned that lesson the hard way through AppleThe indices were down by more than 6 percent in the week just before. Year-to-date, AppleIt had plunged into its bear markets before Friday’s recovery.

Colas stated that Apple had only one task in the market and it was to implode.

Everybody, from small-time investors to Warren Buffett, saw Apple as the “one great place” to be. Watching it fall so quickly shows that it is no longer the closest safe-haven trade. Colas explained that Apple has changed from being a moderately-risky company to one where it is extremely risky. It doesn’t really matter whether Apple’s a great business. “Liquidity and safety are not high across all asset classes…. The safest assets are those people want. Apple is still a great business, but it is a stock.

It’s hard to jump in with tech sector valuations as high as these.

You can purchase it for $140 [$147 after Friday]The market cap is still $2.3 trillion. The entire energy industry is still more valuable than it. Colas stated that it was difficult. Colas stated that tech still enjoys some crazy valuations.

S&P 500 sectors in a better position to rally

Colas sees energy as the better sector, even though it has a catch. Based on its relative valuation and weight in the S&P 500, “It’s a good place to be if we get a rally and to not lose as much,” he said.

The past demonstrates that health-care stocks are more attractive during times like these. Growth investors who bail out tech companies need to move into other sectors. Over the years, the number of options available has narrowed. Among volatility, there used to be “growthy retail” names investors could turn to, but that was long gone.

Colas stated that it is not clear that growth investors have jumped into any other sector. Colas stated that while we don’t yet see health care, as long growth investors keep their heads up, it is clear there aren’t many sectors.

Cathie Wood buys a blue-chip.

Colas maintained that blue-chip stocks can still be bought in bear markets even though Apple succumbed to it. Colas was a Wall Street reporter for a decade and covered autos. They are an example of blue-chips that can be considered long-term investment options.

This is the first lesson. FordThis market might be however, its. dumping of Rivian sharesIt was the first time it had.

Colas stated that Ford does “one thing very well,” and it is to stay alive. You can sell your car and obtain liquidity. They are prepared for what lies ahead and can see the benefits of investing in ICE and EV.

Everything happens RivianFord GMYou are most likely to continue being around for some time. In fact, who do you think just? bought GM for the first timeArk Invest’s Cathiewood.

Wood may not have lost faith in Tesla stock, her top-holding stock, however, this suggests that a portfolio manager might be realizing that stocks do not always rebound at the same pace. ARK is the flagship fund of ARK. Ark InnovationThe Nasdaq is now peak to trough in 2000-2002, so there’s still some work to be done.

Colas admitted that he didn’t think Cathie was a good stock-picker. But it was smart for her to consider a GM. Colas added that “I don’t know if Teladoc will or Square will.” He also mentioned a handful of Wood’s best stock picks.

Wood believes that her multi-year, disruptive themes were still relevant and will prevail in the end. This is the big gap between Wood and many others in the market. However, buying a blue chip like GM could help extend that disruptive vision. Colas stated that GM is a “second order” stock purchase, which means it doesn’t have to place bets on those not profitable.

Long-term names are worth trusting even in an unloved stock market. Apple, Microsoft and Amazon were among the top trades in the period 2002-2021 after the Nasdaq topped out.

Bull markets do not end with a “V”, rather they end at an exhausted flat line. And stocks that end up succeeding don’t work all at the same. Even if Tesla has a valuation of $1.5 trillion, GM may still be in the best position to benefit. Colas explained that this is the portfolio’s value in different stages. “There will always be things you get wrong.”

Wood may have bought GM to signal she is going to make more trades in order to diversify her portfolio’s duration. Investors will still need to monitor where Wood goes in the future. Colas added that, if she continues to believe in the worst, most money-losing companies it will be, “I like QQQs”. He said, “We don’t know what will happen in ARK but we do know what QQQs will be.” Colas stated that he would prefer to own QQQs, in reference to the Nasdaq 100 ETF.

There is a catch. Colas indicated that he doesn’t think big tech will return to prominence the way it used to be, as the value of the sector is so much greater. Microsoft is worth more than several sectors with the S&P 500 (real estate and utilities), and Amazon valued at over two Walmarts, “but you don’t have to be betting on Teladoc and Square,” he said.

His comments included that “we knew they were strong companies and who knows the future, but the fundamentals are sound, and you can trust your picks for the next Apple or Amazon. That’s a difficult trade.”

Wall Street may still be more bearish.

Many factors in macroeconomics make us skeptical about any rally. From the Federal Reserve’s ability to control inflation to China’s growth outlook, all of these outcomes have an enormous range, so the market needs to include the possibility that there could be a global economic recession. But one key market data point where this isn’t being incorporated yet is earnings estimates for the S&P 500. Colas claimed that the earnings estimates for S&P 500 are too high and ridiculously high.

Investors need to be aware that forward prices-to-earnings ratios don’t get cheaper, which means that they are still not getting lower. Currently, Wall Street is forecasting 10% sequential growth in earnings from the S&P 500, which, Colas said, doesn’t happen in this environment. Not with 7% to 9% inflation and 1-2% growth in GDP. It is not right, it’s wrong and numbers need to be corrected.