3 Tips to Stay Ahead of the Market
Fight or flight.
Fear or greed.
These emotional drivers are hard-wired in us. They served our ancestors well in survival situations. But they typically lead to poor investment decisions … especially fear.
Well, here we are again. The latest attempt to scare you away from the stock market is rooted in the recent interest rates spike.
But let me share a few simple tips I’ve learned over decades of investing. They’ll help you make informed decisions about the stock market, so you don’t have to worry about the headlines.
The Bull Market Isn’t Over Yet: 3 Tips to Stay Ahead of the Market
Tip No. 1: Gauge Participation
Tracking the performance of an index like the S&P 500 provides a glimpse at a high level. Stock market internals provide a detailed look under the hood.
It’s like thoroughly checking out a car before you buy it. The exterior may look nice, but you don’t stop there. You also pop the hood and make sure all the components appear in order.
Similarly, when you see the S&P 500 moving higher, that move should be supported by broad participation among index members.
Real fear should set in when the index moves higher without member support. That’s precisely what happened in September 2020, when the S&P 500 ultimately plunged 10%.
As the index made a new high, only 55% of stocks were trading above their short-term uptrend as gauged by the 20-day moving average.
But when the S&P 500 recently made a new high at the start of February, 85% of stocks were above their 20-day moving average. That’s solid participation in the uptrend, and signals that any pullback should be shallow and short-lived.
Tip No. 2: Use Fear to Your Advantage
Last week’s spike in the CBOE Volatility Index (VIX) — Wall Street’s fear gauge — is a clear sign that there is increasing fear in this market. The VIX tends to move higher when stocks move lower.
But sometimes, the sudden influx of fear presents a terrific buying opportunity. This is precisely one of those moments.
The VIX has already started to collapse after spiking to 30. As of this writing, it’s close to 23. There will be more market gains in store if the fear gauge can finally break below the key 20 level that has held since the pandemic began.
Tip No. 3: Follow the Breakouts
If you take a closer look, rising interest rates have had a larger impact on the more overvalued areas of the market. I explained why here last week.
But here’s something that’s getting less attention: Rising rates and a steepening yield curve are signs that the economic recovery is gaining steam. That favors cyclical areas of the economy like industrials, financials and smaller companies.
The chart below shows these sectors have been leading the way higher over the past six months:
Put it together, and you can see that:
- Participation has been strong.
- The right sectors are leading.
- Fear is creating a short-term opportunity to buy the dip in the stock market.
Research Analyst, The Bauman Letter
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