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  • The stock market is oversold, so stocks could see a relief rally.
  • Bear market rallies can be strong but are often short-lived.
  • Buying a low-P/E broker and selling a weak transport stock into strength could be profit friendly.

Bear market rallies begin on short-covering but mature on institutional buying. Many of this year’s biggest early-cycle losers rallied double-digit percentages on Friday, suggesting short covering was a catalyst. However, it’s unclear if institutional investors will press the buy button or sell stocks into strength.

As Action Alerts PLUS co-Portfolio Manager Bob Lang tweeted Thursday, “This is what bear markets do...Fill you with hope, promise, and 'maybe this is it'.. Then crush your spirit. Bear markets wear you out.”

Remember, we saw significant rallies in January, February, and March, when the NASDAQ 100 QQQ ran up 10.7%, 10%, and 17%, respectively, before selling off to new lows.

On Friday, Real Money’s James DePorre wrote in “Bounce Action Is Developing, but Don't Trust It to Last for Long”:

“It is very important to keep in mind that this extremely poor action has created a large number of investors who would like to reduce their exposure if they can do so into some strength. That overhead resistance will be extremely strong, but short covering and momentum chasing are what tend to cause the big counter-trend moves.”

Stocks can climb sharply during relief rallies, but the real test will be what happens at resistance. For example, the NASDAQ 100 stalled at the 21-day moving average in January and February, and the March rally lost steam at its 200-day moving average.

Will we fail at resistance again, or will fear-of-missing-out prompt inflows into funds, supporting a durable rally?

Given Lucy has pulled the ball on Charlie a few times this year, investors should be cautious. Plenty of money will be made with better risk-reward when there’s the conviction the Fed will shift gears and turn friendly again, like in 2019.

In the meantime, selectively buy and sell high- and low-conviction ideas to improve your hand.

A broker to buy

On Thursday, over one-third of all the stocks on the NASDAQ traded at 52-week lows, including Interactive Brokers  (IBKR) , a popular discount brokerage.

Historically, when there's a large percentage of names at lows, the market is usually higher one year later. So if history rhymes again, then Real Money Pro’s Paul Price thinks picking up shares in Interactive Brokers can make you money.

In “Go for Broke-r, Power Ahead,” Price acknowledges brokers struggle when markets falter because of lower trading volume. However, he thinks higher rates offer valuable interest income to offset a drop-off in activity and lower margin balances. He writes:

“ZIRP -- zero interest rate policy -- made a very lucrative source of income go away. It's now coming back rapidly. When I was employed by Merrill Lynch (ML) in the 1980s, ML made more from interest than on commissions.”

That’s not necessarily why he thinks Interactive is a buy, though. Instead, it’s because Price thinks shares are historically cheap. Its shares have gone on to deliver big gains in the past when its price-to-earnings ratio is about as low as it is now.

Back to Price:

“IBKR rarely sells at low P/Es. When it does there has always been money to be made. Its multiple on Thursday was the third-lowest of the past decade.

IBKR bottomed at 14.6-times forward EPS in 2012. The shares proceeded to run from $13 to $45.90 in about 39-months. The stock's Covid-panic low of $33.70 was 13.5-times that year's final earnings. IBKR then took off and hit $82.80 over the next year or so.

From 15.5-times its 2022 estimate even an average P/E of 24.6-times could deliver a Dec. 31, 2022 price north of $83 once the mood swing positive again.

The company is net debt-free and very volatile. It is a terrific trading vehicle when you can get in cheaply. You even get a better than money market yield while holding.”

Interactive’s valuation looks even better on a forward basis. 

Because the market is forward-looking, I compare the forward P/E to the 5-year P/E range (currently, this range includes terrible markets in 2018 and early 2020). Interactive’s forward P/E is presently 12.3, nicely below the 5-year P/E low of 14. Investors appear to be pricing this stock for a ratcheting back of earnings from current estimates, but a normalizing P/E could mean a big move higher if that doesn't happen.

Of course, there’s no rule saying Interactive Brokers can’t get cheaper. So, Price advises patience:

“IBKR traded above $80 during 2018, 2021 and 2022 year-to-date and EPS are expected to grow nicely going forward…You won't likely go wrong..if you buy now and show reasonable patience.”

Toss out this transport

The data hasn’t been bullish for transportation stocks lately. 

In March, FreightWaves began noticing rejection rates were dropping, suggesting operators were scrambling more to fill trucks, and this week, Cass Freight’s index showed shipments fell 2.6% month-over-month and 0.5% year-over-year in April.

The deceleration led Cass to conclude: 

"[T]he additional surge of inflation and recent interest rate increases seem to have pushed volumes over the edge. The prospect of freight recession is now considerable, as substitution from goods back to services spending picks up pace, and as inflation slows overall spending, particularly via higher fuel prices and by pressing up interest rates.”

If freight data worsens because consumers retrench spending because of a slowing economy and stubborn inflation, using strength to exit some transportation stocks could be wise.

In “Transportation Is Still Iffy With XPO Logistics,” Real Money’s Bruce Kamich, a technical analysis pioneer who’s been evaluating stocks for decades, concludes:

”XPO could experience an upside trading bounce with the broad market but the overall picture from the charts and indicators is still bearish. After a potential bounce further declines are possible. I would sit this one out.”

Influencing Kamich’s take is that XPO is trading below its 50-day moving average and 200-day moving average (both of which are declining), and its daily and weekly On Balance Volume (OBV) is negative. OBV is essentially a running total of up-day volume minus down-day volume, and when it’s trending lower, it suggests sellers are in charge.

You can see what Kamich is referring to in XPO’s daily chart.


The Moving Average Convergence/Divergence (MACD) is positive on the daily chart, suggesting a short-term trade higher, but Kamich writes, “The MACD oscillator is bearish” on the weekly chart. MACD subtracts the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A bullish or bearish signal triggers when that result crosses over or below zero, or the 9-day EMA.

How low does Kamich think XPO may eventually trade? Kamich’s price target using a daily point-and-figure chart is $31, and it’s $25 using a weekly point-and-figure chart.

The Smart Play

Long-term investors can use down days to build a position in Interactive Brokers. For example, if your target weighting is 3%, consider buying 1% to 2% now and adding more on weakness until your position is full.

XPO Logistics could climb in sympathy with a market rally, so you can use up days to take the position off (or short) or unwind it if it hits downtrends and rolls over. XPO challenged resistance at the 21-day moving average on Friday. If it clears that level, additional overhead supply exists in the high $50s to low $60s, where it previously held before breaking to new lows. If you’re long XPO, consider using a trailing stop loss to capture additional gains while protecting yourself if the stock starts falling again.

  • The stock market is oversold, so stocks could see a relief rally.
  • Bear market rallies can be strong but are often short-lived.
  • Buying a low-P/E broker and selling a weak transport stock into strength could be profit friendly.
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