By Michael Brush, MarketWatch
Heads up, investors: Wednesday’s selloff in the stock market carried through Friday. It may be the start of something bigger, for the five key reasons I cite below.
The good news is we’re not going to see a full retest of the March lows or anywhere near that kind of decline, thanks to several positive factors in the mix (also below).
The upshot: It’ll make sense to buy stocks after potential 5%-10% declines in the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.40% , Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.05% and Nasdaq /zigman2/quotes/210598365/realtime COMP +2.13% . Stock market indexes posted declines Friday of over 2% on concerns about rising coronavirus cases in some states as they reopen their economies.
Here are some tactical suggestions.
• Focus on buying a group that I call “public space” stocks. The eight stocks I put in my public-gathering-place portfolio in my stock newsletter, Brush Up on Stocks , on March 17 were up 70.7% by the close June 15, compared with 26.3% gains for the SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY +1.39% . As the big gainers (and the ones most vulnerable to Covid-19 resurgence fears), they will likely decline a lot, offering the best opportunity for a rebound when Covid-19 fears recede again.
If you missed this play the first time around, you will get another shot on a smaller scale. The eight stocks are: Churchill Downs /zigman2/quotes/205054336/composite CHDN +0.38% , Royal Caribbean Cruises /zigman2/quotes/208854639/composite RCL -2.52% , Carnival /zigman2/quotes/202325446/composite CCL -3.98% , Planet Fitness /zigman2/quotes/203234487/composite PLNT +0.60% , Lowe’s /zigman2/quotes/205563664/composite LOW +1.79% , Home Depot /zigman2/quotes/208081807/composite HD +2.42% , Howard Hughes /zigman2/quotes/206056706/composite HHC -0.91% and Cedar Fair /zigman2/quotes/205497488/composite FUN -1.53% . These all have solid brands, good business prospects and decent insider buying levels.
• Buy the most cyclical areas, which will also get hit the hardest. This means energy, industrials and basic materials. Consider solid names in energy like Exxon Mobil /zigman2/quotes/204455864/composite XOM -0.02% and Royal Dutch Shell /zigman2/quotes/205095589/composite RDS.A +3.20% , which get Morningstar’s highest (five star) stock rating, or one I like and own among mid-caps, Continental Resources /zigman2/quotes/200740136/composite CLR +2.64% . In industrials and chemicals, there’s been compelling insider buying in TransDigm Group /zigman2/quotes/203902625/composite TDG +1.68% and LyondellBasell Industries /zigman2/quotes/200036808/composite LYB -1.63% over the past several weeks.
For exchange traded funds (ETFs), consider Energy Select Sector SPDR /zigman2/quotes/206420077/composite XLE +0.99% , SPDR S&P Oil & Gas Explore & Production /zigman2/quotes/203527521/composite XOP +1.78% and Vanguard Energy /zigman2/quotes/202541791/composite VDE +1.13% in energy; Industrial Select Sector SPDR Fund /zigman2/quotes/202026558/composite XLI +0.32% and Vanguard Industrials /zigman2/quotes/210393217/composite VIS +0.38% in industrials; and Materials Select Sector SPDR /zigman2/quotes/204467551/composite XLB +0.59% , Vanguard Materials /zigman2/quotes/202119071/composite VAW +0.73% and iShares Dow Jones US Basic Materials /zigman2/quotes/208111671/composite IYM +0.64% in basic materials.
• Own gold or gold-mining stocks. They are a hedge against potential weakness. Consider SPDR Gold Trust /zigman2/quotes/200593176/composite GLD -0.47% , iShares Gold Trust /zigman2/quotes/210005244/composite IAU -0.44% , VanEck Vectors Gold /zigman2/quotes/206399889/composite GDX +0.46% and VanEck Vectors/Jr Gold Miners /zigman2/quotes/204075079/composite GDXJ +1.16% .
• Don’t get too aggressive in selling biotech stocks or the iShares NASDAQ Biotechnology Index /zigman2/quotes/206189322/composite IBB +1.46% or SPDR S&P Biotech /zigman2/quotes/205950134/composite XBI +0.32% . Biotech is less likely to sell off sharply, and it may even go up since it’s now considered a “defensive” group that rises on increasing fears about Covid-19 spread. Politicians need breakthroughs on vaccines and therapies, so they are in love with the sector. No more talk about drug price regulation, at least not for now. Biotech stock valuations are largely based on the discounted net present value of earnings many years out, when therapies get approved. What happens over the next 12 months is less important to valuations.
The bottom line: This is not a time when you need to rush into the markets for fear of missing out. Wait for price. Get out of trades and positions you are not certain about. But don’t touch core long-term positions. A disastrous long-term recession does not appear to be in the cards. Be wary of using margin. Slowly raise some cash or keep some on hand.
Then as market weakness develops, scale into stocks getting hit the most, such as the public-space stocks and companies in cyclical areas like energy, industrials and chemicals. There are plenty of things that could crop up to create volatility and better prices, near term. Here are five reasons why.
The stock market is more vulnerable now
1. Sentiment is turning bullish. Not feverishly so, but enough to make this a less compelling time to buy stocks in the contrarian sense, meaning you should get less bullish as the crowd gets more bullish. The dozen sentiment indicators I track are all now either neutral or bearish (showing too much bullishness). Excessive optimism is seen in the high levels of call buying at the Chicago Board Options Exchange, for example, and the record number of new accounts at discount brokerage firms and Robinhood.
2. Insiders have shifted to neutral. Insider buyers have left the building. On Tuesday there were only 12 companies whose own executives bought more than $100,000 worth of stock, which is low. Part of the decline is because we are moving into earnings reporting season. So insiders are getting locked down. But this doesn’t explain all of it.