Were you caught by surprise at the market selling off this hard to start the year? We will admit that we were caught slightly off guard by how soon the market changed its sentiment into New Year. Our initial view was for a Q2 selloff, with the chips being set this winter for such a fall. However, the market psychology shifted a touch sooner than we expected. That said, we were planning for such a selloff by raising cash during the market exuberance in the late fall. You see, the writing was on the wall for a while for the high-flying, no earnings tech names. They suffer in a rising rate environment. But folks, the fear that was in those names led to the correction we were anticipating in Q2 right here in January. But we’re here to tell you that you cannot panic, despite the incredible volatility in the markets. This is a key message we have left for our members day in and day out. With proper planning, you are protected.
Friends, we are traders at heart. Our service focuses on trading. But you may be surprised that much of what we discuss in our chat boards is regarding your long-term portfolios. You see, the way we view trading is as a mean to pad your long-term portfolio with short-term gains. Those gains can be had in both bull and bear markets, if we plan. With the last two weeks, you may be surprised to learn that the best advice we have given members is to basically do just about nothing. Making rash decisions when the market has already made major moves will decimate your portfolio. The key? When the going is so good and every one is euphoric is when you should be trimming. Sell into strength as is it were. And now it would seem, everyone is bearish. That overarching negative psychological state of the market has compounded on itself, creating volatility. Did you throw in the towel? If so, you probably made a mistake.
No one “knows” for sure where the market is going, or when it will go there. But there are many clues and signals that the market puts out that can at least give you a slight edge. You may be a little early on profit taking, or a touch early on starting to buy, but one thing is certain, you do not need to be left holding the bag.
There are many schools of thought on trading, and each of them has their own positives and negatives. We have our own strategy that combines fundamentals, management strength, sector, momentum, pending catalysts, and overall market feel. The latter portion of our strategy is what we want to hone in on.
While our members at BAD BEAT Investing have been exposed to these messages seemingly daily, we wanted to share with you a few pieces of wisdom that can help you protect your portfolio. While we cannot tell you our approach for hedging, portfolio mix, sector preferences, etc., as that would not be fair to our membership, we believe that our followers deserve to know what it is that we see, and how we are generally set to go forward.
Let us rewind momentarily. Why were we predicting a pullback in Q2? The reasons were several. First, we predicted that the Fed would make moves to start and clean up its balance sheet. We also were projecting three interest rate hikes, and more if things were still on fire with inflation in early spring. However, the timeline was moved forward on these fundamental catalysts, or at least, that is what the market psychology is telling us.
What do we mean? Ask yourself this: “Had the Fed really done anything yet?” Unless we fell asleep at the wheel, no rates have been hiked, and the balance sheet is still adding bonds every month! Yes, the pace of buying has begun to slow, the so-called taper. This was being priced in already. But those Fed minutes scared investors. And scared money doesn’t make money, to paraphrase a well known saying. Well, the unknown of when the fed might reduce its balance sheet, or when it may do its first rate hike, sparked this correction. However, you may be surprised to learn that we thought the technicals were speaking to toppish action. Our upside target was for 4750-4775 before we would see some consolidation. We were wrong, as the market actually pushed to 4818. But we were close. We may have missed as few points by raising cash early, but, it’s not about being “right” it’s about having a plan. Worst case? No one gets hurt taking profits.
So now we are in a market where the S&P 500 is now hovering at what we see as a psychological resistance line of 4300. The market has not really relinquished this level, yet. We do have catalysts ahead, including the Fed meeting this week, as well as ongoing earnings. It seems, just looking at Twitter, Stocktwits, Seeking Alpha, and handling our hundreds of inquiries at our service the last few weeks that there is panic right now, and near universal bearishness. That tells us that we are close to a bottom.
Yes, finances matter. If earnings power is reduced this year, we could fail to see a sizable rally. That is a true fundamental pressure. But, right now, people are selling into this weakness. You should rest slightly better when we tell you this: We see massive support zones approaching in a 3.5% range of 4100-4250. We expect this zone to see buyers come in heavily. Our research suggests that this is where you should deploy significant cash.
Now, there are no guarantees in anything, but we can rest assured with reasonable probability that this is a solid zone to buy in. However, it does not hurt to start nibbling at present levels either. In other words, if you did not sell according to your plan (did you even have a plan?), we think there’s not much to gain by selling here.
Now, that is not universally true. It’s a very tough hold in some of these names in tech that are growing revenues 20-30% a year but have no path to earnings. As with all things, there are some good exceptions that our members are familiar with. These are the names that are reasonably valued with massive growth and huge total addressable markets, along with solid management teams. We talk to a lot of management teams, and frankly, we think a ton of traders and investors do not include this variable in their modeling to the degree we do. You should.
Have you panicked? Did you feel strong after watching 300 points come off the S&P500, holding like a boss, only to capitulate and sell when the market was down 4% earlier this week? How about today when markets turned back lower 2%. Once you do capitulate, after hanging on, you are often the loser. While you cannot time the market, you can gauge, with reasonable precision, pending directions, and use charting to guesstimate at levels. While individual stocks move with their own reasons, when markets are getting destroyed, little is spared.
But let’s be honest. Maybe by a show of hands… were you looking at the screens this week and thinking “boy if only I had done XXXXXX” or “wow why didnt I sell this back on XXXXX?” or “I should sell now and end my pain.” We are certain one of these three things has crossed your mind the last week, and especially this week. The truth is hundreds of billions, trillions really, in collective value is and could be erased. That hurts. No doubt.
What you may not know is that underneath the averages there are some names down 70%-80%. This epic revaluation on interest rates being raised a few basis points has now gone from “we are overvalued” into “OK, it’s panic time.” This is how crashes happen. In today’s age the algorithms drive like 85% of trading, and it sucks in human emotion to do the wrong thing. Market euphoria and depression bring out the worst in our human instincts. And this is emotion-driven decision making. Big mistake folks. The reality is the fiscal system is pretty strong as is the economy, but we are seemingly almost pushing ourselves into recession by panic selling. To some degree, we’re doing the Fed’s bidding for it.
Here’s the thing. We know that nearly everyone, and we mean nearly everyone is down right now over the last month. Sure, short sellers are having their day in the sun. But even our service team and our members are down, even though we were raising cash into this.
Oh, and by the way, if you are 100% cash you are slowly going down, because inflation is eating you, or it will.
What we are seeing right now is panic. And the last to panic is always the everyday Joe, usually the same guy who entered the market at highs (which we saw as 4775, though it got a bit higher). What’s causing this panic? Well this panic is typically the “fear that the market for a particular industry,” or in general the entire market, will continue to decline, causing additional losses. And if you do not sell, you might be left with nothing. So, although you were beaten up, you panic, and sell. That’s what we were seeing this week. As more and more start to see a bear market, we start to get a little bullish.
Panic will get you nowhere. Think back to the good ole days, when hope and excitement for holidays were building, and we were telling you about raising cash and trimming winnings. It took two months, and, we may have been early starting to buy something again, but you have got to look for value. There are some places to park money to limit losses other than cash, and these are consumer staples, telecoms, and REITs. Maybe healthcare. Growth can be had in energy and financial, once we settle down. Though with the global strife between Ukraine, Russia, the U.S, etc, energy should be getting a bid. We hate to say it but even the names that are rapidly growing and making no money… it’s almost time there to consider some buying.
What we see happening now is the mega cap names are starting to fall. That to me tells me we are close to an end. Tomorrow? Friday? Maybe next week, but this seems to me to be on the verge of “enough is enough.” But it will not end until there is capitulation. Did you capitulate? Capitulation is when investors (often driven by panic) give up any previous gains in any security or market, or lock in losses, by selling their positions during periods of declines. We definitely saw some signs of it to take us about down to our 4300 line of support. If breached, it may be a quick drop, but we see the buyers coming in heavy in the aforementioned 4100-4250 range.
Capitulation happens when the panic gets so high you can’t stomach seeing your positions down 10, 15, 20% or more, and you say, “I don’t want to be left with zero.” Being left with zero is also known as being left with “holding the bag.” Most of you probably knew that. When you capitulate, you often lose. When that happens and you sell, the market comes back, and you chase it back higher.
Does this mean that we’re saying you should hold and never sell? No. Not even in your long-term account. Perfectly fine to take profit when things are over done, that is to trim, and to buy more when the markets get crushed. Sure, a dollar cost averaging approach to market investment works fine over 30 years if you buy the same amount every week if you buy the index. Lot of times this can do better than those who day trade. Actually day traders almost always lose. The proper way to trade is to have a horizon of weeks, months, even quarters. Then, use your trading gains to feed your long-term portfolio.
It can be done. You can get ahead of the market if you know what to look for. You will not always be correct, and often may be early, but almost always, you can get the direction right. If you’re buying or selling stocks more than once a month, then you need to know how to trade and what to look for. So if you are panicking, it tells us that you simply did not have an exit plan. And when you sell, and we buy your shares, you will know that you fell into the capitulation trap. If you are afraid, the best thing to do is stop obsessing over the tick by tick movement of the market.
Walk away from the screens for a while. None of you (or very few of you reading) run a mutual fund or an ETF. You do not need to obsess tick by tick. Whining will also get you nowhere. It sucks. This sucks. No one likes watching their gains they worked hard for to fall in three weeks or so.
Diversification helps, but now with panic, it does not matter. Hedges will help ease some pain, but the market is taking its medicine ahead of the Fed this week and that is because the psychology shifted weeks ago.
All you can do now is resist the urge to sell the highest-quality names that are being taken down. The best strategy is holding those hedges, hopefully you had trimmed some winners, building a list of names on your own that you want to be in. Start buying those names that are on sale if the growth is to remain in them (and in many cases they are).
A few final thoughts. It will get better. We see sizable support beneath us. If this is stressing you out, it’s OK to take a few days off. We also have a few final rules of trading that we want you to keep in mind. First, always have a plan. A plan for entry and exit. Second, trading should not be your entire portfolio. We have a set percentage we and our members target. Third, be careful with leverage (e.g. weighted ETFs, options). Fourth, when volatility is sky high, sell premium, do not buy it. Fifth, never trade on margin (sorry, we know many disagree with this, but, we are helping people investing their savings and paychecks). Sixth, the market is a combination of fundamentals, psychology, macro catalysts, and technicals, and they each interact with one another, but under no circumstance should you trade with emotion. Finally, our seventh and most important rule, which is perhaps most important after the last month. Hopefully you are winning, but if you are losing, and losing bad, please always remember that it is just money. We can always make more of it.