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How to Trade With ETFs & Win in a Record-High Market?

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The U.S. market is in great shape as 2023 comes to a close, thanks mainly to a less-hawkish Fed, an Artificial Intelligence (AI) boom and dissipating global growth worries. The S&P 500, the Nasdaq and the Dow Jones are hovering around their all-time highs courtesy of the Santa Claus rally. The S&P 500 (up 24.4%), the Dow Jones (up 13.3%), the Nasdaq (44.0%) and the Russell 2000 (up 16.9%) are all up double digits this year.

After such astounding gains, thoughts of a correction in the market or overvaluation concerns are justified. After all, Wall Street bears signaled earnings weakness as the main concern for 2024. Notably, earnings projections for the fourth quarter of 2023 have been consistently decreasing since the start of the quarter.

How to Trade in An All-Time High Market

History has proven time and again that stocks recover and reward long-term investors after bear markets and market downturns. Selling stocks at their lows can be counterproductive, as demonstrated this year. History says that when stocks reach all-time highs, the best strategy often remains unchanged for long-term investors.

Bull Markets: A Tale of Continuation

Examining past bull markets reveals that stocks frequently continue to rise even after returning to all-time highs. For instance, after the 2008 financial crisis, it took five years for the S&P 500 to surpass its 2007 high, and it enjoyed a seven-year run of success thereafter, per an article published on Yahoo Finance.

The same pattern emerged after the early 2020 COVID-19 bear market, with the S&P climbing significantly. However, occasional setbacks have been seen too. While stocks do recover, there are instances when they reach all-time highs only to fall again, as seen after the tech bubble burst in 2000.

Right Strategy for Today

The ideal approach to all-time highs depends on your specific situation:

Long-Time Horizon

If you have a lengthy investment horizon, focus less on market fluctuations and continue investing in stocks to benefit from historically superior returns.

iShares MSCI USA Quality Factor ETF (QUAL - Free Report) could merge as a good pick in this context. The fund QUAL offers exposure to large- and mid-cap U.S. stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage). Investors can also play iShares Core S&P 500 ETF IVV. Both funds have a Zacks Rank #2 (Buy).

Post-2022 Bear Market

 If you weathered the 2022 bear market but doubt your ability to handle another, consider a more conservative asset allocation, potentially shifting a portion of your holdings to bonds and cash.

In this context, investors can play PIMCO 25+ Year Zero Coupon US Treasury Index ETF ZROZ andVanguard Extended Duration Treasury ETF (EDV - Free Report) . These funds are up 14.6% and 13.8%, respectively, in the past month. As the Fed is likely to cut rates by 75 bps in 2024, bond ETFs should do well.

As far as cash is concerned, investors can play high-yield money market ETFs like JPMorgan Ultra-Short Income ETF (JPST - Free Report) (yields 4.78% annually) andArrow Reserve Capital Management ETF (ARCM - Free Report) (yields 4.02% annually).

Retirement Planning

 If you're retired and have been using your cash reserves to avoid selling stocks at lows, consider replenishing your cash reserves. Maintain a balanced portfolio to support your long-term strategy.

iShares Core Moderate Allocation ETF (AOM - Free Report) could be a good pick. It follows the S&P Target Risk Moderate Index, which intends to represent a moderate target risk allocation strategy. It is designed to measure risk-adjusted exposure to a diversified array of financial assets. The fund has a 58.5% exposure to bonds, followed by a 41.1% focus on equities and a 0.44% focus on cash.

Getting Back In

 If you've been out of the market, consider making gradual stock purchases, using a dollar-cost averaging strategy to mitigate the risk of investing at the market's peak. Plus, one can look for undervalued investing zones like small caps.

Despite broad market indices reaching all-time highs, many individual stocks and ETFs are still below their peak levels. Investors can tap options like Invesco S&P 500 Value with Momentum ETF (SPVM - Free Report) (P/E: 10.40X & Zacks Rank #2), Invesco Dividend Achievers ETF (PFM - Free Report) (P/E: 14.13X & Zacks Rank #2) and Health Care Select Sector SPDR ETF (XLV - Free Report) (P/E: 19.50X & Zacks Rank #1 (Strong Buy)).

(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)



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