The last few days of price action in stocks have been puzzling to many. We now know that the Fed sees improvement but will continue with an accommodative monetary policy for a short time. The Chinese economy is growing slower than some would like, but the possibility of a complete collapse looks remote. I don’t think many people believe that congressional Republicans will commit political suicide and shut down the government again. In short, the fundamental environment for stocks looks broadly positive, yet we are still seeing significant volatility.
The only reasons that make real sense for the continued weakness are market dynamics and the attitude of traders. Momentum is a powerful thing and has a tendency to overrun. Once it does, traders are always tempted to squeeze just a little harder in the hope of picking up bargains. It seems that that is what we are seeing here, and if that is the case investors should be prepared to take the gifts that are being offered from the obvious plays.
Those of us who study markets often have a tendency to overcomplicate things. We are always looking for the obscure play, the little known company that can soar, or for the obscure reason not to do the obvious. There is always a feeling that if something is obvious, it is not worth our attention, yet the principles of successful investing are simple. As Warren Buffett once said we should be greedy when others are fearful and fearful when others are greedy. In other words, we should, to use an old cliché, be buying low and selling high.
The question, of course, is what constitutes “low” and “high.” When looked at in terms of the last few months, current levels are low. Go back a little further, however, and from a multi-year perspective, the stock market is still high. See what I mean about overcomplicating things? The fact is that some stocks have been dragged or held down with the rest of the market despite showing no sign of being hurt by any of the things that have caused the worry.
As Nike (NKE) showed yesterday when they released earnings, China is still a rapidly growing market if your products and marketing are good enough. Even after the inevitable pop following those numbers, that looks like a must own stock, as does rival Under Armour (UA), who will report next month. Athletic wear is trendy right now and investing in what is popular shouldn’t be discounted just because it is the obvious play.
Another “obvious” trend is the move away from traditional T.V. programming and cable delivery. Netflix (NFLX) and Amazon (AMZN) are at the forefront of that shift yet both are down significantly from recent highs, so holding those stocks is an obvious move. Don’t let that put you off, though, it is smart as well as obvious.
The mother of all obvious plays, however, remains Apple (AAPL). With the iPhone 6S going on sale today the company will be in the news and there will be those who see even good sales as disappointing, but early indications are that the new phone will be a success. Even if they simply meet expectations, however, there is no shortage of people (me included) who will point out that a forward P/E of under 12 for arguably the world’s most successful company is absurd, especially given that the oft delayed explosion of the brand in China seems to be in full swing.
Pointing out that NKE, UA, NFLX, AMZN and AAPL are good stocks to own is, certainly to Nasdaq.com readers, hardly revolutionary. In fact it is obvious, but in the current topsy-turvy environment, stating the obvious is not a bad thing to do.
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