It seemed like everyone was in a buying mood on Friday, except Elon Musk. The Dow Jones Industrial Average broke a six-day losing streak, the Nasdaq Composite turned in its second positive session in a row, and the S&P 500 was up over 2%, a small step back from the brink of a bear market, ending the week 16.50% off its 52-week high. The reprieve for equities could continue , but any single-day or short-term stock gains in this market are tenuous. The Dow was down for its seventh-consecutive week for the first time since 2001.

“We saw the exact same thing in 2000 and 2001,” says Nicholas Colas, co-founder of DataTrek Research. “You knew asset prices were going down, but trading action always gave you just enough hope. … I’ve had so many flashbacks to 2000 in the past three months. … If you haven’t seen it before, it’s very hard to go through, and you don’t forget.”

For many investors who flooded into stocks since the pandemic as the bull market again seemed to have only one direction, this may be their first time dancing with the bear for an extended period. For Colas, who earlier in his career worked at the former hedge fund of Steve Cohen, SAC Capital, there are a few lessons he learned from those years which “saved a lot of heartache.”

People with umbrellas pass by bull and bear outside Frankfurt’s stock exchange during heavy rain in Frankfurt, Germany.

Kai Pfaffenbach | Reuters

To start, the standing philosophy at the trading firm was to never short a new high and never buy a new low. As investors who have only ever experienced a bull market are now learning, momentum is a powerful force in both directions. This doesn’t mean investors should take any particular stocks off their radar, but stabilization in stocks isn’t going to be measured in a day or two of trading. Investors should be monitoring stocks for signs of stabilization over one to three months. An exception: a stock that rallies on bad news may be one in which the market is signaling that all the bad news is already priced in.

But for the moment, Colas said, making a big bet on a single stock as a buy-in-the-dip opportunity isn’t the best way to proceed. “The No. 1 rule is lose as little as possible,” he said. “That’s the goal, because it’s not like you’re going to kill it, and investing to lose as little as possible … when we get the turn, you want to have as much money as possible.”

Here are a few more of the principles he has at the top of his stock-buying list right now and how they relate to the current market environment. The importance of the VIX at 36

Volatility is the defining feature of the stock market right now, and the clearest signal that investors can look to as far as the selling being exhausted is the VIX volatility index. A VIX at 36 is two standards deviations away from its mean since 1990. “That’s a meaningful difference,” Colas said. “When the VIX gets to 36 we are well and truly oversold, we’ve had the hardcore panic mode,” he said. But the VIX hasn’t reached that level yet during the most recent bout of selling.

In fact, the stock market has only experienced one 36-plus VIX close this year. That was on March 7, and that was a viable entry point for traders because stocks ended up rallying by 11% — before the situation again deteriorated. “Even if you bought that close, you needed to be nimble,” Colas said. The VIX is saying that the washout in stocks isn’t over yet. “We’re dancing in between the rain drops of the storm,” he said.

Short-term bounces are often more a reflection of short squeezes than an all-clear signal. “Short squeezes in bear markets are vicious, and it’s easier trading than being short,” he said.

Look at some of the recent action in the pandemic “meme stocks” such as GameStop and AMC, as well as pandemic consumer winners such as Carvana, and Colas says that buying those rallies “is a tough way to make a living, a tough way to trade,” but back in 2002, traders did look to the heavily-shorted names, the stocks most sold into earnings. Whether Apple, Tesla or any other, stocks won’t love you back

For investors who made a fortune in the recent bull market riding Apple or Tesla higher, it is a time to be […]

source How to buy stocks on the brink of a bear market

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