The last few months have been pretty frustrating for most investors. After months of smooth and small gains, the markets saw a spike in volatility. Plenty of investors have been on pins and needles, worried that this means the long run for the bull market could be coming to an end, but I don't see that.
Instead, I see excellent fundamentals and higher earnings estimates for this year and next as well. There are a few drivers that I will discuss further, but the main point has to be understood up front. Corrective markets happen inside of a bigger bull market, but they come to an end.
Of even greater importance is where should you be positioned as the corrective action in the market starts to end? What types of stocks should you be looking at and what is your overall game plan? I want to share with you some ideas that I am employing and on potential upcoming trades that I am considering.
The fourth quarter of 2017 was great for bulls, but it was horrible for bears. Anytime the bears mounted a serious effort to push prices lower, they were met with buyers. This happened so much that there really never was a "buy the dip" moment in the quarter.
That all changed in late January of 2018. As the Dow Jones Industrial Average pushed towards 27,000 the markets saw a big gap down, a mild recovery was followed but then it happened. Back to back multi hundred point down days. The VIX (fear / volatility gauge) spiked and investors were spooked.
What seems to be lacking from most recaps of late is that this is actually healthy market behavior. Stocks cannot just go up, they have to go down too. Volumes were low and the reasons to sell were few leading up to the correction... but as the old saying goes, sell when you can and not when you have to.
Reasons to Be Bullish
Let's take a look why I am becoming increasingly bullish of late. As a fundamental investor, it wouldn't surprise you that I favor getting and staying long and ignoring the "Sell in May" mantra.
Continued . . .
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First, the 1Q18 earnings season has been a good one. We are not even close to being done with all the earnings, but the early read is that this is going to be a strong reporting season. That alone should make you excited about putting capital to work for the rest of the year.
Also, ISM numbers continue to remain strong and valuations are now well below where they were in December of last year as the market was powering higher. The tax cuts are certainly part of the story, but what is really doing the heavy lifting is the robust demand by consumers and businesses alike.
Reasons to Be Bearish and Selective Rotations
To balance my rationale for being bullish, I need to present the other side of the argument. Thing is, both bulls and bears point to Trump as a driver, so what is good for the goose is good for the gander. The forces driving the bear case are much more technically driven.
I cannot tell you how many times I have heard bears talk about a declining 50 day average and support that is found at the 200 day moving average. I am not saying that technical analysis is worthless, there are a million ways to skin the cat and there is no "one correct" way of looking at the market.
What we have seen over the last several months is selective sector rotations. Several stocks in a specific sector see a pullback all at once. Some names in more risky industries end up really getting hit hard. When it happens to the sector that has been leading the way higher over the last few years (tech), then the whole market takes a pause.
Corrections End, Bulls Go On Parade
As is the case with nearly all things, this corrective market will come to an end. Attempting to time it is fruitless. Wise investors know that you need to be properly positioned before the bulls go on parade.
When the fear index falls back down to the low teens and below, it will be time to be fully invested. The markets tend to have a very quick snap back rally following long corrective periods. Getting in while the market is soaring is likely going to be too difficult a task. Instead, a better play is to be positioned now, ahead of the coming surge.
Hitting Stock Home Runs
A good way to take advantage of this timely market opportunity is to look into my portfolio service that has been generating quite a bit of excitement, Zacks Home Run Investor.
In fact, during the last few months we've closed trades of +361.9%, +238.9%, +90.8%, +100.1%, and +161.0%.1
And after the market opens Monday, May 14, I am preparing to add a stock with the same kind of explosive upside. It serves inexhaustible demands for water, environment and energy services. Flush with cash and impressive earnings surprises, it's primed for a big move and you could get in at the right time.
Of late, I had been seeking diversification, spreading our holdings around sectors and having very limited tech exposure. I can tell you one thing though, that is going to change. I'm now looking for more aggressive names that hold great growth potential. The time for making these moves is at hand, the only question is are you ready for them?
You should know that our home run strategy blends growth and value metrics with strong Zacks Rank stocks that correlate with a 1 to 3-month profit horizon. So our selections stand a good chance of beating earnings and then continuing those beats for many quarters to come. A long-term strategy that starts fast - to me, that's the best of both worlds.
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All the best,
Brian is our growth stock expert and one of the hottest hands at Zacks with a reputation for double and triple-digit gains. He is the editor of the Zacks Home Run Investor.
1 The results for the trades listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors.