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‘Nasty pullback shouldn’t surprise any of us:' InTheMoneyStocks on market moves

Yahoo Finance’s Akiko Fujita and the CFO of InTheMoneyStocks Gareth Soloway discuss the latest market moves.

Video Transcript

AKIKO FUJITA: Let's bring in Gareth Soloway. He is the CFO at InTheMoneyStocks. Gareth, it's good to have you on today. What's standing out to you here today in that pullback that we're seeing in the markets?

GARETH SOLOWAY: Hi, I mean, it continues to be a nasty pullback. In all fairness, it shouldn't of surprise any of us, considering the run-up in the markets we had. I mean, you had this euphoria that was reminiscent of the-- you know, the early and late-1999, early-2000 period. So the sell-off should continue. It needs to unwind. You need to shake out the weak hands that continue to hold on.

I think the Nikola news is a big news period. I saw you guys discussing that on the prior segment. That had a lot of smaller investors in. They need to be shaken out. I think this news really shakes them to the core with the founder leaving. And ultimately, I think we see a downside move to at least 3,000 on the S&P before this is all said and done.

AKIKO FUJITA: What do you think is going to be that catalyst to the downside? I mean, we've talked about a number of headlines here. The stimulus concerns continuing to weigh on the markets, now you've got tensions between the US and China potentially rearing its head again, and then you've got that election risk looming in-- what are we, just over 40 days I think?

GARETH SOLOWAY: Yeah, absolutely. It's all of those things you mentioned and more. I mean, you have a situation where now Europe is seeing this resurgence in COVID, which now makes people worry here that we're going to see a big resurgence in COVID, which then keeps people indoors from spending money. Again, no sign of stimulus from the government.

You have the China issue here where you have-- at some point, they're going to retaliate. I think Trump is probably walking a fine line right now because he doesn't want them to retaliate prior to the elections. But they're not ones to sit on the sidelines. So at some point, something is going to come through on that. Does it affect Apple? Does it affect some other major tech stock?

So there are just so many risks here, and the markets are still at elevated levels. I mean, there are certain stocks that are beginning to look semi-attractive for balances. But overall, it is-- there's-- I mean, the worry, it doesn't make sense to be heavily long this market to me. There's just too much unknown, you know?

It's kind of like going into a casino. Yeah, you're going to-- you know, at least in a Casino, I always say to our traders that at least you're getting free drinks. You're having a good time with your buddies. And you know the odds are basically 50/50 or a little worse. In this market, it's there's no benefit to you being long heavily. Now, it's not to say, again, there aren't some small areas. But certainly, it doesn't make sense to me.

AKIKO FUJITA: So what's the strategy? I mean, should be investors be holding cash? Should they actually put their money to play here in anticipation of this rotation accelerating? What's your advice?

GARETH SOLOWAY: Yeah, I would say-- so as the S&P comes lower-- so first of all, be very patient. It's so important to be patient. Don't jump the gun. Think about the money that kept driving this market up for months and months and months and months. It was never ending. The markets always overshoot on the upside, and they'll always overshoot on the downside. So you'll get a chance.

I think the buy-the-dip mentality has been ingrained in this market for so long that people are just reeling to jump in on the first three or four or five-- here we are at over 10 on the NASDAQ-- pullback, and you just got to be patient. But when you get down to the levels where these valuations start to make sense, I think you start to inch in.

Now, there are some sectors I actually like. One that I've been passionately talking up is the marijuana area-- you know, Aurora Cannabis, Tilray. And the reason these are so interesting is because they're trading near their March lows. So basically, they're pricing in no change in the government, but the Democrats have already talked about-- in fact, they've postponed a vote on legalization in the house for marijuana on the federal level.

So you have a situation where you have some trades like this. And again, listen, these are high-risk trades. So it's something that if I am in them, but I'm in very small. But if you have a scenario where you have a Democratic president and potentially a sweep with the Senate and the House, these stocks could have huge upside to me. So there are pockets just like that.

And again, I think the key with these marijuana stocks is that they're trading at levels where the market or investors are assuming there's not going to be. So there's very little-- relative little downside risk. But again, little pockets like this are super, super attractive to me and can be found, if you think about it.

AKIKO FUJITA: I mean, you say it's not-- there's not a lot of downside risk, but isn't there an inherent risk there? Because we're talking about the makeup of Congress and how likely that shift-- and the polls are far from certain on that issue--


AKIKO FUJITA: --with just about two months left to go.

GARETH SOLOWAY: Yeah, you're 100% right. They're far from it. But what I like about these stocks-- now, if these stocks were trading 50%, 100% higher like a lot of the tech stocks out there, then I would say, stay away, you know, right? And I think this is one of those situations for me where I say, all right, you know, 1% or 2% of my capital, I'll commit to that.

And that's OK because worst case, if they do go down a little bit more, if there's no change, then that's OK. And it's basically a risk-reward assessment here on what is priced in versus what could happen. And again, it's somewhat of a gamble, no doubt. But because I think that these stocks are so low and basically trading at their March 2020 lows, you have that potential of a big upside versus relatively low downside.

And again, folks, I stress this, you have to be aware of position size. This is one of the biggest things that my traders work on that I work on with them is understanding that you don't go in heavy on a position that's highly speculative.

AKIKO FUJITA: And what about the value stocks that we keep-- we keep hearing about the value plays where people are rotating out of growth. I mean, is that-- is now the time to rotate out? Or to your point, is it really not as simple as value versus growth anymore, given how much volatility we've seen in so many different corners of the market?

GARETH SOLOWAY: I think you have to look at it like if you have money that you are pushing to get in the market, start focusing on the value names. Because I mean, you have a Kraft Heinz that is trading at low valuations, relative to many other things. I mean, there's a lot of these value stocks that make sense if you are kind of being pushed to put-- and listen, a lot of money managers have to put money to work, so it makes sense that their rotation is going to go in that direction. That's where you're getting a dividend. So you're kind of getting a protection, if you will. Whether it's a 3% or 5% dividend, at least you're protecting your downside a little bit like that in this type of crazy market.

So I do think the value stocks-- I own a couple of value stocks. I think the financials are semi-interesting, even though they're getting beaten up today. I have a little position in JPMorgan. So these type of stocks, absolutely. I still think there's more downside on the stocks like Apple and Microsoft and Tesla, forget about It I think-- I'm very curious to see what happens after Battery Day tomorrow, if the stock can hold up or if it dumps out.

AKIKO FUJITA: Yeah, there's a lot of hopes riding on Battery Day. We'll be watching that one closely. Gareth Soloway, CFO at InTheMoneyStocks, good to talk to you today.

GARETH SOLOWAY: Thank you so much. Take care.