Buy The Dip Before The Next Leg Up

Stocks have been surging higher this year. And aside from the recent pullback over the last few weeks, it looks like there’s a lot more upside to go.

YTD, at their highest close from just a few weeks ago, the Dow was up 5.62%, the S&P was up 10.2%, and the Nasdaq was up 9.53%.

Since then, profit taking has seen the indexes pull back from their recent highs with the Dow off by -4.57%, the S&P off by -5.46%, and the Nasdaq off by -7.06%.

But that’s good news.

Because pullbacks like these are very common and healthy.

Every bull market has them.

In fact, stocks usually pull back about -5% roughly 3-4 times per year. (A pullback is defined as a decline between -5% and -9.99%.)

And pauses like these help refresh and strengthen the market before their next leg up.

While pullbacks and corrections are never fun when they’re happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.

Currently the Dow is up 0.79% this year, while the S&P is up 4.14%, and the Nasdaq is up 1.80%.

And I’m expecting the gains to continue throughout the rest of the year.

Here are some reasons why 2024 is shaping up to be a historic bull market.

Presidential Cycle

The 4-year Presidential Cycle shows that year 4 (that’s this year), is the second-best year of all four years (second only to year 3 (last year), which is the best year of all 4 years).

This is a powerful recurring cycle. And historically, it’s amazing to see how favorable this cycle is for investors.

Other Statistical Trends Benefitting The Market

Even though we are in the midst of a strong bull market, which has seen a series of new highs after new highs, the market prior to that had gone 24 long months without setting a new high even once.

And it was only in January of this year that we finally eclipsed the previous all-time highs from January 2022.

I point this out because history shows in the previous 14 times when the S&P has gone at least a full year without a new high, and then finally made one – a year later it was higher in 13 out of those 14 times, and up nearly 15% on average.

Another interesting statistic, which points back to the big gains we saw in November of last year, bodes well for more gains to follow this year.

Once again, history shows that when the S&P was up by more than 8% in a single month (November 2023 was up by 8.91%), (this has happened 30 times since 1950), a year later the index was higher in 27 out of those 30 times (that’s 90% of the time), with an average return of 15.8%.

Pretty compelling stats.

It also sets a bullish tone for all of the other factors working in the market’s favor this year.

Continued . . .

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Peak Inflation Is Behind Us

Even though progress on inflation has slowed, recent reports show peak inflation is behind us.

Earlier this month, the Consumer Price Index (CPI, retail inflation) showed core inflation (ex-food & energy) at 3.8% y/y, well below 2022’s peak of 6.6%.

The Producer Price Index (PPI, wholesale inflation) came in at 2.4% y/y, also below their peak of 8.2%.

And the Personal Consumption Expenditures (PCE) index (the Fed’s preferred inflation indicator), was at 2.8% y/y vs. their peak of 5.3%.

While everyone agrees that inflation is still too high, and that disinflation has slowed, the Fed is still forecasting 3 rate cuts this year (presumably by 25 basis points each).

Granted, the timeline has been pushed out. And instead of May or June, the consensus is looking for the first rate cut to begin in September.

But that’s still bullish for the market.

The Outlook Is For Growth

Just last week, the International Monetary Fund (IMF) raised their global growth forecast to 3.2%, up from January’s forecast of 3.1%.

They also gave the U.S. the biggest upside revision, upping their growth forecast to 2.7% from their previous estimate of 2.1%.

The Eurozone saw a slight downward revision, but is still expected to grow by 0.8% from the previously expected 0.9%, while China is expected to grow by 4.6%, and India is expected to increase by 6.8%.

But the IMF specifically singled out the U.S. as being a major driver of global growth this year.

And Fed Chair, Jerome Powell, concurred with the strong assessment for the U.S. economy, saying “more recent data shows solid growth and continued strength in the labor market.”

While some may suggest that the strength in the U.S. economy is at odds with easing inflation, nobody is making a case for a recession anytime soon.

And a growing economy goes hand in hand with a bull market.

Moreover, personal incomes are hovering near all-time highs. An important point when you consider that 70% of our GDP is driven by consumer spending.

And that helps fuel corporate profits.

Earnings Season

Earnings season is always an exciting time since stocks typically go up during earnings season.

Stocks soared last earnings season. And I’m expecting them to do it again.

Especially with earnings and sales estimates on the rise. Q1’24 is expected to show earnings up 2.2% and sales up 3.4%; Q2’24 is expected to show earnings up 9.0% and sales up 4.5%; Q3’24 is expected to show earnings up 7.1% and sales up 5.0%; and Q4’24 is expected to show earnings up 12.3% and sales up 5.5%.

The earnings picture is one of improvement, and another bullish indicator underpinning the market.

Stocks Are Undervalued

Let’s also not forget that valuations are down.

While the P/E ratio for the S&P has risen from their lows, they are still down sharply from 2021’s peak, and are below where they were the last time stocks were anywhere near this level.

And that makes stocks a bargain.

Then when you factor in the increasing earnings estimates, stocks look even more undervalued.

Do What Works

So how do you fully take advantage of the market right now?

By implementing tried and true methods that work to find the best stocks.

For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 36 years (an 81% win ratio) with an average annual return of more than 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns.

Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!

Those two things will give any investor a huge probability of success and put you well on your way to beating the market.

But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.

So, the next step is to get that list down to the best 5-10 stocks that you can buy.

Proven Profitable Strategies

Picking the best stocks is a lot easier when there’s a proven, profitable method to do it.

And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.

Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success.

Here are a few of my favorite strategies that have regularly crushed the market year after year.

New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 36.3% vs. the S&P’s 7.0%, which is 5.2 x the market.

Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.9%, beating the market by 6.4 x the returns.

Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.7%, which is also 6.4 x the market.

The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.

Where To Start

There’s a simple way to add a big performance advantage for your stock-picking success. It's called the Zacks Method for Trading: Home Study Course.

With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.

Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more.

You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.

You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles.

The best of these strategies produced gains up to +62.6% in 2023 while the S&P 500 gained 26.2%.¹

The course will also help you create and test your own stock-picking strategies.

Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.

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Thanks and good trading,

Kevin

Zacks Executive VP Kevin Matras is responsible for all of our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.

¹ The individual strategies mentioned herein represent only a portion of the ones covered in the course.


 

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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