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Are You Prepared for the Market's Turn?

Are You Prepared for the Market's Turn?
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Saturday, 09 December 2017 01:20 PM Current | Bio | Archive

Some wisdom is timeless. Many of the best investment ideas go back hundreds, if not thousands of years. For instance, in the book of Matthew in the Bible, Jesus makes the statement, “many who are first will be last, and many who are last will become first.”

While Jesus speaks of the rewards of heaven versus those on earth, it applies to all sorts of other things in life. When thinking about investments, I’ll often try to sort various ideas, sectors and stocks between those that are currently first, and those that are currently last. That’s because the market tends to move away from areas that have been leading, and to put money in those areas that are now lagging.

It’s something I call a “rotation to value.” But it’s fundamentally based out of Biblical teachings. And in 2017, it’s still incredibly relevant to understanding how to profit in the stock market without taking on undue risk.

As we enter the final weeks of the year, stocks are starting to make a major rotation. High-flying tech names, which led the rally this year, are seeing prices drop. That’s simply profit-taking. As long as these companies remain profitable, they’ll likely see their shares start to bounce back again.

During the tech bubble of the 1990’s, tech names would see a big selloff over the summer months before rallying to new highs. We didn’t have that kind of move this year, at least until the end of the 2-17 tax year started to rear its head.

While there have been some big drops, the overall market has been going up. That’s because capital has been flowing into stocks that haven’t done as well year-to-date. That includes a few different sectors, like retailers. Of course, for retail, the holiday season is usually where all the annual profits come from. The rest of the year, many retailers are fortunate if they can just breakeven. A few subsectors might fare differently, of course, but that’s the general holiday pattern at work.

This is all a pretty normal feature of markets. There’s always going to be a rotation to value. As an investor, buying into value names means that there’s the potential for some sizeable gains down the line as those values are recognized by the broader market. But it also means that patience is required. It could take time for that value to materialize. What’s more, a handful of companies that fall into the value category are often in trouble themselves.

The fact that we’re rotating to value right now is a huge positive sign for the markets, and that 2017’s rally will extend at least partway into 2018. That’s because if markets were selling off, we’d see far more than a decline in technology stocks. It would extend across the entire market. Likewise, if markets were entering a full-blown mania mode, like in 1999 or 2007, you wouldn’t be able to point to a specific sector where there was a huge relative value. All stocks would have been in rally mode and would now look overpriced.

It’s no surprise that I’ve been pounding the table on the value in the overly-hated retail space for most of the year. But with companies like Target (TGT) now up over 25 percent from their lows, they’ve made a come-from-behind victory over the broad market for now. Even companies like Costco (COST), which will likely be able to compete indefinitely against online retailer Amazon (AMZN), is trading at a premium valuation to the average S&P 500 stock. Not to worry. New values will emerge. They always do. And if retailers bounce enough and tech companies fall enough, the values may simply swap sectors.

So where do we go from here? Short of a Federal Reserve rate hike this month over 0.25 percent, or short of an exchange of nuclear missiles with North Korea, the uptrend in stocks overall is in place. It may be a good time to start looking at buying technology stocks that have dropped 20 percent or more from their recent highs.

Only a handful of companies are dominating in growth terms right now, and those tend to cluster in the technology space. It may even be prudent to buy some long-dated call options on some big tech names later in the month as a way to profit from a bounce there as 2018 gets under way.

Outside areas like tech and retail, which have been the biggest loved and unloved names in 2017, it may be prudent to step back mentally and look at areas that have been a bigger challenge for investors over the past few years. Hard assets, like oil and gold, somewhatt fit the bill here. Both commodities are well off their cyclical highs from a few years ago (2011 for gold and 2014 for oil). They’re both up year-to-date, albeit somewhat quietly compared to the overall market.

Yet last week, the OPEC cartel announced that they’re happy with their restrictive production levels through at least the end of 2018. And gold production has been declining since 2013. With many rich-vein gold mines depleted, new supply coming to market will likely put pressure on prices there.

Yes, it lacks the glamor and growth of the tech space. But the tech space still requires the use of hard assets. You need some kind of fossil fuel to power the servers that make the Internet possible. And gold has a centuries-long tradition of storing value over time. It’s definitely a better store of value than the parabolic rise of cryptocurrencies this year.

In short, retail’s no longer the extreme value it was earlier this year. But high-flying tech names have been taken down a peg. And other sectors are showing some value right now as well. The market rally isn’t dead yet—but it is turning towards other sectors. That’s a normal, healthy sign that there’s room to go. Invest accordingly.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

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AndrewPacker
The market rally isn’t dead yet—but it is turning towards other sectors. That’s a normal, healthy sign that there’s room to go. Invest accordingly.
market, turn, prepared, investors
1022
2017-20-09
Saturday, 09 December 2017 01:20 PM
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