Here's Why Stocks Rallied Last Week

I don't know about you, but right now, I'm breathing a little sigh of relief.

And with good reason. Finally last week, we got some good news out of stock market action. And pretty much across the board, the news was positive. Here’s what I mean:

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As you can see from this set of multiple weekly charts, stocks booked some decent action last week. In fact, the Dow was up 6.2% for the week. Meanwhile, the S&P 500, a good proxy for the broader stock market, was up 6.6%. Also, last week, the Nasdaq was up 6.8%, and the Russell 2000, a good indicator of what all stocks are doing, was up 6.5%.

You have to admit that's broad positive action across all equity asset classes. And it's welcome news considering what the markets have been up to over the past two months. Continue reading "Here's Why Stocks Rallied Last Week"

Building A Portfolio In A Bear Market

No Place To Hide

A massive amount of portfolio wealth has been destroyed throughout this bear market that continues its carnage that started in January. Except for oil stocks, there hasn't been any place to hide, as the cryptocurrency market, gold, equities, and bonds have all scummed to the mauling of the bear. The current bear market has been brutal, with some individual stocks losing more than 90% of their value, such as Peloton (PTON), Beyond Meat (BYND), Coinbase (COIN), and Zoom Video (ZM). However, even high-quality large-cap companies with growing revenues and durable business models have not been spared and have sold off 30-50%, such as Disney (DIS), Microsoft (MSFT), Adobe (ADBE), Costco (COST), and Meta (FB).

During bear markets or an extended period of a market-wide correction, investors have the unique opportunity to purchase heavily discounted stocks at a fraction of the price compared to their peaks. As history indicates, establishing long-term positions during corrections can lead to outsized gains over the intermediate and long term. As the selling pressure abates and the macroeconomic backdrop resolves, building equity stakes in high-quality companies bodes well for investors. The most recent market-wide sell-off is due to a confluence of the China Covid lockdowns, the Russia/Ukraine war, persistent inflation, and rising rates. As these macro issues resolve over time, the markets will regain their footing and appreciate higher. The current market backdrop is the exact scenario where investors should be deploying cash on hand to snap up heavily discounted merchandise.

Cash Is King

Deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. However, for any portfolio structure, having cash on hand is essential and in these environments is where this cash should be deployed in equities. 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 and dollar cost averaging during these extended periods of weakness are great long-term drivers of portfolio appreciation. Absent any systemic risk; there are a lot of fantastic entry points for many high-quality large cap companies. Investors should not be remiss and capitalize on this buying opportunity because it may not last too long.

Anchoring And Dollar Cost Averaging

Purchasing stocks at the exact bottom is nearly impossible; however, purchasing stocks at attractive valuations in a disciplined manner over time is possible. For example, dollar cost averaging is a great strategy when anchoring down into a position with an initial sum of capital and following through with additional incremental purchases as the stock declines further. The net benefit is reducing the average purchase price per share in a sequential fashion (i.e., reducing cost basis). An example of building out a high-quality portfolio with subsequent dollar cost averaging throughput this market weakness can be seen in Figure 1.

Building A Portfolio In A Bear Market
Figure 1 – Initiating positions in high-quality companies with subsequent dollar cost averaging to lower the average purchase price over time. These long equity trades along with options-based trades can be found via the Trade Notification service

Conclusion

Purchasing stocks at the exact bottom is nearly impossible; however, purchasing stocks at attractive valuations in a disciplined manner over time is possible. During bear markets, investors have the unique opportunity to purchase heavily discounted stocks at a fraction of the price compared to their peaks. As history indicates, establishing long-term positions during corrections can lead to outsized gains over the intermediate and long term. As the selling pressure abates and the macroeconomic backdrop resolves, building equity stakes in high-quality companies bodes well for investors. The current market backdrop is the exact scenario where investors should be deploying cash on hand to snap up heavily discounted merchandise.

Having cash on hand is essential and in this environment is where this cash should be deployed in equities. 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 and dollar cost averaging during these extended periods of weakness are great long-term drivers of portfolio appreciation.

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 [email protected]. The author holds shares of AAPL, ACN, ADBE, AMD, AMZN, ARKK, AXP, BA, BBY, C, CMG, COST, CRM, DIA, DIS, EW, FB, FDX, FXI, GOOGL, GS, HD, HON, IBB, INTC, IWM, JPM, LULU, MA, MS, MSFT, NKE, NVDA, PYPL, QCOM, QQQ, SBUX, SPY, SQ, TMO, UNH and V.

Potential Market Inflection Point Imminent?

Cautiously Optimistic

Commodity prices are soaring, the war between Russia and Ukraine is worsening, inflation is raging, and the Federal Reserve has begun increasing rates. The backdrop seems ominous; however, the market may be just one positive headline away from an inflection point to turn the tide in a positive direction.

Timing the market has been proven time and time again to be nearly impossible; however, what is possible is capitalizing during these correction periods and buying heavily discounted stocks. These correction periods are great opportunities for long-term investors via dollar cost averaging throughout these long stretches of suppressed conditions. As the best market days typically follow the worst market days, building stock positions and riding out the volatility has proven advantageous. Missing out on just a few of the best-performing days of the market in any given year can drastically alter investor returns and yield dramatically inferior results.

The Russian/Ukraine War

Conditions between Russia and Ukraine continue to worsen while the west slaps sanction after sanction on Russia for its aggression. However, per Bank of America, stock declines related to the conflict may have bottomed. Continue reading "Potential Market Inflection Point Imminent?"

Geopolitics - Sell The Rumor, Buy The News?

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. Continue reading "Geopolitics - Sell The Rumor, Buy The News?"

Dollar-Cost Averaging Into The Correction

Relentless Selling

The bears have been circling for months and have now mauled these markets into a correction. The linchpin was inflation along with an impending rising interest rate environment. The simmering geopolitical tensions between Russia and Ukraine only exacerbated this delicate market and pushed it into a full-blown correction. Over a third of the Nasdaq 100 stocks traded off at least 30% from their highs, over half of the S&P 500 fell 15% or more while the median biotech stock had sold off by 60%. Massive amounts of market capitalization have been eviscerated across the board, with many individual stocks selling off 50% or more throughout this downward spiral.

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. 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.

Dollar-Cost Averaging

Repurposing Cash

Deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. Continue reading "Dollar-Cost Averaging Into The Correction"