With the market pulling back from their recent highs, 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’re finally getting it.
But pullbacks 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 missed out on the latest rally due to disbelief, or fear, you don’t have to again.
Because after this pullback, it looks like there’s a lot more upside to go.
There was nothing ominous in the pullbacks we saw last year.
They were just your normal, ordinary pullbacks.
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.
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.
After shaking the tree, 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.
Continued . . .
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Climbing the Wall of Worry
Inflation concerns continue to grip the market.
Some inflation is good. Not too much, but some. As they say, one person’s cost increase is another person’s profit.
That’s why, historically, stocks typically perform well in inflationary environments.
Of course, with inflation just hitting a near 40-year high, it’s already reached the ‘too much’ point.
But remember, inflation doesn’t tank stocks. High interest rates do.
And while the Fed is expected to raise rates 3-4 times this year, getting to 0.9% by year’s end, that would still keep rates at historically low levels.
It’s also important to know 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 rates only expected to hit 0.9% by the end of this year, 1.6% by the end of 2023, and 2.1% by the end of 2024, that’s a far cry from that 4% level.
So the prospect of ‘high’ interest rates is literally years and years and years down the road.
And to me, that shows a clear path for strong economic growth for the foreseeable future.
Bullish Economic Growth
The Fed isn’t talking about raising rates because the economy is weak. On the contrary, it’s because it’s so strong.
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 projected at 2.2%.
In the Fed’s own words, the economy remains “really strong,” “consumer demand is very strong,” and “incomes are very strong.”
Sentiments Jamie Dimon echoed just last week when he said that he thinks the U.S. is headed for the best economic growth in decades.
He went on to say that the “consumer balance sheet has never been in better shape,” and “they’re spending 25% more today than pre-Covid.”
As the economy continues to impress, so should the market.
And that’s why people are expecting this to be the beginning of a multiyear boom.
History In The Making
What we’re seeing right now is history in the making.
And historic times typically lead to historic price gains.
So you need to make sure you’re taking full advantage of it.
And not squandering this opportunity with preventable mistakes.
If you ever wished you could have traded historic times in the market differently, now is your chance.
Because the next historic run-up could be just around the corner.
And the time to get ready for it is now.
Do What Works
So how do you fully take advantage of this historic opportunity?
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 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.
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Thanks and good trading,
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.