Tags: stock | market | rally | legs

Fear and Loathing on Wall Street Is Why This Market Rally Has Legs

Anxious young woman looking at $100 bills shoved in her face by four hands

By    |   Friday, 21 September 2018 10:45 AM

I often describe my investment philosophy as “cautiously optimistic.”

I think it provides the right balance. If you’re too optimistic about any investment, you’re not thinking about the downside danger. But if you’re too cautious, you’re not letting the wealth-creating power of the stock market work for you.

At times, more caution is warranted. At others, more optimism.

In this market, fear is running pretty high, all things considered. There’s a general sense of wariness, in spite of markets setting all-time highs.

And to me, that kind of emotional sentiment is exactly why the market is likely to head higher for a while yet.

It goes back to the old Wall Street adage that bull markets don’t die of old age. Rather, bull markets die on the altar of greed, where this time is different and anyone can make at least 15-20 percent per year without any real effort at it.

When we get that kind of sentiment, we’ll be too close to a market top for comfort. And chances are we’ll also likely be tempted to be caught up in the mania.

That tells us that today’s caution means we’re likely to still see stocks rally into the last part of the year. That’s true even if we get a seasonal selloff over the next few weeks. September and October tend to be the two worst performing months of the year for investors.

But if anything, I think we’ll have a solid fourth quarter. Fears of foreign markets and trade wars will always be with us in one way or another. But whatever’s spooking the markets now will be the distant past in a few months as different fears emerge. Looking at markets through this greed/fear lens, we can have a few short-term fears, but still have a long ways to go.

This gives investors plenty of options to choose from. For folks inclined to be more cautious than optimistic right now, selling covered calls on existing holdings is a useful strategy that can provide extra income and the possibility of cashing out of a position at a price you’re happy to lock in a profit at.

The advantage of this strategy is that you can use it to stay invested, even in a high-flying market like today. And given how stocks can do anything over the short-term but still be in a long-term uptrend, selling covered call options on a company after a big rally is a great way to improve your returns while the stock then lags for a while. That’s what I expect with Qualcomm (QCOM), where I just sold covered calls following the company’s improving fundamentals, and large rally fueled by a massive immediate share buyback.

For more optimistic investors, consider buying into many of the companies that aren’t breaking through to new highs. That can include turnaround plays that look like dead money now in old industries, but provide a compelling valuation, like General Electric (GE) or Newell Brands (NWL). While not every turnaround story ends up turning around, there’s usually a solid valuation and income potential while waiting for it to happen.

Both GE and Newell pay around 4 percent right now, a dividend rate more than double the average stock. By buying higher-yielding stocks out of favor right now, you can increase your total returns from dividends — and having cash coming in on a regular basis is a far better way to stay cautious while still staying invested than simply selling out and missing out on both income and capital gains along the way.

Finally, investors can also take advantage of cyclical, seasonal, and emotional trends to really be optimistic that this market has at least one last leg higher. Buying out-of-favor and oversold technology names, like chip and semiconductor companies, can provide substantial returns. It’s why I was buying Micron Technology (MU) earlier this week ahead of earnings and following a large number of analyst downgrades, and why I’m still buying after their strong earnings beat (but lackluster guidance).

Oddly, the analysts downgrading the company still gave shares a price target far in excess of today’s price — in some cases, the analysts still expected shares to more than double by the end of the year.

Go figure. That kind of behavior is yet another reason why this rally has legs. It’s when a company is faring poorly, gets downgraded for fundamental reasons, and still rallies that we’re in the latter stage of a bull market.

The point is, we’re still in an uptrend. There may be months, like February through August, where stocks make a round trip to nowhere. But that’s no reason to throw in the towel.

Find opportunities, even if it’s just to make a little extra on something you already own.

And don’t give up on this market rally yet. If you need to be cautious, there are plenty of ways to do it, from selling covered calls to increasing the number of dividend-paying companies you hold.

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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For folks inclined to be more cautious than optimistic right now, selling covered calls on existing holdings is a useful strategy that can provide extra income and the possibility of cashing out of a position at a price you’re happy to lock in a profit at.
stock, market, rally, legs
Friday, 21 September 2018 10:45 AM
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