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Bull Markets, Pullbacks And Corrections

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After a stellar run-up last year, it looks like we are starting this year off with a bit of a pullback.

And I, for one, couldn’t be happier. Why? Because the ‘fear’ of a pullback was keeping plenty of investors on the sidelines.

And the sooner we can get this over with, the sooner we can get back to the bull market rally.

What’s important to know is that pullbacks and corrections are common.

Every bull market has them.

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

And we saw roughly 3 pullbacks last year for the Dow and the S&P, all while the markets went up 18.7% and 26.9% respectively.

Stocks usually correct -10% on average about once a year. (A decline of -10% to -19.99% is called a correction.)

And we saw that with the Nasdaq last year too while finishing up 21.4%.

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

Now the markets are at it again.

From the recent highs, the Dow at its worst has pulled back by -5.24%, the S&P by -5.99%, and the Nasdaq by -11.6%.

After shaking the tree, it will be exciting to see how high the market can go this time.

While pullbacks and corrections 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.

Continued . . .

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Support

All of the major indexes have already pulled back.

The question now is, will there be more, or is this it?

Let’s take a look at the S&P and see where the support comes in.

With the S&P’s January 4th all-time high of 4,818.62, a -5% pullback came in at 4,577.69. We're already through there with the S&P at 4,532.76 (as of the close on 1/19/22).

If there’s more, a -10% correction would come in at 4,336.76. That’s about -4.32% below where we are today, and about -2.01% below the 200-day moving average of 4,425.62 (which is also considered support).

What about -15% or -20%? A -15% correction would be seen at 4,095.83. Incidentally, that would come close to filling a gap left on the chart at 4,020.63 from April 1st.

And a -20% decline (let’s say -19.99% instead, since technically, a -20% decline is a bear market, which nobody is calling for), would come in at 3,855.38.

For The Record 

Why am I stopping short of -20%? As I said, I haven’t seen anybody calling for a bear market.

And why would they? Bear markets typically coincide with recessions. And recessions mean two quarters in a row of negative GDP.

Full-year GDP for 2021, when the number is released, is expected to come in at 5.9%, which would be the fastest growth rate in 37 years. And GDP in 2022 is projected at 4.0%, with 2023 at 2.2%.

So no need to waste our time with recession talk. And by that measure, no need to waste our time with bear market talk either.

Plus, interest rates are near zero. Granted, the Fed is expected to raise rates 3 times this year (maybe 4). In fact, they’re expecting rates to hit 0.9% by year’s end, which would still put rates at historically low levels.

And it should be noted 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%.

So at quarter-point moves (even half-point moves), it would take years to get to that level.

And with officials suggesting rates could hit 1.6% in 2023, and 2.1% in 2024, (three full years from now), that’s still a far cry from 4%.

So knowing all that, investors should be excited over this recent pullback.

Because now you can pick up stocks at prices people only wished they could have gotten in at previously.

Riding the Bull

While the indexes have pulled back, there’s plenty of stocks that may have done worse.

And there’s nothing wrong with raising cash by getting out of your laggards and poorest performers – stocks you know you should have gotten out of long before this pullback even happened.

But then replacing them with the strongest stocks that will be the new market leaders.

You don’t have to go all in at once. But you can start taking nibbles at these discounted prices.

That’s true for your favorite stocks. As well as plenty of new stocks that you may not have even heard of yet.

But the time to get ready for the next leg up is now.

Do What Works

So how do you fully take advantage of this pullback, and not squander this opportunity with preventable mistakes?

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 26 of the last 32 years with an average annual return of 25.4% per year? That's more than 2x the S&P. But when doing this year after year, that can add up to a lot more than just double 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

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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.