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Getting Ready For The Next Leg Up

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With the market off of its correction lows, now’s the time to start getting ready for the next leg up.

After heady gains last year, the market was ripe for a pullback. And we finally got it.

Granted, getting it so early in the year caught many by surprise, especially after finishing 2021 on such a strong note.

And the worrisome headlines over high inflation, and the war on Ukraine, only exacerbated things.

But pullbacks and corrections are common occurrences.

Unfortunately, too many investors panic when they happen.

Some sell. Others short. And some refuse to buy for fear of it going lower.

But then the market snaps back. And stocks race to new highs, leaving them behind.

This happens time and time again.

In fact, the S&P pulled back 3 times last year. And each time, they then soared to new all-time highs afterwards, before ultimately finishing with a 26.9% gain.

If you’ve ever missed out on a post-pullback or post-correction rally in the past due to disbelief, or fear, you don’t have to again.

Because with this one out of the way, it looks like there’s a lot more upside to go.

Fear Not

There was nothing ominous in the pullbacks we saw last year.

They were just your normal, ordinary pullbacks.

And current fearful headlines notwithstanding, there doesn’t appear to be anything ominous in this one either.

Every bull market has them.

A pullback is defined as a decline between -5% and -9.99%. And stocks usually pull back about -5% roughly 3-4 times per year.

That was true with both the Dow and the S&P last year before finishing up 18.7% and 26.9% respectively.

A correction is defined as a decline between -10% and -19.99%. And stocks usually correct -10% on average about once a year.

That’s what the Nasdaq did last year before finishing up 21.4%.

But these are the pauses that refresh before the next leg up.

This year, all of the major indexes saw a correction.

Since then, in spite of the recent volatility, the market has bounced off those lows and looks set to move higher.

And it will be exciting to see how high the market can go this time.

While pullbacks are never fun when they’re happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.

More . . .

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Climbing The Wall Of Worry

Inflation concerns continue to grip the market.

Some inflation is actually good for the market (one person’s cost increase is another person’s profit -- and why the Fed likes to see a steady 2% inflation rate). And historically, stocks typically perform well in inflationary environments.

But everyone can agree that the current 40-year high inflation rate is not good for anyone.

And that’s why the Fed has finally sprung into action.

The Fed raised interest rates back on March 16th (the first hike in more than 3 years), with a quarter-point increase.

Investors cheered the move since many felt the Fed let inflation run too hot for too long. And there was relief that the move to combat inflation had finally begun.

The next move is expected at the conclusion of their 2-day FOMC meeting on May 4th.

The FOMC minutes, from their last meeting, showed many participants were in favor of increasing rates by 50 basis points at future meetings, if inflation continued to persist.

Well, it has. And the future is just 2 weeks away, with all signs pointing to a half-point increase.

Of course, some worry that raising rates too high, too quickly, could slow the economy down too much.

But a slowing economy has not been an issue. Just the opposite. It’s been too hot. And that’s partly why inflation has gotten so bad.

Quite frankly, the bigger risk is not raising enough, and going too slowly.

And that’s why the 50 basis point move will likely be cheered once it happens.

Because the economy is more than strong enough to just withstand tighter monetary policy. According to Fed Chair, Jerome Powell, it should actually “flourish in the face of less accommodative monetary policy.”

Taking some of the excess out of the economy, which in turn can help tamp down inflation, could go a long way to help elongate the current economic expansion that we are in.

Interest Rates

The Fed has forecast that rates could get as high as 1.9% by year’s end.

They also predicted the Fed Funds rate could reach 2.8% by the end of 2023.

But they are expecting rates to remain at 2.8% in 2024, meaning no further rate hikes after next year.

Moreover, they’re expecting PCE inflation to come in at 4.3% by year’s end, 2.7% in 2023, and 2.3% in 2024.

And they are forecasting GDP growth at 2.8% this year, 2.2% in 2023, and 2.0% in 2024.

Simply put, by raising rates as outlined above, they see inflation finally coming down, and sustainable growth to continue.

And rates will still be relatively low.

This is important because some out there worry that raising rates will cause a recession.

But history has shown that over the last 50 years, there’s never been a recession (aside from 2020’s pandemic-induced plunge), when the Fed Funds rate was under 4%.

And with officials suggesting rates will not exceed 2.8% (by the end of 2023 and all of 2024), that’s a far cry from 4%. 

Oil Prices And The War On Ukraine

High oil prices are also adding to concerns.

But $100 a barrel oil doesn’t automatically spell doom for the economy.

In fact, oil traded above $100 in 2011, 2012, 2013, and 2014, all while GDP averaged over 2.0% during that time.

Demand for oil is strong, especially as the world continues to reopen its economies after the pandemic.

During the pandemic, when demand fell, prices cratered, and production fell as well.

But now that demand is up, prices have followed suit. Production is still playing catch-up. But producers virtually everywhere are racing to increase production.

Especially since much of the world has either cut-off, or is in the process of trying to cut-off, its dependence on Russian oil due to their invasion of Ukraine.

That shortfall will have to be made up somewhere. And producers are vying to gain that new market share.

A meaningful increase in production won’t happen overnight, but it will happen. And prices will eventually come down, like they always do.

As the saying goes, ‘the cure for high prices is high prices.’ And the high prices will bring in the much needed increase in production that ultimately sends prices lower.

Back To Business

Throughout it all, the economy remains resilient.

In the Fed’s own words, the economy remains “really strong,” “consumer demand is very strong,” and “incomes are very strong.”

And the labor market is “extremely tight.”

With literally millions more jobs available than unemployed people to fill them, it looks like the strength of the labor market will continue well into the future.

Also underscoring the strength of the economy is the strength in corporate earnings as well.

And we’re about to see by how much with earnings season, once again, upon us.

Since stocks typically go up during earnings season, now is the time to get ready for the next leg up.

Do What Works 

So how do you fully take advantage of the market right now?

By implementing tried and true methods that work to find the best stocks.

For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years (an 82% win ratio) with an average annual return of 25% per year? That's more than 2 x the S&P. And consistently beating the market year after year can add up to a lot more than just two times the returns.

And did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!

Those two things will give any investor a huge probability of success and put you well on your way to beating the market.

But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.

So the next step is to get that list down to the best 5-10 stocks that you can buy.

Proven Profitable Strategies 

Picking the best stocks is a lot easier when there’s a proven, profitable method to do it.

And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.

For example, if your strategy did nothing but lose money year after year, trade after trade, over and over again, there’s no way you'd want to use that strategy to pick stocks with. Why? Because it's proven to pick bad stocks.

On the other hand, if your strategy did great year after year, trade after trade, over and over again, you'd of course want to use that strategy to pick stocks with. Why? Because it's proven to pick winning stocks.

Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success.

Here are a few of my favorite strategies that have regularly crushed the market year after year.

New Highs: As mentioned earlier, studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 22 years (2000 through 2021), using a 1-week rebalance, the average annual return has been 43.2% vs. the S&P’s 7.5%, which is 5.7 x the market.

Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 22 years (2000 through 2021), using a 1-week rebalance, the average annual return has been 50.4%, beating the market by 6.7 x the returns.

Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 22 years (2000 through 2021), using a 1-week rebalance, the average annual return has been 51.2%, which is 6.8 x the market.  

The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.

Where To Start

Now that the economic recovery is in full swing, there's a simple way to add a big performance advantage for your stock-picking success. It's called the Zacks Method for Trading: Home Study Course.

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You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.

You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles.

The best of these strategies produced gains up to +48.2%, +67.6% and even +95.3% in 2021.¹

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Thanks and good trading,

Kevin

Zacks Executive VP Kevin Matras is responsible for all of our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.

¹ The results listed above are not (or may not be) representative of the performance of all strategies developed by Zacks Investment Research.



 

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