BStopping a miracle today, which seems unlikely given that futures are pointing to a lower open than yesterday’s close, it looks like the end of June will mark the end of the worst first half for stocks since 1970.
Even as traders await big numbers, major indexes are pointing to significantly lower opens, and it’s hard to see how the weekly unemployment numbers or the Fed’s favorite inflation indicator, core personal consumption spending (PCE), can reverse the trend. Anecdotally at least, companies are starting to downsize and prices continue to rise, so unless our eyes and ears are deceiving us, this morning is unlikely to bring any life-saving news in the first half.
However, if they manage to shake off the fear that a large and sustained market decline like the one we’ve seen over the past six months inevitably brings, most investors will be only too aware that at some point given, it will be an opportunity to buy with a big discount.
Therefore, the three important questions we should ask ourselves are: are we already there? If not, how low can we go? And, when the time comes, what should we buy?
I have already answered the first question. If, as expected, this morning brings news that is or can be interpreted unequivocally as bad for the economy, today will be another big down day for stocks, restoring bearish momentum. Yesterday I highlighted a bearish technical picture that indicated a drop below the 3,639 low of the S&P 500 futures from a few weeks ago, and if we close lower today, that’s even more likely. This bottom may provide some support, but if and when it breaks, the next breakout point on the chart is somewhere around 3,500, which was a strong support level in November 2020 on several occasions.
The good news, however, is that if this low is broken and even if we go as low as 3,500, the fifth wave of the Elliott pattern that I identified in this article will be complete, which means there will then be a much better chance of a real and lasting rebound. So, given the possibility of support around 3,640 and the fact that the ultimate low target is only 3.8% below that level, this would seem like a good place for investors to start to buy. The key word here, however, is “begin”. This is definitely an average dollar cost time frame in anything you buy, as other big swings, whether in an upward or downward direction, are almost guaranteed.
This brings us to the third question: what should investors buy? There are always two thoughts following a sharp market decline. You can buy the hardest hit stocks on the assumption that when the recovery comes they will rebound further and faster, or buy the ones that have done well on the way down on the assumption that if they outperform then they will also outperform now. In this case, due to the nature of what was being sold, I prefer the first strategy.
The one-year comparison chart of the S&P 500 and the Nasdaq Composite Index above clearly shows what most of us already know, which is that the Nasdaq dragged the other major indices down. Indeed, it is heavily focused on the kind of tech growth stocks that had outperformed so strongly since mid-2020 and the hardest hit by both rising rates and slowing growth.
However, if you think the low should be around 3,500 in the S&P, you have to believe that inflation will be under control soon enough and the Fed won’t have to hike rates too far. If so, those stocks will rebound quickly, especially companies like Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) that are far too big and cash-rich to withstand any existential threat of a downturn.
So while I don’t think now is the right time to start buying, I think that time will come quite soon. And when it does, I will favor tech and growth stocks that have been hardest hit by the decline, but with a clear preference for large, established companies.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.