How to Buy Stocks on the Edge of a Bear Market

It seemed everyone was in Friday’s buying mood except Elon Musk.this Dow Jones Industrial Average Breaking a six-day losing streak, Nasdaq Composite positive progress for the second time in a row, and S&P 500 Up more than 2%, taking a small step back from the brink of a bear market, it ended the week down 16.50% from its 52-week high. But any one-day stock gains in this market are insignificant. The Dow fell for the seventh straight week for the first time since 2001.

“We saw the exact same thing in 2000 and 2001,” said Nicholas Colas, co-founder of DataTrek Research. “You know asset prices are going down, but trading action always gives you enough hope. …I’ve been back in 2000 too many times in the last three months…if you haven’t seen it before, it’s hard Pass, you won’t forget.”

For many investors who have flocked to stocks since the pandemic, the bull market once again appears to have only one direction, in what may be their first long dance with bears. For Colas, who worked at Steve Cohen’s former hedge fund SAC Capital earlier in his career, he has learned some lessons from those years that “relieved a lot of heartache.”

In heavy rain in Frankfurt, Germany, people with umbrellas pass a bull and bear market outside the Frankfurt Stock Exchange.

Kepfaffenbach | Reuters

First of all, it is a consistent philosophy of trading firms to never short new highs and never buy new lows. As investors who have only been through bull markets are now learning, momentum is a powerful force in both directions. That doesn’t mean investors should keep any particular stock off their radar, but the stock’s stability won’t be measured in a day or two of trading. Investors should monitor the stock for signs of stabilization in one to three months. One exception: A stock that rises on bad news can be one where the market is signaling that all the bad news has been priced into it.

But for now, Colas said, betting big on a stock as a bargain-hunting opportunity isn’t the best approach. “The first rule is to lose as little as possible,” he said. “That’s the goal, because it’s not like you’re going to kill it and invest as little as possible to lose… When we get a turnaround, you want to have as much money as possible.”

Here are some of his most important principles on his stock buy list right now, and how they relate to the current market environment.

The importance of the VIX at age 36

Volatility is the defining characteristic of the stock market right now, and the clearest signal investors can see is that the sell-off has run out. Volatility Index Volatility Index. A VIX of 36 is two standard deviations from the mean since 1990. “It’s a meaningful difference,” Colas said. “When the VIX hit 36, we were really oversold and we were in core panic mode,” he said. But in the latest round of sell-offs, the VIX has yet to reach that level.

In fact, the stock market has only experienced a VIX close above 36 once this year. That was March 7, and it was a viable entry point for traders, as stocks ended up gaining 11% — before things got worse again. “Even if you buy that close, you need to be flexible,” Colas said. The VIX said the shuffle in stocks is not over. “We danced among the raindrops of the storm,” he said.

A short-term bounce usually reflects more of a bear squeeze than a completely clear signal. “Short squeeze in a bear market is vicious, and it’s easier to trade than short,” he said.

Looking at some of the recent actions of pandemic “meme stocks” like GameStop and AMC and pandemic consumer winners like Carvana, Colas says buying these rallies “is a tough way to make a living, a tough way to trade,” but Back in 2002, traders did look at heavily shorted stocks that were sold for the most gains.

Whether it’s Apple, Tesla, or any other company, stocks won’t love you

For investors who made their fortune riding Apple or Tesla higher in the recent bull market, now is an “extremely choosy” time to remember even your favorite stocks, Colas said. Do not love you.

This is another way to remind investors of the most important rule of investing in volatility: get out of your emotions. “Trade the market you have, not the market you want,” he said.

many investors Lessons learned the hard way with Apple, down more than 6% in the past week alone. year to date, apple It fell into its own bear market before Friday’s rally.

“Apple has a job to do in this market, and it hasn’t imploded,” Colas said.

Everyone from husband-and-wife investors to Warren Buffett sees Apple as “a great place,” and watching its rapid collapse signal that the stock market’s closest approach to a safe-haven trade is over. “We’ve moved from moderate risk-off to extreme risk-off, and it doesn’t matter if Apple is a great company,” Colas said. “Liquidity is not very good, there are security risks in any asset class you can name… The financial assets that people are looking for are the safest things, Apple is still a great company, but it’s a stock.”

Diving isn’t exactly a slam dunk since valuations in the tech industry have always been high.

“You can buy it for $140 [$147 after Friday] It still has a market cap of $2.3 trillion. It’s still more valuable than the entire energy sector. It’s hard,” Colas said. “Tech stocks still have some pretty crazy valuations.

S&P 500 sectors in better position to bounce back

On an industry basis, Coke is focusing more on energy because “it’s still in play,” he said, and health care is the best “safety deal” in terms of growth deals, even with one caveat. Based on its relative valuation and weighting in the S&P 500, “if we can bounce back and not lose as much, it’s a great buy,” he said.

History suggests that health care stocks will get bigger bids during times like these, as growth investors out of tech need to cycle into another space, and the options they can turn to have narrowed over the years. For example, it wasn’t long ago that investors would turn to “growth” retail names amid volatility, but the rise of online retailing killed the deal.

Colas stressed that there is no evidence that growth investors are investing in anything yet. “We haven’t seen healthcare yet, but as growth investors are rearing their heads again, there aren’t many other sectors,” he said.

What Cathie Wood’s Blue Chip Buy Means

Even if Apple succumbed to the sell-off, Colas said there’s always a reason to buy blue-chip stocks in a bear market. Colas reported on Wall Street as an example of how a decade of cars is a blue-chip stock for long-term investors.

The first lesson from ford However, in this market, it may be its Sell ​​Rivian stock It gets its first chance.

“Ford did a great job of keeping it alive, and now it’s closed the hatch,” Colas said. “Push the sell button and get some liquidity. They see what’s coming, and they want to be ready to continue investing in EV and ICE businesses.”

no matter what happens Rivianford and General Motors Might be around for a while, actually, guess who First time buying a generic: Cathie Wood of Ark Invest.

That doesn’t mean Wood is necessarily disgusted by her favorite stock — Tesla’s No. 1 stock — but it does suggest that a portfolio manager may admit that not all stocks are rallying on a similar timeline.Ark, its flagship fund Ark InnovationFalling as much as the Nasdaq’s peaks and troughs between 2000 and 2002, there is some place to make up.

“I have no problem with whether Cathie is a good or bad stock picker, but she sees GM as smart, not because it’s a good stock…I won’t touch it here, but anyway, we Knowing that barring some catastrophic bankruptcies, it’s going to happen in 10 years,” Colas said. “I don’t know if Teladoc or Square will,” he added of some of Wood’s top picks.

A major disconnect between many in the market right now and Wood is her firm belief that the multi-year disruptive themes she’s betting heavily on are still around and will eventually prove right. But buying a blue-chip stock like GM could help prolong this disruptive vision. In a sense, Colas said, GM is a secondary buy “without having to put the farm on those unprofitable stocks.”

Even in a market that doesn’t like any stock, there are names you can trust in the long run. After the Nasdaq bottomed in 2002, Amazon, Microsoft and Apple ended up being among the top trades from 2002-2021.

A bear market doesn’t end in a “V”, but a tired flat line that can last for a long time, and the stocks that end up working don’t all work at the same time. Even if Tesla’s market cap hits $1.5 trillion three years from now, GM could benefit before Tesla. “That’s the value of a portfolio at different stages, and there are things you can get wrong,” Colas said.

The GM buyout could be a signal that Wood will make more deals to diversify the duration of her fund, but investors will need to pay attention to where she places her portfolio in the coming months. If it’s still a firm bet on the most disruptive, money-losing company, “I love QQQ,” Colas said. “We don’t know what ARK will be, but we know what QQQ will be,” he said. “I’d rather have a QQQ,” Colas said, referring to Nasdaq 100 ETF.

Even so, the caveat must now be raised. “I don’t know if the big tech companies will make a comeback like they did before because the valuations are so much higher,” Colas said. Microsoft is worth more than several sectors in the S&P 500 (real estate and utilities), and Amazon is worth more than two Walmarts, “but you don’t have to bet on Teladoc and Square,” he said.

“We know they’re good companies, and who knows where the stock is going, but the fundamentals are solid, and if you have to believe you’ve picked the next Apple and Amazon, it’s going to be a tough trade,” he added.

Where Wall Street will remain bearish

From a macroeconomic standpoint, there are plenty of reasons to be skeptical of any rebound, from the Fed’s ability to manage inflation to growth prospects in Europe and China, all of which range so broadly that markets have to factor in the possibility A global recession of a greater magnitude than usual. But one of the key market data points yet to be included is S&P 500 earnings estimates. “They’re so tall, ridiculously tall,” Colas said.

The fact that forward P/E ratios aren’t getting cheaper tells investors that the market still has work to do in lowering the numbers. Currently, Wall Street is forecasting a 10% sequential increase in S&P 500 earnings, and Colas said that won’t happen. “With 7%-9% inflation and 1%-2% GDP growth, that’s not the case. The streets are wrong, the numbers are wrong and they have to come down.”

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