After a terrible year so far, have stocks finally turned the corner?
I’m referring to last week’s key reversal on Thursday, 10/13.
After a hotter than expected core (ex-food & energy) CPI report, which showed inflation up 6.6% y/y in September, eclipsing the summer high of 6.5% (even though headline inflation fell to 8.2% y/y from their summer high of 9.1%), stocks plunged on the news.
At first, the S&P gapped lower on the open and proceeded to fall by -2.39% at its worst, before quickly heading back up. Within the hour, stocks turned positive. And by day’s end, they closed with gains of 2.60%.
(FYI -- a key reversal is characterized by an open that’s below the previous day’s close, it then makes a new low, and the close must be above the previous day’s high.)
All of the major indexes made key reversals on that day, which includes the Dow, the S&P, the Nasdaq, and the small-cap Russell 2000 index.
Key reversals are relatively rare patterns, and are usually considered reliable.
Since then, stocks have added to their gains, closing above the highs of the key reversal day, which is viewed as a confirmation.
What prompted the turnaround?
Quite frankly, after 3 quarters in a row of falling stock prices, and endless stories of doom and gloom, it appeared as if all of the bad news might just have been priced into the market already. And now it was time to go higher.
How much higher will stocks go remains to be seen. Is this a temporary bottom we’re witnessing, or THE bottom?
Only time will tell.
But with stocks so oversold, after seemingly pricing in the worst-case scenario (a deep recession) – what happens if the worst-case scenario doesn’t happen?
Stocks are likely to make a sharp rebound. And that appears to be what we’re seeing take place.
Is It Déjà Vu All Over Again?
As tough as this year has been so far, I’m reminded of the comparison that was made between the first half of this year, and the first half of 1970.
This year’s first half performance (the S&P was down nearly -21%), was strikingly similar to that of 1970 (also down -21%). And in both periods, high inflation was an issue.
But in the second half of 1970, the S&P was up 27%.
Of course, that doesn’t mean that’s how it’ll go for the back half of this year. But it doesn’t mean it won’t either.
Granted, it’s now Q4, so there’s only 3 months left in the year. But with plenty of economic positives backstopping the economy right now, not the least of which is a strong labor market, there’s definitely a chance that the market has been too pessimistic.
Exiting The Recession
Every day there seems to be somebody coming out talking about the possibility of a recession in the next 12-18 months.
We shall see.
But in the meantime, we have already (unofficially) been in a recession. In Q1, GDP fell by -1.6%. And in Q2, it was down by -0.6%. (Two quarters in a row of negative GDP is the technical definition of a recession.) Even so, consumer demand remained strong throughout. So did corporate earnings. And the jobs market stayed sizzling hot.
You can also see that in the GDI numbers (Gross Domestic Income), which measures U.S. economic activity via the income earned for these activities. Usually, the GDI and GDP (Gross Domestic Product) are statistically very similar. But unlike the GDP, the GDI was up in the first half of the year with a positive 0.5% annualized growth rate, while GDP was down.
Will these two measures converge? If so, will GDP rise to meet GDI, or will GDI fall to meet GDP? Or maybe a little bit of both? TBD. But, at the moment, GDP forecasts are pointing to plus signs for the rest of the year.
In fact, The Federal Reserve Bank of Atlanta, via their GDP Now forecast, is estimating Q3 GDP to come in at 2.8%. (It’s no longer a recession when the economy starts growing again.)
And Q4 could be even better.
Moreover, the Fed is predicting full-year GDP growth in 2023 to come in at 1.8%.
Those are not recessionary numbers.
More . . .
------------------------------------------------------------------------------------------------------
Get Your Free Copy of Finding #1 Stocks – A $49.95 Value
One single idea changed Kevin Matras' life as an investor, enabling him to tap into the greatest force driving stock prices. In Finding #1 Stocks, Kevin reveals his top stock-picking secrets and strategies based on this powerful idea. Now you can claim a free copy of the 300-page hardcover book.
In 2021 - while the market climbed +28.8% - these strategies actually produced gains up to +48.2%, +67.6%, and even +95.3%.¹
You can take full advantage of them without attending a single class or seminar, in a lot less time than you think. Opportunity ends Saturday, October 22.
Get your free book now >>
------------------------------------------------------------------------------------------------------
Is A “Soft Landing” Still Possible?
The Fed is not done raising interest rates.
Nor should they be. High inflation is far worse for the economy than higher interest rates.
Nonetheless, we appear to be getting near the Fed’s suggested terminal rate.
After three back-to-back-to-back 75 basis point hikes, the midpoint for the Fed Funds rate is currently at 3.13%.
They are widely expected to raise rates by another 75 basis points in November, and another 50 bps in December, which would put them on par with their forecast of 4.40% by year’s end.
Then they meet again in February. In order to hit their projected 4.60% target next year, that would require anther 25 bps.
And that is where they are expected to hold rates for a while, as inflation is expected to moderate to the 5-6% range next year.
Are Stocks Undervalued?
Let’s also not forget that valuations are down.
In fact, the P/E ratio for the S&P is trading at multiyear lows, and below its five-year average.
And that makes stocks a bargain.
Of course, if earnings drift lower, valuations will become higher. But there’s plenty of room for stocks to remain relatively cheap.
And the earnings outlook is still forecasting growth.
In fact, the latest earnings season has just begun, and it’s off to a better than expected start.
Earnings season is always an exciting time, since stocks typically go up during earnings season.
Seasonality Is On The Market’s Side
It also doesn’t hurt that Q4 is typically the best quarter of the year for stocks.
Especially during midterm years.
Many are familiar with the Presidential Cycle and the markets. But many may not know that the Presidential Cycle covers all for years of a presidency.
Of particular interest is the midterm portion of the cycle, which is where we are right now.
And historically, it’s amazing to see how favorable this cycle is for investors at this point in time.
In fact, we’re entering the most bullish part of the cycle; Q4 of year 2 in the 4-year presidential cycle (the second-strongest quarter of all 16 quarters), sporting an average return of 6.6% (since 1950); and Q1 of year 3 (the strongest quarter of all 16 quarters), with a 7.4% average gain.
And when we factor in that the third year of the presidential cycle (that would be 2023), has historically witnessed the best performance of all four years, the outlook for stocks looks even brighter.
But, What If...?
To be fair, the economy has its problems.
Some are still calling for a recession (even though we already had it, and are coming out of it).
And who can forget Jamie Dimon’s call for an “economic hurricane?”
Although, Jamie Dimon, earlier this year, also said that he thinks the U.S. is headed for the best economic growth in decades, and that the “consumer balance sheet has never been in better shape.”
So he’s definitely putting out some mixed messaging.
But that’s why big announcements like this all have to be taken with a grain of salt – both the bullish ones and bearish ones.
I’m not dismissing the possibility of problems down the road.
But his ominous ‘hurricane’ statement instantly remined me of the ‘irrational exuberance’ line from Fed Chair, Alan Greenspan, back on December 5th, 1996.
From the time of that speech, the S&P gained over 105% before peaking on March 24th, 2000 (more than 3¼ years later).
Just imagine all of the money someone would have missed out on if they had jumped ship the moment he made that comment.
The point is, these kinds of big announcements have terrible track records.
And I definitely wouldn’t trade on it.
Watch The Jobs Numbers
One of these days, maybe next year, maybe a few years from now, the economy will crack.
But one of the telltale signs will be a drop in new jobs.
When that happens, you can start wondering when the other shoe will drop.
Until then, there’s plenty of money to made in the market.
You just have to know what to look for to take full advantage of it.
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.
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
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.
With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.
Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more.
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
The course will also help you create and test your own stock-picking strategies.
Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.
Please note: Copies of the book are limited and your opportunity to get one free ends Saturday, October 22, unless we run out of books first. If you're interested, I encourage you to check this out now.
Find out more about Zacks Method for Trading: Home Study Course >>
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.
Image: Bigstock
Did Last Week's Key Reversal Signal The Bottom?
After a terrible year so far, have stocks finally turned the corner?
I’m referring to last week’s key reversal on Thursday, 10/13.
After a hotter than expected core (ex-food & energy) CPI report, which showed inflation up 6.6% y/y in September, eclipsing the summer high of 6.5% (even though headline inflation fell to 8.2% y/y from their summer high of 9.1%), stocks plunged on the news.
At first, the S&P gapped lower on the open and proceeded to fall by -2.39% at its worst, before quickly heading back up. Within the hour, stocks turned positive. And by day’s end, they closed with gains of 2.60%.
(FYI -- a key reversal is characterized by an open that’s below the previous day’s close, it then makes a new low, and the close must be above the previous day’s high.)
All of the major indexes made key reversals on that day, which includes the Dow, the S&P, the Nasdaq, and the small-cap Russell 2000 index.
Key reversals are relatively rare patterns, and are usually considered reliable.
Since then, stocks have added to their gains, closing above the highs of the key reversal day, which is viewed as a confirmation.
What prompted the turnaround?
Quite frankly, after 3 quarters in a row of falling stock prices, and endless stories of doom and gloom, it appeared as if all of the bad news might just have been priced into the market already. And now it was time to go higher.
How much higher will stocks go remains to be seen. Is this a temporary bottom we’re witnessing, or THE bottom?
Only time will tell.
But with stocks so oversold, after seemingly pricing in the worst-case scenario (a deep recession) – what happens if the worst-case scenario doesn’t happen?
Stocks are likely to make a sharp rebound. And that appears to be what we’re seeing take place.
Is It Déjà Vu All Over Again?
As tough as this year has been so far, I’m reminded of the comparison that was made between the first half of this year, and the first half of 1970.
This year’s first half performance (the S&P was down nearly -21%), was strikingly similar to that of 1970 (also down -21%). And in both periods, high inflation was an issue.
But in the second half of 1970, the S&P was up 27%.
Of course, that doesn’t mean that’s how it’ll go for the back half of this year. But it doesn’t mean it won’t either.
Granted, it’s now Q4, so there’s only 3 months left in the year. But with plenty of economic positives backstopping the economy right now, not the least of which is a strong labor market, there’s definitely a chance that the market has been too pessimistic.
Exiting The Recession
Every day there seems to be somebody coming out talking about the possibility of a recession in the next 12-18 months.
We shall see.
But in the meantime, we have already (unofficially) been in a recession. In Q1, GDP fell by -1.6%. And in Q2, it was down by -0.6%. (Two quarters in a row of negative GDP is the technical definition of a recession.) Even so, consumer demand remained strong throughout. So did corporate earnings. And the jobs market stayed sizzling hot.
You can also see that in the GDI numbers (Gross Domestic Income), which measures U.S. economic activity via the income earned for these activities. Usually, the GDI and GDP (Gross Domestic Product) are statistically very similar. But unlike the GDP, the GDI was up in the first half of the year with a positive 0.5% annualized growth rate, while GDP was down.
Will these two measures converge? If so, will GDP rise to meet GDI, or will GDI fall to meet GDP? Or maybe a little bit of both? TBD. But, at the moment, GDP forecasts are pointing to plus signs for the rest of the year.
In fact, The Federal Reserve Bank of Atlanta, via their GDP Now forecast, is estimating Q3 GDP to come in at 2.8%. (It’s no longer a recession when the economy starts growing again.)
And Q4 could be even better.
Moreover, the Fed is predicting full-year GDP growth in 2023 to come in at 1.8%.
Those are not recessionary numbers.
More . . .
------------------------------------------------------------------------------------------------------
Get Your Free Copy of Finding #1 Stocks – A $49.95 Value
One single idea changed Kevin Matras' life as an investor, enabling him to tap into the greatest force driving stock prices. In Finding #1 Stocks, Kevin reveals his top stock-picking secrets and strategies based on this powerful idea. Now you can claim a free copy of the 300-page hardcover book.
In 2021 - while the market climbed +28.8% - these strategies actually produced gains up to +48.2%, +67.6%, and even +95.3%.¹
You can take full advantage of them without attending a single class or seminar, in a lot less time than you think. Opportunity ends Saturday, October 22.
Get your free book now >>
------------------------------------------------------------------------------------------------------
Is A “Soft Landing” Still Possible?
The Fed is not done raising interest rates.
Nor should they be. High inflation is far worse for the economy than higher interest rates.
Nonetheless, we appear to be getting near the Fed’s suggested terminal rate.
After three back-to-back-to-back 75 basis point hikes, the midpoint for the Fed Funds rate is currently at 3.13%.
They are widely expected to raise rates by another 75 basis points in November, and another 50 bps in December, which would put them on par with their forecast of 4.40% by year’s end.
Then they meet again in February. In order to hit their projected 4.60% target next year, that would require anther 25 bps.
And that is where they are expected to hold rates for a while, as inflation is expected to moderate to the 5-6% range next year.
Are Stocks Undervalued?
Let’s also not forget that valuations are down.
In fact, the P/E ratio for the S&P is trading at multiyear lows, and below its five-year average.
And that makes stocks a bargain.
Of course, if earnings drift lower, valuations will become higher. But there’s plenty of room for stocks to remain relatively cheap.
And the earnings outlook is still forecasting growth.
In fact, the latest earnings season has just begun, and it’s off to a better than expected start.
Earnings season is always an exciting time, since stocks typically go up during earnings season.
Seasonality Is On The Market’s Side
It also doesn’t hurt that Q4 is typically the best quarter of the year for stocks.
Especially during midterm years.
Many are familiar with the Presidential Cycle and the markets. But many may not know that the Presidential Cycle covers all for years of a presidency.
Of particular interest is the midterm portion of the cycle, which is where we are right now.
And historically, it’s amazing to see how favorable this cycle is for investors at this point in time.
In fact, we’re entering the most bullish part of the cycle; Q4 of year 2 in the 4-year presidential cycle (the second-strongest quarter of all 16 quarters), sporting an average return of 6.6% (since 1950); and Q1 of year 3 (the strongest quarter of all 16 quarters), with a 7.4% average gain.
And when we factor in that the third year of the presidential cycle (that would be 2023), has historically witnessed the best performance of all four years, the outlook for stocks looks even brighter.
But, What If...?
To be fair, the economy has its problems.
Some are still calling for a recession (even though we already had it, and are coming out of it).
And who can forget Jamie Dimon’s call for an “economic hurricane?”
Although, Jamie Dimon, earlier this year, also said that he thinks the U.S. is headed for the best economic growth in decades, and that the “consumer balance sheet has never been in better shape.”
So he’s definitely putting out some mixed messaging.
But that’s why big announcements like this all have to be taken with a grain of salt – both the bullish ones and bearish ones.
I’m not dismissing the possibility of problems down the road.
But his ominous ‘hurricane’ statement instantly remined me of the ‘irrational exuberance’ line from Fed Chair, Alan Greenspan, back on December 5th, 1996.
From the time of that speech, the S&P gained over 105% before peaking on March 24th, 2000 (more than 3¼ years later).
Just imagine all of the money someone would have missed out on if they had jumped ship the moment he made that comment.
The point is, these kinds of big announcements have terrible track records.
And I definitely wouldn’t trade on it.
Watch The Jobs Numbers
One of these days, maybe next year, maybe a few years from now, the economy will crack.
But one of the telltale signs will be a drop in new jobs.
When that happens, you can start wondering when the other shoe will drop.
Until then, there’s plenty of money to made in the market.
You just have to know what to look for to take full advantage of it.
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.
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
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.
With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.
Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more.
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
The course will also help you create and test your own stock-picking strategies.
Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.
Please note: Copies of the book are limited and your opportunity to get one free ends Saturday, October 22, unless we run out of books first. If you're interested, I encourage you to check this out now.
Find out more about Zacks Method for Trading: Home Study Course >>
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.