Editor's Note: Originally published January 21, 2016 - madhedgefundtrader.com
Suddenly, the consolidation turned into a correction and maybe even a bear market.
A crucial part of trading a crash is knowing what to do at the bottom. Don't worry. You'll receive a flurry of text alerts from me right when that happens.
Many individual investors simply run to the bathroom and lock the door, hoping nobody knocks on the door for a couple of days.
Worse, they dump every stock they have. That's what makes market bottoms.
Trades that once seemed impossible can now get done, provided you use limit orders.
Let me get this right. Stocks are crashing because:
1) The Federal Reserve isn't going to raise interest rates anymore.
2) The price of oil has dropped 84% in five years.
3) Commodities have reached multi-decade lows.
4) The US dollar has suddenly stabilized.
5) Investors are yanking money from abroad and pouring it into the US on a flight to safety trade because it is the only place they can obtain a positive return, especially in stocks.
May I point out the screamingly obvious right here?
These are all reasons for 90% of US companies that borrow money and consume energy and commodities to increase earnings and to boost their share prices.
Only the 10% that derive revenues from ripping oil and commodities out of the ground should get hurt here.
Of course the market doesn't know that. It is anything but rational when we hit big triple digit declines. There was only one direction on, and that was OUT.
And that is where you make your money
Margin clerks rule supreme, squeezing every bit of leverage out of their clients they can find.
The Dow and (NYSEARCA:SPY) are already posting large negative numbers for 2016.
Of course, I saw all of this coming a mile off.
I have been banging drums, pulling fire alarms, shooting off flare guns, and otherwise warning readers that the technical situation for the market was terrible ever since I went 100% into cash in December.
When the breakdown appeared imminent, I shot out Trade Alerts to sell short the S&P 500 in size as fast as I could write them. And I started buying outright puts for the first time in ages.
As a result of these sudden tactical moves, my model-trading portfolio has been keeping its head above water all month, up 2%. The Dow Average is off by a nausea inducing -10.7% at today's low.
Yes, yes! All the hard work and research is paying off!
Ignore my musings at your peril!
What is even more stunning is that these declines are occurring in the face of US macro economic numbers that are going from strength to strength. The blockbuster December nonfarm payroll report of 292,000 is the real writing on the wall.
Housing, which accounts for about one third of the US economy, has been on fire. I'm sorry, but if you can't find a parking space at Target, there is no recession.
Another crucial leg of the US economy, auto manufacturing, has been in overdrive. Auto sales are at a record 18 million annual rate, and some summer production shut downs have been cancelled.
That is, everywhere except Volkswagen.
With two of the most important legs firing on all cylinders, it's clearly not about the economy, stupid!
There certainly hasn't been a geopolitical event to justify moves of this magnitude.
As far as I can tell, Hitler has not invaded Poland, nor have the Japanese attacked Pearl Harbor.
Sure, there is whining about China, which has the Shanghai Index approaching the 2,900 level once again, down 40% from the top.
Which leads me to believe that all of this is nothing more than a temporary hiccup. A BIG Hofbrauhouse kind of hiccup, but a hiccup nonetheless.
In a zero interest rate world, stocks only have to fall back from a price earnings multiple of 18 to 15 to flush out a ton of buying, and they will have done just that when the hits $174.
THAT IS MY LINE IN THE SAND.
If nothing else, corporate buybacks should reaccelerate here, which could reach $1 trillion in 2016. Some 75% companies exit their quiet period by February 5 and can resume buying.
That could signal an interim market bottom.
The great thing about this selloff is that the best quality companies have fallen the most. This has been a function of the heavy sovereign wealth fund selling the bridge oil deficits.
After all, when share prices are in free fall, you have to sell what you can, not what you want to. It is only human to realize profits rather than incur losses, so quality has been trashed.
I am therefore going to give you a list of ten of my favorite stocks to buy at the bottom, highlighting the sectors that will lead us into a yearend rally.
The themes here are home builders, consumer discretionary, autos, solar, old technology, and international. I'm sorry, but the entire interest sensitive sector is on hold for the rest of the year, thanks to likely Fed inaction.
Watch out, because when I sense that the market has burned itself out on the downside, the Trade Alerts are going to be coming hot and heavy.
You have been forewarned!
Read 'em and weep with joy!
10 Stocks to Buy at the Bottom
Lennar Homes (NYSE:LEN)
Home Depot (NYSE:HD)
General Electric (NYSE:GE)
First Solar (NASDAQ:FSLR)
Palo Alto Networks (NYSE:PANW)
Wisdom Tree Japan Hedged Equity (NYSEARCA:DXJ)
Wisdom Tree Europe Hedged Equity (NYSEARCA:HEDJ)
Finally, All the Hard Work is Paying Off
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