We saw yet another wild swing in the SPDR S&P 500 ETF Trust (NYSEArca: SPY) and other indices on Tuesday. As I’ve noted, we’re in a day trader’s market and must adjust.
But many people aren’t willing to sit at their computer all day and follow this line.
This chart shows the volume-weighted average price (blue line) of SPY, and the other lines are standard price deviations…
As you can see, the markets don’t like to stay in the third standard deviation up or down for long periods.
We’ve seen algorithmic systems buy when the stocks move into the third standard deviation on the bottom… and sell when they get into the third standard deviation from the top.
It’s absolutely maddening. This trend has accelerated over the past two months, particularly as retail traders and fund managers threw in the towel in late September.
I’ve said that you either trade like this, or you don’t worry about trading in 2023 — which will feature a lot more similar behavior!
Instead, I’m looking for bargains in this market right now. I want deep value or strong income, and it’s even better if I can find both at the same time.
So I’ll explain why I’m looking to start buying stocks… tomorrow.
Reason No. 1: There Are ‘Winners’ Right Now
Most investors look at this market and are afraid to hit the buy button. But most also don’t even know where to start.
Each month, I’ve put together a list of the top stocks with strong F and Z scores… with low buyout multiples.
When you see stocks on that list like Exxon Mobil Corp. (NYSE: XOM) and Marathon Oil Corp. (NYSE: MRO), you should know that these are companies that are “working” in this economy. They have shareholder-friendly executives, and they’ve been working to improve their balance sheets all year long.
Given they have strong balance sheets and low valuations, you might not see them at these prices again. And when the Federal Reserve finally does pivot and the economy emerges from what should be a mild recession, these stocks could easily outperform the S&P 500.
That’s why one of my favorite places to start is buying these stocks and dollar-cost averaging — buying a fixed dollar amount of stock on a regular basis — into the position each month they remain on my list.
Reason No. 2: Capital Rotation Is Happening Right Now
Apple Inc. (Nasdaq: AAPL) is moving to its lows of the year.
The reason? Capital rotation.
Fund managers are exiting the stock as they start to plan for their thematic trades in 2023. The number of exchange-traded funds (ETFs) surged from 280 to 404 over the past 16 months.
That was part of an effort by fund managers to align with their benchmark — usually the S&P 500. Now they’ll start to shift back toward their original investment themes to start the year. I expect they’ll crowd back into Apple in mid-2023 when most fund managers don’t get the pivot from the Fed in May.
That said, we want to focus on places where the capital is rotating. That rotation — also evidenced by large amounts of insider buying — is happening in banks, energy and materials. The good news is that so many of the companies in this space — especially during this sell-off — have low valuation multiples and offer terrific dividends.
Reason No. 3: Tax Planning for Next Year
Finally, I’m a big fan of thinking ahead. Naturally, not every stock I buy will generate a profit. That’s just the nature of managing a portfolio. But too many people look at the calendar and think they should buy stock when the new year starts.
Not me. I’m buying tomorrow… And if not Wednesday, definitely before Friday.
Next year, there are only four trading days between Christmas and New Year’s, and traditionally those are low-volume periods. So if I buy Wednesday or Thursday, I’ll have a very important advantage next year in managing my portfolio from a tax perspective.
I’ll be able to harvest losses during those final six trading days in 2023. But I’ll also be able to take long-term capital gains to offset any losses…
So instead of paying ordinary income taxes on short-term capital gains — for buy and hold under one year — I’ll have put in my 365 days, ensuring I could maximize my profits.
Always… always… always think ahead.
On Wednesday, I’m joining the WealthPress Live Roundtable, where I’ll give some insight on how to pick the best stocks for the next 12, 24 or even 60 months.
Now is the time to think long. You might not get another opportunity.
To your wealth,
P.S. And don’t forget to let me know if you have any feedback, questions about today’s issue or anything else. Just email us at email@example.com.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
Market Momentum is Red.
We’ve seen a big move from intraday momentum as markets continue to swing in wild directions. The ongoing breakdown in Apple stock suggests we haven’t yet found a bottom in this market. There could be a significant amount of fund selling in the next week as managers aim to protect their already dismal performances in 2022. Cash remains a very good position… but it’s also a very important time to start deploying capital into a select number of industries.