Thinking of Buying Stocks Now? Be Selective

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Over the last few days, I think I have made it pretty clear in my recent articles that I think stocks can and probably will continue to fall from these levels. This is not the kind of fear-driven selloff that we have become used to in the last few years, where the market panics about something that might happen. This is a fundamental reset based on a change in and forecasts for one of the most important factors when valuing assets, interest rates. On that basis, a twenty percent drop in the S&P 500 looks far from overdone and even the Nasdaq’s thirty-three percent decline leaves us short of what I would describe as a “must buy” level.

The reason for that becomes clear when you look at both indices or, for simplicity’s sake, the ETFs that represent them, over the last three years, SPY and QQQ.

SPY chart

Figure 1: SPY 1-Week 3-Year Chart

QQQ chart

Figure 2: QQQ 1-Week 3-Year Chart

If we assume that the post-covid bump was a distortion brought on by a lot of pent-up consumer demand after the shutdown and an excess of monetary and fiscal stimulus, then it makes sense that we have not adjusted back from that until we hit the pre-covid highs. As you can see, we are still a long way from that. For SPY, that high was at 339.08, meaning that the index must fall another 7.4% from yesterday’s close for a reset to have taken place, while QQQ would have to drop another 12.5% to get to its early 2020 high of 237.47.

If those ETFs were to drop below the levels marked on the charts above, then it would be a clear signal that it was time to buy. There has been some net economic growth over the last two years, so giving back all of the gains would be an exaggerated move. Until that point, though, I am not particularly tempted by broad-based investments like index funds.

Using that same logic, though, there are some stocks, particularly in the tech sector, that do look oversold and might be worth nibbling at. Amazon (AMZN) would be a good example:

AMZN chart

As you can see, AMZN closed yesterday below its pre-covid high of 109.30. That makes sense in some ways; AMZN is a growth stock with massive dependence on the consumer, the same consumer that the Fed is trying slow down. But over the last two years, AMZN has made investments in its own infrastructure of just over $100 billion, so the basic value of the company is a lot higher than it was two years ago. They have a lot more planes and trucks, more warehouses, and more technology. Even after you take away all of the growth premium that accrued from an over-stimulated economy, AMZN should be above, not below, its spring 2020 level.

Of course, simply being below pre-covid levels is not reason enough on its own to buy a stock. Some are there because fundamental conditions within their industry have changed, such as Netflix (NFLX), or because of company specific problems, such as those at Boeing (BA). In those cases, the businesses are not necessarily worth what they were in the spring of 2020, even if they will bounce back ay some point. Those kinds of things and a general malaise as the market adjusts to an about turn from the Fed will keep the pressure on the major indices for a while.

However, if you dig a little deeper, there are some opportunities to be had where exaggerated drops to this point limit your downside and provide plenty of upside.

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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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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