The S&P officially entered bear market territory on Monday, June 13th, when it closed down -21.3% from their all-time high close made earlier this year.
For the record, the Nasdaq entered bear market territory in March. And they made a new low on Monday as well, putting their total decline at -32.7%.
The Dow has so far avoided a bear market (given their lesser exposure to tech, which has been weighing on the markets). But at -17.1%, those few percentage points separating a bear market from a correction is of little consolation.
Raging inflation (41-year high according to the latest CPI report last week), is largely responsible for the economic and market angst.
With inflation running hot, and the Fed way behind the curve in trying to mitigate it, fears of a recession are growing. Problem is, if the Fed remains too slow in raising rates, then inflation itself will take its toll by reducing demand and eating away at consumers’ purchasing power. On the other hand, if the Fed raises too high and too fast, that could bring about the kind of demand destruction that could send the economy into a recession.
So, the Fed has to thread the needle.
We will see how the Fed’s 75 basis point rate increase on Wednesday, and the expectation for another 50 basis points in July (culminating in 3.4% by year’s end), does in trying to do just that.
But now that we’re in a bear market, now what?
For one, it suggests we’re closer to hitting bottom that we were previously.
The average bear market decline for the S&P (going back 100+ years), is -38%. With the S&P down by more than -21%, we’re more than halfway there.
If a hard landing is to be seen, there’s likely more downside to go.
If the worst-case scenario does not unfold, however, and a softer landing indeed is what we see (no recession), then stocks are grossly oversold and a sharp repricing higher should be seen.
The question on whether we see a recession or not won’t be answered until at least the end of the second quarter, plus a few weeks, for the stats to come out.
In the meantime, with over 1,450 stocks down more than -50% YTD, and over 500 stocks down more than -70%, there’s tons of bargains out there right now. And it presents an opportunity to pick up some great names at prices you could only have wished for a few short months, or even years ago.
And in spite of inflation, and fears of recession (we shall see), there’s plenty of positives in the economy that have been virtually ignored during this sell-off, including a strong labor market (near 50-year low unemployment), strong household spending, strong business investment, and strong industrial production. So much so that the Fed (in the latest FOMC Minutes), said they anticipate GDP would ‘advance at a solid pace over the remainder of the year.’
Which means now is a great time to start looking for new stocks to buy, especially with valuations having fallen to their lowest levels in more than 2 years.
But you need to be selective.
And it’s now more important than ever to make sure you’re doing everything you can to get the most out of your trades. Because there will be distinct winners and losers as we move forward.
So, before you make your next trade, please read this first to learn how to put the probabilities of success in your favor.
Knowledge Is Power
We’ve all heard the old adage; knowledge is power.
It’s a great saying because it’s true.
And that saying couldn’t be truer than when it comes to investing.
Take a look at your last big loser for example. After analyzing what went wrong, you soon discover some piece of information that ‘had you known beforehand, you never would have gotten into it in the first place.’
I’m not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard.
I’m talking about things that you could have known about or SHOULD have known about before you got in.
Did You Know?...
• Did you know that roughly half of a stock's price movement can be attributed to the group that it’s in?
• Did you also know that oftentimes a mediocre stock in a top performing group will outperform a ‘great’ stock in a poor performing group?
• And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1?
• And did you also know that the top 10% of industries outperformed the most?
More . . .
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Was your last loser in one of the top industries or in one of the bottom industries?
If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.
That’s what is meant by ‘knowledge is power’. Knowable things that you need to know.
That’s not to say that stocks in crummy industries won’t go up -- they do. And that’s not to say that stocks in good industries won’t go down -- because they do too.
But more stocks go up in the top industries, and more stocks go down in the bottom industries.
And since there are over 10,000 stocks out there to pick and choose from, why settle for one with a reduced chance of making any money?
Did You Know?...
• Did you know that stocks with ‘just’ double-digit growth rates typically outperform stocks with triple-digit growth rates?
• Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that the companies with the highest growth rates would do the best. But it doesn’t always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
For example, a company earning 1 cent a share that is now expected to earn 6 cents, has a 500% growth rate. But, if it receives a downward estimate revision to 5 cents, that’s a significant drop. Even though it still has a 400% growth rate, the estimates were just reduced by -16.7% and the price is likely to follow.
If you’ve ever wondered how a stock with a triple-digit growth rate could possibly go down -- that’s how.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint. And focusing on companies with growth rates above the median, but less than 50%, has produced some of the best results.
Did You Know?...
• Did you know that stocks receiving broker rating upgrades have historically outperformed those with no rating change by more than 1.5 times? And did you know they outperformed stocks receiving downgrades by more than 10 x as much? The next time one of your stocks is upgraded or downgraded, be sure to remember these statistics so you know how the odds stack up and whether they’re for you or against you.
• Did you know that stocks with a Price to Sales ratio of less than 1 have produced significantly superior results over companies with a Price to Sales ratio greater than 1? And did you know that those with a Price to Sales ratio of greater than 4 have typically shown to lose money? That doesn’t mean that all stocks with a P/S ratio of less than one will go up and those over four will go down, but you can greatly increase your odds of success by following these valuations.
• Did you know that the Zacks Rank is one of the best rating systems out there? And did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years, with an average annual return of 25% per year? That’s more than 2 x the returns of the S&P with an 82% annual win ratio. And when doing this year after year, that can add up to a lot more than just two times the returns.
• Did you know that two simple filters added to the Zacks Rank #1 stocks significantly increases its returns? What if you did? We have a screen that utilizes these two additional items to narrow that list down to 5 high probability stocks per week. Over the last 22 years (2000 thru 2021), using a 1-week rebalance, it’s produced an average annual return of 51.2%, which is 6.8 x the market. That screen is aptly called the Filtered Zacks Rank 5 screen.
Do you know how well your stock picking strategies have performed?
Whether good or bad -- do you know why?
Do you know if your favorite item to look for is helping you or hurting you?
This is important stuff to know.
Beat The Market On Your Next Trade
After the recent sell-off, and with stocks trading at huge discounts, now is the time to build your watchlist with new stocks to get into that will lead the market.
And there's a simple way to add a big performance advantage for stock-picking success. It's called the Zacks Method for Trading: Home Study Course.
With this interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.
Zacks Method for Trading covers the investment ideas I just shared and so much more. It guides you to better trading step by step.
You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.
You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles.
The best of these strategies produced gains up to +48.2%, +67.6% and even +95.3% in 2021.¹
The course will also help you create and test your own stock-picking strategies.
Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.
Please note: Copies of the book are limited and your opportunity to get one free ends midnight Saturday, June 18, unless we run out of books first. If you're interested, I encourage you to check this out now.
Find out more about Zacks Home Study Course >>
Thanks and good trading,
Zacks Executive VP Kevin Matras is responsible for all of our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.
¹ The results listed above are not (or may not be) representative of the performance of all strategies developed by Zacks Investment Research.
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