Messy Market Action Continues But 2 Big-Cap Names Stand Out
Your best move right now is to focus on trends, not turns.
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We have very messy market action on Monday morning as investors grapple with a potential slowdown in AI spending, higher oil prices and a likely Fed interest rate hike. The action could be much worse, and maybe it will be, but I’m not going to do anything right now while this develops.
The good news is that breadth is close to flat, so this is not a broad market selloff. It is technology names in the Nasdaq 100 (QQQ) that are being hit the hardest. Pharmaceuticals, retail and oil are green, so there is some rotational action helping matters.
The two big-cap names that I’m looking to add to are Amazon (AMZN) and SpaceX (SPCX). Both are off of their early lows nicely and that helps the charts, but I’m not rushing to build up any position right now.
The best advice I can give right now when the market is under pressure and corrective action is building is to focus on trends rather than bottoms. In poor markets, the media, financial advisors, pundits and everyone else are focused on trying to predict the exact moment a turn occurs. It is understandable. Declaring a bottom is far more interesting than saying maybe things are starting to improve.
If you write about the stock market like I do, there is an inclination to always write about what you should be buying. New stock picks are fun to write about and they attract interest. Telling folks that the market stinks and they should do little and hold high levels of cash might be the right advice, but nobody really wants to hear it.
Everyone Wants to Nail the Turn
Most people are overanxious to embrace a shift in the market. They jump on minor improvement and are afraid they will miss out if they don’t nail the exact turning point. The reality is that you will produce much better returns if you focus on trends and momentum rather than turning points. That is common sense if you think about it, and there are quite a few academic studies that back it up.
Eugene Fama and Kenneth French built their careers studying the efficient market theory. They examined every pattern in the market that should not exist if markets were truly efficient, and concluded that the premier anomaly is momentum. Stocks that have been going up keep going up for months, and stocks that have been going down keep going down.
Later researchers took that finding and stretched it across as much history as they could find. It has held in U.S. stocks going back two centuries, in every foreign market anyone has bothered to check, and in bonds, currencies and commodities. A simple trend-following approach made money in every decade going back to the 1880s and in eight of the 10 worst bear markets, and it did that without ever once predicting where the top or bottom would be. It just stayed with the trend and got out when the trend ended.
Why Bottom Picking Is the Hardest Game
Momentum strategies that rack up big profits take their biggest losses when a trend reverses, and there is always a delay as you adjust to the new direction. That narrow window, the moment of reversal, is the one place where even the best strategy gets hurt.
That is exactly the window the bottom picker is trying to make a living in. The stocks that plunge do tend to have higher volatility and they offer some good bounces, which makes it a seductive game to play. But those stocks are seldom the leaders again when a new uptrend emerges. You catch a bounce and then watch the real leadership move without you.
The turn trade only lasts a short time and it requires precise timing to profit from. Trends, by contrast, last for months, and a trend tells you it is over by breaking. You do not have to be smart enough to see the turn coming. You only have to be disciplined enough to stay with the move while it is working and leave when it stops.
The Bottom Line
The bottom-calling game is exactly that, a game. It can be fun to play and you can nail some good trades if you are lucky, but if you want to produce solid returns over the long run, focus on trends and not turns.
That is why I am not trying to call a bottom in this market. There is enormous uncertainty right now, with the Fed on Wednesday, oil at $108 and a fresh question mark over the AI trade, and there is no way to know when the turn comes. My job is not to predict it. My job is to have cash and patience so that when a durable trend emerges, I am in a position to follow it.
At the time of publication, DePorre was long AMZN and SPCX.
