This week was a great litmus test for determining what kind of investor you really are. Was it just a speed bump or did it feel like the wheels were coming off Wall Street?
There’s no wrong answer. Depending on where you are in the market, this is the worst of times and the best of times.
The Biggest Bubble and The Biggest Bargains Can Co-Exist
In the first scenario, the market as a whole has created an unrealistic and fragile bubble. Valuations are stretched to the breaking point, while a collapse is inevitable.
That’s the narrative that often turns heads. It is easy to sell doomsday when investors are already nervous.
But the second scenario is equally plausible. If you’re in the right stocks and have the right expectations, you see bright days ahead.
Two Economies Produce the Biggest Bubble and The Biggest Bargains
Never forget that the S&P 500 typically climbs about 8% and pays a dividend yield comparable to Treasury bonds in a typical year.
In exchange for that enhanced long-term return, we surrender short-term comfort. Very few years are “typical.” Bad ones are frequent and weigh against the good ones.
And when volatility rises, comfort evaporates. With only fleeting pauses, the CBOE Volatility Index (VIX) hasn’t settled at “normal” levels in over a year.
Crossroads Appear for the Biggest Bubble and The Biggest Bargains
We live in an uncertain era. Like the economy as a whole, Wall Street is negotiating a crossroads.
On one side, you have the hot money. Technology companies and extreme valuations dominate that world. Just watch the NASDAQ move and you’ll get a good look at that world.
But most stocks are still rooted in the old pre-pandemic economy. These are the cinema chains, mall retailers, cruise ships, restaurants and airlines that plunged last year and never really recovered.
Vaccines May Affect the Biggest Bubble and The Biggest Bargains
Now that the vaccines are getting deployed, the time is coming fast when these “old economy” stocks can get back to work. It’s going to feel amazing as people leave their homes with money to spend and cabin fever to cure.
At that moment, smart investors logically favor the “old economy” names that capture their fastest growth rates when the businesses recover from a significant shock. We’re already watching institutional money flow out of the NASDAQ into the relatively low-tech Dow Industrials.
I think this year is going to favor the Dow. The NASDAQ is already midway through what could easily become another 10% correction before it can reach for fresh records.
Apple and Amazon.com Factor into the Biggest Bubble and The Biggest Bargains
Key technology stocks like Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) are somewhere between correction and full-fledged bear market territory. So is Tesla Inc. (NASDAQ:TSLA), the ultimate “hot money” play.
But energy stocks, banks and other “boring” companies look as cheap as they ever have. They’re coming out of a deep recession.
I just saw a note from J.P. Morgan calling this “stock picker paradise.” I pick stocks. As long as you don’t limit yourself to one half of the market or another, it truly is an exciting moment.
Concerns about the Biggest Bubble and the Biggest Bargains Add Appeal of Dividend Stocks
So, where are we? As always, if you’re scared, retreat to the safety of dividend stocks. My Value Authority portfolio has plenty of ideas.
If you’re excited about the future, check out my IPO Edge. We’re holding up well here because we’re directly exposed to companies at the very start of their growth curve.
And in the middle, we trade the controversy. I’m talking about all of this on my Millionaire Makers radio show. Now there’s a podcast (Spotify)(Apple) as well to keep you focused on opportunities to build real wealth while avoiding obvious threats.
Cannabis Corner: Yes, This Is the Cannabis Correction
If you’re new around here, it might look a little like the end of the world. Don’t panic.
Hundreds of “hot” stocks took a big step back this week. The pain is nearly universal among the cannabis-related names on my screen.
Only one of the tiniest fought its way to the upside. I’ll tell you more about it later.
This Is the Cannabis Correction: Canopy Growth
For now, I simply want to linger on the carnage as a teachable moment. The biggest stock in the industry, Canopy Growth Corp. (NASDAQ:CGC), was one of the hardest hit, lurching 14% lower.
Its up-and-coming chief competitor, Tilray Inc. (NASDAQ:TLRY), plunged 16%. Neither giants nor niche favorites were spared.
All in all, the dozen cannabis stocks I track in my proprietary index took an 11% fall. That’s a bona fide correction playing out in real time, only a little slower than the infamous “flash crash.”
This Is the Cannabis Correction When Stocks Return to Realistic Levels
But by definition, a correction happens when stocks that have gotten ahead of themselves retrace their steps until they hit more sustainable and realistic levels. They aren’t crashing. They’re literally correcting course.
And long-term investors accept a few course corrections as part of the natural give and take of life on Wall Street. When stocks go up a lot, they can come down a little and no sensible person complains.
That’s exactly what’s happening here. Those dozen stocks I track may be down 11% this week, but they’re still up 77% in the aggregate year to date (YTD).
This Is the Cannabis Correction: Dropping 11% in a Week
In that context, giving up 11% on what was once a huge return isn’t so terrible, especially when you consider that we’re only two months into the year and these stocks still have a lot of room to run.
After all, there’s no bad news circulating around cannabis. All the indicators still point to enlarged markets and looser regulations ahead.
Wall Street agrees. Price targets on these companies are actually rising. So, don’t blame cannabis. It’s just the market tides circulating.
This Is the Cannabis Correction, Except for a Tiny Stock Recommended in IPO Edge
But what about that tiny cannabis-linked stock that still is rallying through the storm? It isn’t even listed on a major exchange. You’ll have to squint to see it.
Those who have been able to locate a few shares are cheering. Dollar for dollar, when a tiny stock triples in price in a matter of months, it feels just as good as it does when a Silicon Valley stock leaps from $300 billion to $1 trillion.
If anything, it’s more likely for little stocks to stretch than it is for a giant like Apple Corp. (NASDAQ:AAPL) or Amazon.com Inc. (NASDAQ:AMZN) to triple at this stage.
What is the stock? Only my IPO Edge subscribers can answer that question.