Rigidity Versus Flexibility in Investing
Often, when you watch financial television, the anchors will ask an analyst, investor, or guest on their show whether they are bullish or bearish on equities into year-end. Because bold, rigid calls tend to attract eyes to the channel, it is the best way to keep viewers engaged. In other words, instead of being “taught to fish,” amateur investors often prefer to be given a fish. However, investing professionals understand that this type of mindset is a fast way to go broke.
2023 is a prime example of the dangers of being rigid. For example, year-to-date, the Nasdaq 100 ETF (QQQ) is up 31.54%, while the Russell 2000 Index ETF (IWM) is -6.37%. Even within the Nasdaq 100, there are massive divergences between strength in mega-cap names like Netflix (NFLX), Microsoft (MSFT), and Nvidia (NVDA) versus smaller-cap names. Profitability comes from recognizing these trends, not making bold egotistical bets.
Adhering to an “If, then” Perspective
The best investors maintain an “if, then” perspective rather than adhering to a strictly bullish or bearish bias because they understand the complexity and fluidity of financial markets. Recognizing that a multitude of unpredictable factors influences the market, they remain open to various scenarios and are prepared to adjust strategies based on changing conditions. This adaptability allows them to capitalize on opportunities in bullish markets while safeguarding their investments during bearish downturns. Instead of being confined by rigid beliefs, they assess a range of possibilities, considering the implications of different events or economic indicators. This nuanced approach enables them to make well-informed decisions, mitigating risks and maximizing returns in an ever-changing and unpredictable financial landscape.
With the Nasdaq, Russell 2000, and the S&P 500 Index ETF (SPY) entering a correction (10% off highs) last week, US equities are at a crossroads. Before getting overly bullish, investors should only become bullish again until seeing proof. Here are 3 factors investors should look for to get bullish again:
A Return of Breadth
Market breadth measures how many stocks in a particular market index participate in a price movement, either upward or downward. If only a handful of stocks (like the “Magnificent 7”) are driving a move, when they falter as they have in recent weeks, the entire market falls. Conversely, diverse participation across sectors indicates a balanced and resilient market, less vulnerable to external shocks or sector-specific issues.
What to Look For: Look for equal-weighted ETFs like the Nasdaq 100 Equal Weight ETF (QQQE) or the Invesco S&P 500 Equal Weight ETF (RSP) to strengthen and work towards closing the performance gap versus their market-weighted counterparts (QQQ &SPY)
Image Source: TradingView
A More “Dovish” Federal Reserve
Rampant inflation caused the Federal Reserve to drive up interest rates rapidly after years of a near-zero interest rate, market-friendly environment. For a sustainable bull market to emerge, the Federal Reserve must become more “Dovish” (stop raising rates or even lower them).
What to Watch: The CME FedWatch tool is a market indicator that displays the probabilities of future Federal Reserve interest rate changes based on pricing in the Chicago Mercantile Exchange (CME) futures markets. The CME FedWatch tool shows a 95% chance that the Fed will keep rates the same when it announces its decision on Wednesday.
Image Source: Chicago Mercantile Exchange
Improved Price Action
Thankfully, to achieve profitability, investors do not need to catch the bottom in the market. Instead, they can monitor how key indexes act around important levels. For example, the S&P 500 Index undercut its 200-day moving average last week.
What to Look For: Bulls want to see the S&P regain its 200-day moving average. While the 200-day has no magic, it is the best barometer for determining the long-term trend. As Paul Tudor Jones warns, “Nothing good happens below the 200-day moving average.”
Image Source: Zacks Investment Research
Bottom Line
To successfully navigate tricky markets like the 2023 market, investors must adopt an “if, then” mindset. Before forming a rigid, biased opinion, be patient and wait for the market to provide proof in the form of returned breadth, a more “Dovish Fed,” and improved price action.
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Free: See Our Top Stock And 4 Runners UpMicrosoft Corporation (MSFT) : Free Stock Analysis Report
CME Group Inc. (CME) : Free Stock Analysis Report
Netflix, Inc. (NFLX) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
Invesco S&P 500 Equal Weight ETF (RSP): ETF Research Reports
Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
