Trading Desk: The Kind Of Dip We Can Buy

Today was extremely important for the market. Key support lines that cracked last week have largely held, setting the stage for what could be a significant recovery ahead.

And earnings season has started. It isn’t a great one, but there’s no systemic indication of collapse here either.

We already talked about the first wave of banks to report. They’re the single biggest drag on Wall Street right now . . . factor out the challenging environment for financial companies and we’d actually be looking at 11% earnings growth for the S&P 500 this season.

That’s grounds for a rally or at least a “normal” market year as far as I’m concerned. Based on guidance from the banks, there’s no reason to cut profit targets for the rest of the year either.

Is it any wonder all the analysts calmly calculate that despite the Fed, despite inflation and despite all the recession dread in the air, the market will climb 28% over the next 12 months? All those fear factors are factored in . . . and they still say the bear market will be over a year from now.

Find Your Seat On The Rollercoaster

If they’re right, someone could buy the market on Monday and while the next 12 months might still be a rollercoaster, most investors can stick to their convictions for a year when they have a good sense that there’s a good outcome on the other side.

Unless earnings go off an unexpected cliff, this bear market is going to end. And unless the global economy completely freezes over this summer, earnings comparisons actually get better from here . . . not worse.

With that in mind, there’s no guarantee we’ll ever get a chance to buy the S&P 500 at a significantly lower level. It might happen, but if earnings keep tracking like they are now, the odds are good that this is the best entry point you’re going to get.

In other words, it’s looking like it’s relatively safe to buy the dip. Maybe the bottom is still a week or a month out . . . but the thing about bear markets is that when they end, they end extremely fast.

And when you miss the inflection point, you miss out on a lot of the potential gains in the next bull cycle. Who wants that, especially when you’ve already suffered through the losses the bear took away?

So that’s the pep talk. Yes, the banks are staggering a little between higher credit costs, a tangled yield curve and the shadow of deteriorating consumer finances . . . but the weight isn’t any more intense than Wall Street already saw coming.

The next few weeks will reveal whether any other segment of the market is suffering under more pain than expected. After that, it’s going to be clear to everyone that Corporate America can survive what the Fed is dishing out. Every CEO around is learning. They’re evolving.

That’s why analysts see overall earnings growth accelerating again in the current quarter. If they’re right, we’ve seen the worst of it. It gets better from here, even if the Fed keeps loading rate hike on rate hike for months to come.

Do the math: a 28% gain for the market as a whole in the next 12 months means that even if you bought the S&P 500 at its peak back in January, you’ll be back in the money by next summer. I know that’s a long time to wait to fight your way back to breakeven . . . but it’s also something like a worst-case scenario.

Most of us don’t buy the market at the peak and then cash out when we earn 1-2% percentage points. That’s extremely unlucky, but it happens.

Instead, most of us keep buying and selling throughout the cycle. We rotate from weakness into strength and then from strength back into weakness. We do a whole lot better than the worst-case scenario.

But I want you to have the worst numbers in mind so you know how bad it can get. If you bought the January peak and if the analysts are right, it might take you 18 months to earn a measly 2%. That’s what you’d make if you bought short-term Treasury debt today.

You would not have made that if you bought any bonds back in January. That’s why I say Treasury is trash. It just doesn’t make sense for retail investors.

And of course, if you have free cash to deploy, this is a great time to run the numbers. Earning 28% in a single year, if it happens, is huge. You’re basically earning a little less than 3X what the S&P 500 makes in a typical year.

Or you’re compressing three years in the market into a single year. This is when you want to buy in. It’s just the way the math works.

Sector Concentration

But nobody’s forcing you to buy the market as a whole. That’s just inertia.

The banks are on the defensive. Unless you can score a yield higher than the Fed’s inflation target (3%) in that sector, they’re going to be dead money through the end of 2022 if not beyond.

Skip the banks. If they come back faster than anticipated, guess what? You can always buy in when the signs line up the right way.

Double down on oil. Double down on the industrials, the commodity producers. Real estate, if you want a good bond substitute. Technology. Park in Big Tech and roll the dice.

But don’t buy the S&P 500. We buy and sell individual stocks here every day. Believe me, I know how to cut obvious weakness and concentrate on strength.

By the end of the year, energy will not be the hot ticket. We’ll be a year into the Ukraine war, assuming it lasts that long. Prices will flatten out at worst. At best, they’ll go down.

Amazon (AMZN) looks good by the end of the year. This stock is the key to the entire consumer economy. Watch the Prime numbers extremely carefully.

Whatever you do, get in the market. Pick some stocks. I have to say, a few recent IPOs are doing extremely well. Risk tolerances are back.

We’ve seen inflation. If you didn’t make 9% last year, you lost money.

And we’ve felt the bear. If you didn’t lose 22% in the last six months, you’re doing really well.

Now let’s open up to the upside. I know it’s hard. But if you don’t do it, you’ll never make your money back.