Let me be clear where I’m coming from. I think we’re still in a Bear Market and that the rally that has been in place since July is a Bear Market rally. In that context, what I’m falling the FOMO rally, the Fear Of Missing Out rally that has driven so much money from individual investors into stocks over the last few weeks is a stage in the Bear Market rally. It’s not the last stage–I’m not seeing the kind of absolute upside blowouts that would characterize a top–but it gets us closer to a top and a turn back to the Bear. There are positive factors to drive stocks higher–inflation is inching down, supply chains are becoming a bit less tangled, oil prices have dropped and a further drop seems probably in the short term. But I think these positive factors are outweighed by the negative. The Federal Reserve will raise interest rates on September 21 and again on November 2 and on December 14. From recent comments by Fed officials, I think we’re looking at 125 to 150 basis points of increase, enough to take the end of the year Fed Funds rate to 3.50% to 3.75% from today’s 2.25%. I think that will lower inflation, and slow the economy, but I think it’s unlikely that a 3.75% Fed Funds rate will be enough to bring inflation, now running at a core annual CPI rate of 5.9%, will be enough to bring inflation down to the Fed’s 2% target. Which means that the Fed will still be raising interest rates well into 2023 and that the U.S. economy will continue to slow. With the EuroZone economy about to fall into recession and growth in China slowing, it will be very difficult for the U.S. economy to escape putting together two consecutive quarters of negative growth, the popular definition of a recession.
And I think the market, which now is betting on just a few more interest rate increases and an early end to the Fed’s tightening cycle will be disappointed by early to mid 2023. And that inflation will run hotter than not hoped on Wall Street. And that growth will slow more than now projected.
All of which will, at some point, be enough to put the Bear Market back on the prowl.
Is this absolutely guaranteed? Of course, not. But I’d say odds are better (worse, since we’re talking about the return of a Bear Market) than 70%. The big drivers of this scenario–stubborn inflation, a Federal Reserve resolved to put inflation back in the box, economic slowdowns from China to Europe, and higher U.S. interest rates–are both very powerful and very likely.
But if I’m right about this scenario, investors are still left with a big strategic issue–
If the return of the Bear Market is very likely, WHEN will it return?
That’s important because the timing of the return of the Bear determines what strategy we should adopt.
If the Bear will go back on the prowl very soon, say somewhere around August 24 (the date of Nvidia’s (NVDA) very important (for the tech sector and more) earnings report) and August 26 through 28, the dates of the Federal Reserve’s annual Jackson Hole confab, then you should be battening down the hatches now and selling everything you don’t want to hold through another down leg from the Bear.
On the other hand, the return of the Bear could be delayed until early 2023 when it becomes clear to all the interest rate optimists on Wall Street that the Federal Reserve isn’t about to start cutting rates soon.
So what do you do?
I think you try to balance the potential for making decent profits here with a goal of not getting burned by a shift in sentiment back toward a bearish view.
If you remember that in my post yesterday on the FOMO market and the ability of stocks to move higher against the backdrop of bad economic news from China, I suggested that the next check-in level on the Standard & Poor’s 500 was at 4563, a level suggested by the head-and-shoulders technical pattern now on display. That’s about 6%, 258 points, from the Tuesday, August 16, close at 4305 on the index. (That’s not my call for a top but rather a level where I’d look to see how the factors driving the rally,bear scenarios are shaping up.)
A 6% potential gain isn’t something I casually leave on the table, but it’s not enough to make me go wild either.
If you are the kind of person who doesn’t allow his or her emotions to influence investment decisions, it’s clear what to do. Continue to sell individual stocks with exposure to the negative trends in the global economy or that have company-specific problems you’d like to avoid. For example, given trends in China’s economy, Covid-19 shutdown policy, and regulatory hostility to the country’s big technology companies (as well as the danger of turmoil from potential de-listing on U.S. markets), I really don’t want to own any of the big market cap names in China. So tomorrow I’ll be selling my position in Alibaba (BABA) in my Jubak Picks Portfolio and in Tencent Holdings (TCEHY) in my 50 Stocks Portfolio. Both of these buys have turned out to be mistakes I badly misread the change in attitude by Beijing regulators toward the country’s big tech names and over-estimated the ability of the People’s Bank to stimulate growth in China’s economy.
This disciplined investor would look for other obvious sells–while keeping an eye out for any low-risk candidates for making a profit during this leg of the rally.
If, however, you aren’t that iron-willed investor (and frankly, I’m not), you’ve got another problem to deal with. A FOMO rally is built on producing huge gains in some stocks that are so tempting that it becomes painful to sit on the sidelines and Miss Out.
For example, on Friday, August 12, shares of Plug Power (PLUG) were up another 6.49% and were, as of the close on Monday, August 15, up 16.94% in the last week, and 93.79% in the last month.
Or how about EVgo (EVGO) up 64.28% in the last month?
It takes a disciplined investor not to plunge in chasing those kinds of gains.
But recognize that both these stocks have gone from undervalued before this rally to overvalued now, August 16. Jumping in now risks buying into a trend that has its best days behind it and setting up your portfolio for painful losses.
Recognize that a FOMO rally is a momentum rally built on the short-term moves of cash. What that cash moves into is very unpredictable.
Maybe you could have predicted–on past volatility and its role as a favorite meme stock–that AMC Entertainment (AMC) would climb 78% in two weeks, but how about the 222.58% gain in shares of Bed Bath & Beyond (BBBY) in the last month?
And would you be willing to put significant money into those stocks for the next month?
Which leaves aside the question of whether you actually want to own a piece of either of these companies. (I think the answer there is NO, by the way.)
My suggestion is that if you just can’t sit on the sidelines and live with the pain of missing out during this FOMO rally, that you take a very small percentage of your portfolio, and put it into the two best FOMO stocks that you can think of right now. You might take a look at a (once) penny stock (that I recommended in my Special Report: “Own the Future for Pennies” on my subscription JubakAm.con site) Tritium DCFC (DCFC). This Australian electric vehicle charging company is up 51.58% in the last month but Morningstar still calls it 7% undervalued. And there is a real business here. Or try Tellurian (TELL), a startup liquified natural gas exporter (once its facilities are built.) This, another of my penny stock picks was up 29.81% in the last month, but Morningstar calculates that these shares are also still undervalued.
So put some money into a couple of FOMO plays, watch them, enjoy the gains, root for this rally–but don’t put more money in if the stock goes down. And don’t chase the rally with the rest of your portfolio.
Instead, use these FOMO plays to give you the emotional space to follow a disciplined strategy of selling into the Bear Market rally in order to control your risk and to raise cash for the real buying opportunity in 2023 or 2024.
