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"When the Time Comes to Buy, You Won't Want To," -Walter Deemer

  • Selling rallies and buying sell-offs make this year a trader's tape.
  • An onslaught of earnings this week creates uncertainty.
  • Poor sentiment and sagging stocks suggest tilting bullish.

This year has been a trader's market rather than an investor's market.

The wild swings in the major market indexes are unsettling, but they mask even wilder swings in individual stocks. The big winners have become the big losers, with many former high-flyers down 50% or more.

Those losses didn’t happen in a straight line, though. There were plenty of short-burst rallies that failed along the way. As a result, the nimblest of traders have -- at least on paper -- been damaged less than the buy-and-hold crowd.

Last week was a perfect example. 

Those who sold into the S&P 500’s early-week rally were rewarded when the major indexes fell apart on Thursday and Friday. The end-of-week drop erased the early-week gains, leaving the S&P 500 ETF (SPY) to finish the week down 2.7% and the NASDAQ 100 ETF (QQQ) to finish down 3.8%.

The declines brought both indexes back to important lines in the sand – support levels that, so far, have held this year. For example, this morning, the SPY’s $421 price is spitting distance to its lows in January, February, and March. Meanwhile, the QQQ has undercut its January low, but it’s similarly flirting with February and March lows.

Last week's sell-off precedes a torrent of first-quarter earnings releases this week. 

A disappointing report by Netflix last week caused a 35% drubbing, while an encouraging report by Tesla resulted in... a yawn... given shares are trading about where they were last Monday.

This week, we'll get updates from 44 members of the NASDAQ 100 index and about half the S&P 500, including tech titans Microsoft, Google, and Apple. Their fates may dictate if the indexes hold support again or if we see new lows because technology stocks comprise 28% of the S&P 500 and over 50% of the NASDAQ 100.

What to do?

This year has favored zigging while others are zagging, so while an undercut of the indexes may happen, sentiment is so bad that if it were to happen, a toss-hands, buyable rally could be in the offing.

In “When the Time Comes to Buy, You Won't Want To,” Real Money Pro’s Doug Kass explains why he’s starting to tilt bullish despite plenty of reasons for bearishness:

“During the month of April, the consensus of the investment community has begun to recognize the risks that we have been expressing. As of Friday's close, the S&P and Nasdaq indexes have fallen by -7% and -11%, respectively, since March-end. The Nasdaq is now lower by almost -20% year-to-date…

The drop in equities has recently intensified - with a -5% decline in the S&P Index over the last two trading sessions and a 1,000 fall in the Dow Jones Industrial Average on Friday - as fear, an important reagent to creating better entry points, has resurfaced…

It should be emphasized that while high stock prices are the enemy of the rationale buyer, today's lower stock prices are, arguably, the ally of the rationale buyer...

While April's decline in the indexes has been consequential, many equities have fallen by far greater amounts and, for the first time in quite a while, represent emerging value with a more attractive "margin of safety" than at any time in many months.”

Kass thinks stocks have erased a lot of the excess valuation built up by 2020’s easy money policies, bringing them down to levels where stock pickers can start digging through the ashes. 

But, to be clear, he’s not flipping a switch from bear to bull. Instead, he’s keeping true to the thinking that flexibility -- in this case, buying when everybody else is selling -- makes sense, especially given drops in sentiment, price, and valuation.

“I am neither a Perma Bull nor Perma Bear - but, rather, I am a value investor who has at my core the marriage of a contrarian streak and a calculator…

In keeping with that objective, I am seeing more attractive investment candidates today than we have seen in the past.

I welcome the opportunity of finally "returning to the land of the investing living" in a disciplined and analytical manner, as I slowly expand my net long exposure.”

Last week, bullishness in the American Association of Individual Investors (AAII) sentiment survey remained below 20% for a second week. Similarly, the put/call ratio -- a measure of put trading to bullish call trading -- finished at 1.3 on Friday, a high reading coincident with short-term bottoms, and the VIX is above 30 again for the first time since the March lows. These examples of sagging sentiment offer support for thinking it's time to tilt the other way.

The Smart Play

"The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts," Bertrand Russell.

As Top Stocks’ Helene Meisler says, investors mosey over to the bull/bear fence and talk to neighbors before jumping over. As a result, sentiment shifts are a "process" rather than instantaneous, and that creates opportunity. 

This week, a tug-of-war could happen as investors sell big-cap tech and short-sellers buy big-cap tech to flatten out ahead earnings uncertainty. A flattening of exposure could set the market up for a rally from support levels or an even more oversold opportunity to buy if we get another wave lower.

Although nobody rings a bell when it's time to buy, you can improve your odds of buying at a good time by watching for a few things to happen.

For example, a wash-out style, down 3%+ day (on a closing basis) on the S&P 500, and/or a down open, reversal, and a strong close could be a buy signal. 

Similarly, a down 90% day (you can learn more about Lowry's 90%-days here), followed by an up 90% day or a follow-through day, would add conviction that a rally has legs.

If trying to gauge specific points to buy (or sell) isn't your thing, remember that cash is a position. 

Just because the market is open doesn’t mean you need to buy or sell. Sometimes, sitting on your hands and letting others make the “hard money” is smart. 

It may also be worth looking at long bonds, including the 20-year+ ETF,  (TLT) , or the 7-10 years ETF,  (IEF)

Bonds have gotten beaten up on news the Federal Reserve will start reducing the number of bonds it owns as soon as May. Depending on what's said when the Fed makes its next policy announcement on May 4, it could be a "sell the rumor, buy the news" situation. For perspective, the TLT is down over 13% since February 28, and it's down 21% since early December. If the economy weakens and stocks continue tumbling, then buying these bond ETFs now might be wise. In 2018, when the Fed was last increasing rates and running bonds off its balance sheet, the TLT fell about 9% to its low in November before rallying 25% through 2019 after the Fed switched gears.

If you’re in the buy-and-hold camp, my advice remains unchanged: Increase contributions to retirement plans. It can lower your average cost, positioning you nicely for when bulls regain control (potentially, as early as sometime next year, given the Presidential Election cycle). 

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