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Stocks Don't Only Go Up

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The US equity market has recovered faster and more vigorously than anyone could have anticipated. Many investors missed out on the most significant portion of the extraordinary tech-driven rally in the US.

Fear had gripped the retail investing market at the trough of this medically-induced economic recession. After a few months of unprecedented stock returns, everyone and their cousin is jumping into the markets seemingly blindfolded.

Many retail investors have a strong case of FOMO, and they may be looking in the wrong places for returns. The outrageous surge we saw in the tech sector was mostly justified because of the pandemic's rapidly digitalizing effect on the global economy.

Still, investors have been piling into the hottest tech names at their all-time highs under the notion that stocks only go up. This is a very misguided perception and can be dangerous for the 10s of thousands of new retail investors that have entered the public markets these past few months.

This is not to say that there is no opportunity in the equity market, but you need to know where to look.

How To Play This Uncertain Market

I would not recommend buying into big tech at its currently stretched valuation. Still, there is opportunity in cyclical sectors and markets abroad that have not seen the same level of recovery.

Right now, we are experiencing a market rotation from secular tech into cyclical value names, which we can see over the past month. The tech-driven Nasdaq 100 is down 1% the past 30 days while the S&P 500 is up 4%, and the Dow 30 rallied more than 5.5% over the same time frame. You can see this illustrated from my TradingView chart below (Nasdaq 100: candlesticks, S&P 500: red, Dow 30: orange).

Investors & traders saw the data they wanted from the Q2 reports of valuation stretched tech stock and are now looking for other places to put their money to work.

Underperforming cyclical sectors like industrials, financials, energy, and materials are leading the way this month. If this economic recovery can continue to bounce back at the precipitous rate that it has, it may be time to start buying some well-placed value propositions.

Goldman Sachs (GS - Free Report)

This profit-driving machine has been able to keep its bottom-line healthy while producing near-record quarterly revenues. You may hate bank stocks, but it's hard to dislike this captain of high finance.

Goldman has been capitalizing on the market chaos, with its Investment Banking and Trading divisions propelling GS shares past its commercial-banking powered cohorts.

Banks have underperformed the broader market because the excessively dovish Federal Reserve's decision to drop rates to 0% (technically 0-25 bps) and keep them there through 2022. This interest rate plunge is weighing heavily on banks' lending margins. Goldman Sachs' investment banking & trading driven strategy has allowed the firm to come out of this unexpectedly low-interest environment unscathed and ostensibly stronger than ever.

GS remains 14% off its January highs and appears to the stock is just breaking out of its trading rut. I think these shares have the momentum to blow past their old highs, especially as M&A and IPO activity begins to heat up.

Foreign ETFs

The US stock market has recovered faster than anyone could have anticipated and may have been pushed to an unsustainable level. I am quite skeptical about how much further domestic equities can run in the short run at their currently frothy levels. It may be advantageous to diversify your portfolio to include some foreign-held stocks.

Vanguard FTSE Europe ETF ((VGK - Free Report) )

VGK is the largest European traded ETF and remains down over 6% for the year despite having already recovered a lofty 50% from the March lows. This diversified, highly liquid, low expense, ETF is breaking out and looks to be headed towards its old highs.

Schwab Emerging Markets Equity ETF ((SCHE - Free Report) )

Investing in emerging markets may be perceived as high risk in this highly uncertain global economic conundrum. But with the developing world digitalizing faster than ever before, the advancement of these economies could be prolific and very profitable for your portfolio.

Zacks’ Single Best Pick to Double

From thousands of stocks, 5 Zacks experts each picked their favorite to gain +100% or more in months to come. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.

With users in 180 countries and soaring revenues, it’s set to thrive on remote working long after the pandemic ends. No wonder it recently offered a stunning $600 million stock buy-back plan.

The sky’s the limit for this emerging tech giant. And the earlier you get in, the greater your potential gain.

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