Relentless Selling
The old adage is buying the rumor and selling on the news; however, during this recent market correction, it's been the opposite. Selling the rumor and buying the news has prevailed when it comes to interest rate hikes and the geopolitical tensions between Russia and Ukraine. In both cases, the anticipation of rate hikes has sent the market into a downward tailspin despite the fact the Federal Reserve hasn't put forth any rate hikes. In addition, the anticipation of the Russian/Ukraine conflict boiling over into an invasion by Russia drove the markets further into correction territory.
As a result, the markets entered deep into correction territory. Over a third of the Nasdaq 100 stocks traded off at least 30% or more from their highs, over half of the S&P 500 fell 15% or more while the median biotech stock had sold off by 60% or more. In addition, massive amounts of market capitalization have been eviscerated across the board, with many individual stocks selling off 50% or more throughout this downward spiral.
Per Tom Lee, many factors, including the market's big reversal at the onset of Russia's invasion of Ukraine, indicate the markets are now bottoming around these levels. Lee stated that the market's stunning comeback in stocks and a reversal in the Cboe Volatility Index signal that the pain in the market could be coming to an end. The market had a "buy the invasion" moment, Lee said in a note. The S&P 500 opened down more than 2.6% on the invasion news, and oil prices surged above $100 per barrel. However, markets typically sell off into the buildup of geopolitical escalations but rally on the day of the invasion.
Tom Lee's Bottom
Per Tom Lee, many factors, including the market's big reversal at the onset of Russia's invasion of Ukraine, indicate the markets are now bottoming around these levels. In addition, Lee stated that the market's stunning comeback in stocks and a reversal in the CBOE Volatility Index signal that the pain in the market could be coming to an end.
After news that Russia invaded Ukraine, the S&P 500 was far into correction territory, down 13% from its high. However, the market had a "buy the invasion" moment, Lee said in a note. The S&P 500 opened down more than 2.6% on the invasion news, and oil prices surged above $100 per barrel. Yet, a sharp reversal occurred later in the day, and the S&P 500 ended positive, up more than 1.6%.
Lee highlighted that markets typically sell-off into the buildup of geopolitical escalations but rally on the day of the invasion. Lee's Fundstrat firm looked at stock movement surrounding the Vietnam war, the Gulf War, the Afghanistan War, the Iraq war, and the Crimean Crisis and found that five out of five times, stocks bottom just before the invasion. "Again, the 'buy the invasion' seems to have happened," Lee said.
Fundstrat also believes a turnaround in the CBOE Volatility Index (VIX) during the reversal is a bullish sign for markets. The VIX is seen as a fear gauge, and it spiked above the 37 level on the day of the reversal before reverting towards the mean to the 30 level.
Lee said, "It looks like the VIX might have signaled an upside capitulation. That is, the seeking of protection got to a level that could be a sign of exhaustion". Furthermore, after a swing like the one seen in the VIX, the S&P 500 has historically averaged a gain of 1.3% one month later. After three months, that average return grows to 3.4%. Finally, Lee said the major drop in Russia's stock index on Thursday, paired with sanctions from the U.S., should weaken Russia's economy. This could give investors encouragement to buy into equities.
Putting Cash To Work
During periods of market-wide corrections, investors can purchase heavily discounted stocks at a fraction of the prices these stocks were trading at just weeks prior. As history indicates, establishing positions during corrections can lead to outsized gains over the intermediate-term as the selling pressure abates and the macroeconomic backdrop resolves. Portfolio balance is key in all market environments and deploying cash during periods of heavily reduced valuations is essential. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies via patience and dollar-cost averaging.
Recognizing that deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and have become de-risked. Initiating new positions or dollar-cost averaging during these weak periods are great long-term drivers of portfolio appreciation. Absent of any systemic risk, there are a lot of appealing entry points for many large-cap names. Investors should not be too bearish and ignore this potential buying opportunity because it may not last for long.
Too Pessimistic Macroeconomic Front
The Federal Reserve will begin withdrawing its stimulatory monetary policies and discontinue its asset purchases as telegraphed for months now. The Federal Reserve will also increase interest rates over the course of 2022; again, this has been disseminated broadly. As this pivot unfolds, risk appetite towards equities has faltered. Coupled with the geopolitical risk with the Russian/Ukraine conflict, the markets have ostensibly priced in these macroeconomic headwinds. This situation places the Federal Reserve in a precarious situation to combat inflation without derailing the economic expansion while factoring in the geopolitical impacts. Inevitably, rates will increase however the market has priced-in initial rate hikes, albeit the pace and magnitude of rate hikes is unknown. Regardless, this backdrop has been far too pessimistic and negative towards equities.
Conclusion
Per Tom Lee, many factors, including the market's big reversal at the onset of Russia's invasion of Ukraine, indicate the markets are now bottoming around these levels. Lee stated that the market's stunning comeback in stocks and a reversal in the Cboe Volatility Index signal that the pain in the market could be coming to an end. The market had a "buy the invasion" moment, Lee said in a note. The S&P 500 opened down more than 2.6% on the invasion news, and oil prices surged above $100 per barrel. However, markets typically sell off into the buildup of geopolitical escalations but rally on the day of the invasion.
The simmering geopolitical tensions between Russia and Ukraine have exacerbated the market correction. Where over a third of the Nasdaq 100 stocks traded off at least 30% or more from their highs, over half of the S&P 500 fell 13% or more while the median biotech stock had sold off by 60% or more. However, during periods of market-wide corrections, investors can purchase heavily discounted stocks at a fraction of the prices these stocks were trading at just weeks prior. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies via patience and dollar-cost averaging.
Noah Kiedrowski
INO.com Contributor
Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to in**@st*************.com. The author holds shares of AAPL, ADBE, AMD, AMZN, ARKK, AXP, B.A., BBY, C, CMG, CRM, DIA, DIS, F.B., FDX, FXI, GOOGL, G.S., H.D., HON, INTC, IWM, JPM, MRK, MSFT, NKE, NVDA, PYPL, QQQ, SPY, S.Q., TMO, TWTR, UNH, USO, V and WMT.
