A couple weeks
ago, I wrote that these were irrational markets and that all bets were off when
it comes to fundamentals. If you weren’t a believer then, you almost have to be
now, with the Dow falling into a correction territory on Friday, having already
lost 1,200 points this month. The Nasdaq is on the verge of a correction, down
9.8% from all-time highs, falling 7.5% last week, alone. The S&P dropped
5.7% last week and is now just 50 points, or 1 more day, from falling into a
correction. While corrections are normal for long-term bull markets, the
violent drop that we saw last week isn’t. In fact, the Dow suffered its worst
week since the 2nd week of the financial crisis, which began in
October 2008. There was a lot of panicking in the market place on Thursday and
Friday, where companies that reported great quarters and raised guidance, and
have absolutely nothing to do with the reasons for the sell-off, were getting
slammed. But the reality is, this pullback, should not have been a surprise to
you (although the pace of it probably is). For months and months, I have been
giving you the technical levels in the IBB, IWM and S&P that had to hold,
or else the markets were going lower, and this week was the week they all broke
down.
Take your pick, you can name almost any reason you want for
the markets trading lower, but there’s no logical reason that stocks should
have dropped 5-8% last week. Has anything changed in the world between last
Sunday and today? No, absolutely nothing. So what exactly happened last week
that scared so many people away? Blame a softening Chinese economy, even though
no single company has lowered their numbers because of a slowdown in China.
Blame commodities, especially crude oil prices falling below $40/barrel, even
though most companies other than energy actually BENEFIT from lower oil prices,
not to mention that it’s great for the consumer. You also can’t say that lower
oil prices means a weak global economy because oil demand has actually been
rising for the last 6 weeks and is higher YoY. Blame a weaker US Dollar, even
though when the dollar was strengthening, markets were worried that company’s
revenues were being negatively impacted. Blame Fed uncertainty, as there is no
indication that the Fed will indeed raise rates in September. Blame stocks
being overvalued, even though for every 1 stock that’s overvalued, I can name 2
better ones that are undervalued. The point is, it doesn’t really matter what
the reasoning is because it’s over and done. What matters now is where the
markets go from here, and how to proceed.
It would be a mistake to panic and sell everything at this
point. If you want to lighten up on some positions, I have no problem with
that, but selling because of fear of further loses will fall in the hands of
the irrational investor. Take a step back and think for a second. Has anything
fundamentally changed for the stocks that you own? Because Disney said they
expect slightly lower ESPN revenues, should the stock really be worth 19% less
today than it was just 20 days ago? Did Apple stop selling the iPhone and
didn’t tell anybody? Because with the stock in a bear market (down 20% from the
highs), you would think that the company just isn’t making any money anymore.
Most of the concern out there is that China is slowing and that’s bad for the
global economy. The truth is that nobody really knows how bad China is doing.
BMW and Telsa are saying that the Chinese consumer is weakening, but buying a
$75,000 car is a whole lot different than buying a $600 iPhone or $80 pair of
shoes. There are way too many
great companies that are being punished beyond all rationality, which is good
news for you if you have money to deploy. Just about everywhere you look, you
can find great bargains. UnitedHealthGroup fell 8% last week after hitting an
all-time high on Tuesday, simply on profit taking. Skyworks Solutions, which
actually doesn’t have very much exposure to China is now down about 30% since
June 19th solely on the basis that China is slowing (mind you, the
company reported a huge earnings beat just 30 days ago and actually RAISED
guidance despite what may or may not be going on in China).
There’s no way to say for sure where the bottom will be, but
I am very confident that stocks are still headed for more pain this week. The
38.2% Fibonacci retracement in the S&P 500 is at 1940, and is a level that
absolutely has to hold; otherwise 1920…here we come. But whether it’s at 1940
or 1920, I am looking for that capitulation day (which includes the futures market so pay attention to that) which will indicate a bottom. I
want to see a day of very heavy volume where the markets sell off sharply, only
to rebound and rally back into the close. The last two trading days have ended
with the markets closing on the absolute low tick, which points to further
pressure. When we get that capitulation day, you will know it’s time add to
your portfolio.
With that said, here is what I recommend:
You should be a buyer and not a seller of equities, but be patient
and be selective. The individual company fundamentals do not warrant the drops
that some of these stocks have had. When you have panic selling, everything
under the sun goes lower, no matter how well the company is operating, which is
what we saw at the end of last week. A lot of it has to do with profit taking,
where investment managers are selling stocks and raising cash to buy at lower
prices. That’s why I see this market rebounding into year’s end. There is a lot
of money on the sidelines just from this past week, and that doesn’t include
the amount of money that has been on the sidelines all year long. The stocks
that have been selling off the hardest are the growth stocks, no matter how
cheap they are (see Apple, Facebook and Gilead). You are going to be hard
pressed to find a growth stock out there that isn’t in a correction or bear
market. So, as long as you have a long-term time horizon, you are getting a steal
in this market right now. You don’t have to rush in Monday morning and buy
anything. Instead, let the market come in a little more, let the irrational
investor sell scared, and let the RATIONAL investor, you, come in and buy on
that capitulation day. I would start buying or adding to high growth stocks
with strong fundamentals that have already reported great quarters.
Here’s the bottom line. We didn’t learn anything new, not a
single thing, which should have sent stocks down 8% in a single week. Sure,
China is manipulating its currency (and obviously that is having a negative
impact on stocs), but China announced that news on Sunday night and the S&P
rallied the following day, so I don’t consider that the reason for this
correction. The only logical explanation is what I said two weeks ago, that
markets will remain irrational longer than you can remain solvent. There is
definitely weakness in the global economy and there is definitely uncertainty,
but there are too many US companies doing too well to be down 10%-20% in a
matter of weeks. More than 60% of the S&P 500 and 70% of Dow components are
in a correction, with 10 of those Dow stocks in a bear market. So get your
stock shopping list ready this week, wait for that capitulation day which
should come at S&P 1940 or 1920, and that will be your clue to begin
stepping back in.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), Time
Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG),
Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals
(URI), Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical
(DOW), L Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan
(AGN), FireEye (FEYE), Humana (HUM), GoPro (GPRO), Skyworks Solutions (SWKS), and
Disney (DIS).
Jeff Lewison
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