Nibble Nibble. Markets hit the nibble zone of SPX ~3900.
In our blogpost https://www.quantzombie.com/single-post/why-the-markets-could-drift-lower-before-bottoming we warned that the markets will likely drift further down into the 3700-3900 zone in the SPX.
On May 12, we outlined two specific optimal "accumulation" zones for those looking to accumulate good stocks. Here's a part of my FB post for my private client group:
We continued to give our own trading ideas that we were starting to use the excess cash that we saved up since the beginning of the year (to take advantage of the whippy market - see our blogpost at the beginning of the year for the market outlook 2022) to start accumulating at the 3700-3900 levels and will look to buy even more if it gets the 3450-3500 zone as long as there is no new news that is not cataclysmic. For instance, Russia war escalates or the COVID virus mutates into something much worse starting global shutdowns again.
On May 13, 2022, I guided on my FB client group that the SPX had hit into the 3700-3900 zone and that it's likely a good idea if one still believes the economy "isn't that bad" to start nibbling back into the market.
We stated that now, the market likely ready to "find a bottom".
I will include the rest of my May 13 FB post here below in this blog post:
... Hence, it is a good reward-to-risk ratio to be accumulating stocks at these levels (not ALL stocks, but the ones that have enough cashflow, good valuation and reasonable debt, and aren't significantly crippled by the risks of the day: China shutdowns, Europe supply chain and heavy debt). It's actually quite easy to find candidates, if you read their recent quarterly results, some stocks have management guiding good basis for earnings in both 2022 AND 2023. If you've been reading my posts or signed up for my course, you would know ET and VST are two such candidates. Good valuation and have good support for earnings this year and next. In fact, VST has more value creation now because of the change in the natural gas forward curves! Such fundamental analysis is covered in my course, it's much too long to cover in a couple blog posts.
So cautious investors can still stay out, those who are of the conviction that the economy isn't busted yet and want to accumulate now would be time to start. Accumulators can "wade in".
Remember that not all sectors are equal at this time. Whichever you choose, make sure you can see good cash flow, good valuation, and reasonable debt, and try to avoid those with political risk.
Remember that these are statistics-driven and so outcomes still have a probabilistic touch to them.
When the SM/DM is at such extremes away from each other, it is like given two aces in a texas hold em game.
Here at QuantZombie, we don't look just at one dimension.
At the 3700-3900 and 3450-3500 zones are also symetry price objectives of the bearishness that started at the beginning of the year.
On top of that, at the 3450-3500 is strong support which we will not go into right now.
When we have these multiple factors occuring at the same time, it increases the probability of an intermediate bottom greatly.
For those who play texas hold em, here is an example:
Imagine that you are dealt two Aces.
This means you have the highest probability of winning the hand, however, you might still lose the hand. Nonetheless, statistics demand that you MUST play your aces. I would say that the current setup in the market in the intermediate term is not quite AA, but more like AK. It's still a great hand to play, but not the best.
Some will be content to nibble into the SPX, which is fine.
However, we want to get even more alpha not just by superior market timing, which we have been spot on too much for my liking, but also by stock picking. Some stocks WILL do better than others because of their individual situations and their business models in conjunction with the macro environment.
We have been mentioning our top picks ET and VST since the beginning of the year. Both are up 25%+ while the rest of the market is down anywhere from -12% (SPX) to -50% (Growth stocks). They have performed in stellar fashion. This is even more impressive when they part of the usual suspects that are directly linked to the one sector that is killing it, which energy.
I encourage you to read about those companies yourself. Go through their earnings presentations. Although their price has increased, a case can still be made that they can still increase in price. Although not as fantastic as 5 months ago, we feel their investment cases are still better than 50% of the stocks out there.
So besides ET and VST (where in my course we do a deep dive to understand why its undervalued and are in a great position to drive earnings and return them to shareholders), here is another you might want to read up on.
CROX (footwear) has a different type of earnings profile and story to ET (midstream oil) and VST (private utility), but it is arguably undervalued as well. CROX has had revenue growth from last year and has just acquired HeyDude shoes, driving their debt/equity to 2.8x. CROX has guided they are stopping share buybacks to reduce debt to >2x (by mid 2023, just 1 year) after which they will RETURN significant earnings back to shareholders. This isn't too shabby considering their fw PE is 5.3x. In a coincidental way, they are in the same position as ET was one year ago. ET had also 20% cash flow yield but needed to pay down debt. As they successfully paid down debt, their share price grinded higher.
Of course, investors would have to be comfortable knowing something about CROX. Perhaps if you hate CROX stuff and think no one likes to buy those shoes, you might want to avoid this stock. Put your thoughts about CROX in the comments below! Do you love them? Hate them? Do you know friends or family that buy them? Are they still a thing?
Those who are very conservative can wait for more of their debt to be paid off first. If you buy them now, you are risking better reward, but take more risk in case something happens between now and when they pay down debt.
In my opinion, ET and VST > CROX because retail and fashion is less predictable to me. I can't tell if suddenly CROX will suddenly become more or less than a hit to the public, but I know that they world will definitely need oil and gas now, and more electricity tomorrow.
However, we do need to diversity, hence I still offer these suggestions.
Don't put your eggs in one basket!
Anyways, I am not saying that today is the day the bottom is starting, but I am saying that if you start buying around these levels, you are getting good "value" based on market timing. This means that around this level, AND especially around 3450-3500, the "investment ground" is ripe for a bottom, and is waiting for good news to trigger it. But, will that good news come?
Summary: I am looking for better signs of a bottom, but in the meanwhile, I am nibbling on stocks that I have earmarked for accumulation.
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