Waiting For Buy Signals

(MENAFN- ValueWalk) sergeitokmakov / Pixabay

In his Daily Market Notes report to investors , while commenting on buy signals, Louis Navellier wrote:

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Q4 2021 hedge fund letters, conferences and more

In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More

• 1. Waiting for Buy Signals
• 2. Catch the Falling Knife
• 3. Coffee Beans

Looking for a bottom in this surprisingly strong pullback has obviously led many investors to head for the sidelines and the selling continues this morning. Bottom fishers have gotten their fingers burned, as simply buying the dip and waiting for the bounce has become too painful. Investors are looking for some guidance as to what circumstances will need to develop for buyers to step in and lift the market. For now, the downward spiral creates relative values which pull down comparable names, the flip side of a bull market.

There remain pockets of strength ; while technology is down 12% YTD, Energy is up 12%. Banks are still in the green; Wells Fargo is up 11%. Remember that both the Dow & S&P had new all-time highs just earlier this month. The circumstances that created those levels have not changed fundamentally; consumers have a record amount of savings, earnings are still forecast to rise as is the US economy , and the end of the pandemic is in sight.

The primary damage is a compression of valuing the earnings , in the face of potentially higher interest rates as central banks tighten monetary support to address inflation. It is important to note that higher interest rates remain a forecast rather than a reality; the 10-year US Treasury bond is only 0.22% higher than when the S&P was at its last all-time high, after the Fed had already begun its announced tightening. Note that if interest rates do rise materially before the Fed is satisfied inflation has been tamed, that bond prices will fall significantly, cash will still pay less than many dividend yields, real estate will be pressured by higher mortgage rates, and stocks will remain the most attractive asset, with ongoing earnings growth and favorable tax treatment.

The ultimate irony of the sell off is causing bond yields to collapse, and it was the initial surge in bond yields and concern about Fed policy. And that really kind of spooked the market. As our Fed withdraws its support and basically retreats from quantitative easing, there's plenty of pressure to shove our treasury yields lower. So here's the conundrum we're in. Everybody thinks market rates are going to go higher, but market rates are actually going lower. So we're getting upset over nothing.

When the stock market corrects 5%, we can be resilient. When it corrects, 10% or more, nothing works. But right now we're at a crucial period where we should get a silver lining and critical path to follow because the markets are grossly oversold and we're still in the midst of good earnings.

It's not easy to catch a falling knife but be ready to move quickly when the new equilibrium arrives as it's very likely the eventual bounce will be equally dramatic , with the companies with long-term solid earnings and pricing power leading the recovery. No one would be surprised if the bottom was reached soon. Be ready.

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Updated on Jan 24, 2022, 1:41 pm

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