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How to buy shares on the edge of the bear market

It looked like everyone was ready to buy on Friday, except for Elon Musk. The Dow Jones Industrial Average broke the six-day losing streak, followed by a second consecutive positive session for Nasdaq Composite, and the S&P 500 rose more than 2%, taking a small step on the edge of the bear market, ending . a weekly discount of 16.50% for the 52-week high. Stock breaks may continue, but single-day or short-term stock gains in this market are weak. The Dow fell for the seventh consecutive week for the first time since 2001.

“We saw the same thing in 2000 and 2001,” says Nicholas Colas, one of the founders of DataTrek Research. “I knew asset prices were going down, but trading has always given you a lot of hope … I’ve had so many flashbacks to 2000 in the last three months … If you haven’t seen it before, that’s it. It’s very difficult to pass, and you don’t forget.” .

For many investors who have been flooded with shares since the pandemic, the bull market seemed to be moving in one direction again, this may be the first time they have danced with the bear in a long time. For Colas, who previously worked at Steve Cohen’s former hedge fund, SAC Capital, there are some lessons he learned from those years, which “saved him a lot of heartache.”

People with umbrellas pass by the bulls outside the Frankfurt Stock Exchange in heavy rain in Frankfurt, Germany.

Kai Pfaffenbach | Reuters

To begin with, the business company’s long-held philosophy was not to cut new highs and not to buy new lows. As investors who have only experienced the bull market are now learning, the momentum is a strong push in both directions. This does not mean that investors should remove a particular stock from the radar, but stock stabilization will not be measured in one or two trading days. Investors should track stocks to see signs of stabilization. One exception: an action that coincides with the bad news may be that the market indicates that all the bad news is already at a price.

But for now, Colas said, making a big bet on a single share is not the best way to move forward as an option to buy. “The first rule is to lose as little as possible,” he said. “That’s the goal, because it’s not like you’re going to die, and invest in losing as little as possible … when we get the turn, you want to have as much money as possible.”

Here are some of the principles at the top of the stock buying list right now and how they relate to the current market environment.

The importance of the VIX in 36

Volatility is the defining feature of the stock market at the moment, and the clearest sign that investors can look at as the sale runs out is the VIX volatility index. A VIX of 36 has been a standard deviation from its average since 1990. “That’s a significant difference,” Colas said. “When we get to VIX 36 we’ve sold well and really over-sold, we’ve had a tough panic,” he said. But VIX has not reached that level yet in this latest wave of sales.

In fact, the stock market has had a single VIX close of over 36 this year. That was on March 7, which was a viable entry for traders, as stocks ended an 11% rise before the situation worsened again. “Even if you bought it near that, you had to be agile,” Colas said. VIX is saying that the stock clearance is not over yet. “We’re dancing between the raindrops of the storm,” he said.

Short-term rebounds are often a reflection of short squeezes rather than a clear signal. “Short squeezes in bear markets are vicious, and it’s easier than short trading,” he said.

Look at some of the latest action in pandemic “meme stocks,” such as GameStop and AMC, as well as pandemic consumer winners like Carvana, and Colas says buying these rallies is “a hard, hard way to make a living”. to trade, ”but in 2002, traders looked at very abbreviated names, with the best-selling shares in profit.

Apple, Tesla, or whatever, the stock won’t love you

For investors who have made money in the recent bull market, Apple or Tesla are going to be “extremely selective,” Colas says, and even with the stocks you love the most, they may not be remembered. i don’t love you

This is another way to remind investors of the most important rule of investing in volatility: remove emotion. “It’s a market you’ve made, not what you want,” he said.

Many investors learned this lesson through Apple, which fell more than 6% last week. Throughout the year, Apple entered its bear market before Friday’s bounce.

“Apple had a job to do in this market, and that wasn’t an implosion,” Colas said.

From mom-and-pop investors to Warren Buffett, they saw Apple as a “great place to be” and seeing it break down just as quickly as it does shows that the stock market is the closest equivalent to a safe haven trade. “We’ve gone from lightweight to extreme risk removal and it doesn’t matter if Apple is a great company,” Colas said. “Liquidity is not high and there is a flight to safety in any asset class you can name … the financial assets that people are looking for are the safest things and Apple is still a great company, but it is a stock.”

And as high as the ratings in the technology sector have been, it’s not about immersion.

“You can buy it for $ 140 [$147 after Friday] and still has a $ 2.3 trillion market cap. It still costs more than the entire energy sector. That’s hard, “Colas said.” Tech still has pretty crazy ratings. “

S&P 500 sectors are in a better position to meet

In the sector, Colas looks more at energy, “because it’s still working,” he says, and when it comes to growth trade, health is the best “safety trade,” even if that comes with a warning. Based on its relative rating and weight in the S&P 500, “it’s a good place to get a rally and not lose so much,” he said.

History has it that in times like these, health care stocks will have greater supply because growth investors who are out of technology will have to move to another sector and the opportunities available to them over the years have diminished. For example, not so long ago retail retail names were “growing” that investors would return to in the midst of volatility, but the rise in online retail sales killed that trade.

Colas stressed that there is still no evidence that growth investors are riding on anything. “We don’t see any health care yet, but as growth investors raise their heads again, there aren’t many other sectors,” he said.

What does it mean for Cathie Wood to buy a blue-chip

Although Apple capitulated to the sale, Colas said there is always a case for making blue-chip stocks in the bear market. The cars that Colas covered on Wall Street over the decade are an example of how to think about blue-chips for long-term investors.

Ford’s first lesson in this market, however, may be that Rivian’s share of dumping may be the first chance he gets.

“One thing Ford is doing well, and that is to stay alive, and right now their backs are immersed,” Colas said. “Press the sell button and get some liquidity. They see what’s coming and want to be ready to continue investing in the EV and ICE business.”

Whatever happens to Rivian, Ford and GM are likely to be in a stretch, and in fact, guess who just bought GM for the first time: Cathie Wood of Ark Invest.

This is not to say that Wood has inevitably hindered his favorite shares, owned by Tesla, but that one portfolio manager may suggest that not all shares may bounce back in a similar timeline. ARK, its most iconic Ark Innovation fund, has fallen as much as the Nasdaq fell from top to bottom between 2000 and 2002, if anything to make up for it.

“I don’t know if Cathie is a good or bad stock collector, but it was smart to see a GM, not because it’s a great stock … I wouldn’t touch it. “Colas said. “I don’t know if they’ll do Teladoc or Square,” he added of Wood’s large stock selection.

A big disconnect between many in the market right now and Wood’s long-held disruptive multi-year disruptive issues are still in force and he believes they will eventually be corrected. But buying a blue-chip like GM can help prolong the duration of this visual break. GM is somehow buying a second-order stock, “without having to bet on a non-profitable farm,” Colas said.

Even in a market that doesn’t love stocks, there are trusted names in the longer term. After the Nasdaq bottomed out in 2002, Amazon, Microsoft and Apple were among the biggest trades for the 2002-2021 period.

Bear markets don’t end in a “V”, they just run out of four lines that can last a long time, and the stocks that work don’t all work at once. GM could benefit before Tesla, even if Tesla is $ 1.5 trillion three years from now. “That’s the value of a portfolio in different phases and there will be things that you get wrong,” Colas said.

GM’s acquisition could be a sign that Wood will trade more to multiply the duration of its funds, but investors will need to see where it takes its portfolio in the coming months. And if it remains a persuasive bet in favor of the most harmful companies that lose money, “I like QQQs,” Colas said. “We don’t know what the ARQ will be like, but we know what the QQQs will be,” he said. “I would rather own QQQ,” Colas said, referring to the Nasdaq 100 ETF.

Even that should come with a warning right now. “I don’t know if the big technologies will come back the same way as the kids, because the ratings are so much higher,” Colas said. Microsoft is worth more than the various S&P 500 (real estate and utilities) sectors, and Amazon is valued at more than two Walmarts, “but you don’t have to bet on Teladoc and Square,” he said.

“We knew they were good companies, and who knows where the shares are going, but the basics are solid and if you have to trust that you have chosen the next Apple and Amazon, that’s a tough trade,” he added.

Where Wall Street will still be bigger bearish

There are many reasons to be skeptical of any rally in the macroeconomic lens, from the Federal Reserve’s ability to manage inflation to its European and Chinese growth forecasts, all of which have such a wide range of results that the market needs to incorporate the opportunity. as a result of a global recession, to a greater extent than usual. But one of the key market data that isn’t included yet is the S&P 500’s earnings estimates. “They’re too tall, they’re too ridiculous,” Colas said.

The fact that forward price and earnings ratios are not cheaper means that investors still have the market to work to lower the numbers. Wall Street is currently forecasting a sequential 10% increase in S&P 500 earnings, which Colas said is not happening in this environment. “Not with 7% -9% inflation and 1% -2% GDP growth. The street is wrong, the numbers are wrong, and they need to go down.”

How to buy shares on the edge of the bear market

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