How to Keep Up During Times of Volatility
Editor's note: You can sift through the carnage...
Many investors have struggled to navigate stocks over the past few years due to high inflation and geopolitical conflict weighing on the markets. And with President Donald Trump's administration shaking up the economy, this uncertain market could last much longer...
That's why Vic Lederman – editorial director for our corporate affiliate Chaikin Analytics – believes it's critical for investors to look for every edge they can in order to uncover buying opportunities throughout this ongoing chaos.
In today's Masters Series, adapted from the March 5 and 20 issues of the free Chaikin PowerFeed e-letter, Vic details how you can consistently identify winners amid today's market chaos...
How to Keep Up During Times of Volatility
Be honest with yourself...
How are you feeling about the markets right now?
Both the S&P 500 Index and the Nasdaq Composite Index officially hit "correction" territory.
The S&P 500 has moved slightly higher in recent days. But it's still down about 9% from its all-time high last month.
Meanwhile, the Nasdaq remains around 14% below its all-time high in December.
A lot is going on in the world right now as well...
The U.S. is undergoing a dramatic priority realignment. And regardless of how you feel about the surrounding politics, major changes are underway.
But does it feel like the world is falling apart? Does it feel worse than the first COVID-19 lockdowns? Or how about when the financial world fell apart in 2009?
I would bet, for most of you reading this essay, the markets don't feel anywhere near those extreme events. After all, despite the new tariffs, things are mostly humming along...
The unemployment rate is roughly 4%. And despite signs of weakening consumer spending, the economy is still in solid shape.
Sure, there are a lot of brewing problems across our economic landscape. But I think many of us can see that we're not at a standstill – and we're nowhere near 2009 or 2020.
If you feel that way, though... you're in the minority.
You see, retail investor sentiment is downright terrible right now.
But as I'll explain, this kind of extreme means that we likely aren't far from a bottom...
I must admit, I was shocked when I saw that headline about terrible sentiment...
I couldn't help but think that maybe all those other folks knew something I didn't.
After all, it's obvious to me that the economy is not at a standstill. Yet retail investors aren't just feeling bad about the market. They think it's terrible.
That's clear when we look at the American Association of Individual Investors' ("AAII") Investor Sentiment Survey. Based on this measure, as of mid-March, slightly more than 59% of retail investors believed the market would fall over the next six months.
Respondents have felt mostly negative since the end of last month. In fact, for the first time in history, "bullish" sentiment recently came in at less than 20% for three straight weeks.
When it comes to sentiment, that's an extreme. And it should get your attention...
Here at Chaikin Analytics, we don't spend a lot of time on sentiment. But it's a key part of the Power Gauge.
Sentiment from the so-called "smart money" on Wall Street plays a huge role in a stock's movement.
We measure analyst rating trends, earnings trends, and insider activity. And we do all that to get a feel for how the smart money feels about a stock.
But right now, retail investors are the ones feeling particularly extreme. If you don't know, Wall Street calls these folks the "dumb money."
That may be a bit harsh. But the truth is that when this crowd runs in one direction...
The market is usually near a turning point.
We're seeing that today. Retail investors fear that we've reached the end of the world.
Now, I don't have a crystal ball. I focus on data, not wizardry.
But it's obvious that the crowd is feeling downright terrified right now. It's a sentiment extreme. And I know from experience that means we're likely nearing a bottom.
So, sure it feels bad out there today. But don't forget...
Even in the worst markets, investors like us can still find opportunities.
And right now, the crowd is telling us that a big opportunity is right around the corner.
Now, as regular Chaikin PowerFeed readers know, we use three exchange-traded funds ("ETFs") to measure the S&P 500, the tech-heavy Nasdaq 100 Index, and the small-cap Russell 2000 Index.
These are the SPDR S&P 500 Fund (SPY), the Invesco QQQ Trust (QQQ), and the iShares Russell 2000 Fund (IWM), respectively.
Back in January, I told PowerFeed readers that all three had kicked off the year in "neutral" territory in the Power Gauge. It was a "triple yellow" warning that we needed to take seriously.
Meanwhile, I also looked deeper. As I told PowerFeed readers...
Combining the three ETFs, 654 of their holdings are rated "bearish" or worse right now. And 469 stocks currently earn a "bullish" or "very bullish" rating.
In other words, today you're more likely to pick a stock in "bearish" territory than one in "bullish" territory. Or more simply, you can't just "throw a dart" and hope to win in this market right now.
That's still true today...
Combined, SPY, QQQ, and IWM hold 261 stocks with "bullish" or better ratings. And they hold a staggering 655 "bearish" or worse stocks.
Things have gotten worse in the world of small caps, too. IWM now earns a "bearish" rating in the Power Gauge.
Folks, I'm sure you're feeling it...
The market is processing real uncertainty right now. And some of the cracks in the economy seem like they're growing wider.
In their most recent earnings releases, retail giants Target (TGT) and Walmart (WMT) both warned of slowing spending. And there's no question that politically spurred uncertainty is adding to the market's woes.
Yesterday, our founder Marc Chaikin noted that he had been following the S&P 500's movement between two key levels. The lower level, when looking at SPY, was $580. As Marc noted, a breakdown below that level meant the possibility of a full-blown correction of 10%. And that's what we ended up seeing.
Of course, that doesn't mean it's time for full-blown panic. There are two important points to keep in mind...
First, corrections are normal.
Last year, the S&P 500 soared a staggering 23%. And now, it's processing the new realities it faces.
Wall Street will reprice. But after the cycle of fear, traders will find new areas of optimism.
The second key point – as I mentioned earlier – is that drawdowns create opportunities...
Amid pullbacks and corrections, quality stocks will defy the downtrend. And others will move into "discount" territory.
Now, with the help of the Power Gauge, our job at Chaikin Analytics is to identify them...
Good investing,
Vic Lederman
Editor's note: In 2020, Marc started developing a brand-new investing strategy to help investors thrive during the next market crash. This year – with investors concerned about today's up-and-down market – Marc is finally ready to reveal what he has been working on...
It's designed to more than double your entire portfolio – before the next big downturn comes. So Marc is going on camera on Thursday, March 27, to unveil the ins and outs of this powerful new strategy. Learn more here...