Rewards Will Come to Those Who Wait Out This Top-Down Selling
The market action is volatile and appears depressing, but it can also create opportunities for patient investors.
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How Do You Perfectly Time the Market? Simple, You Don't
The market is extremely volatile and fragile on Monday morning as investors struggle to assess the longer-term impact of sharply higher oil prices driven by the war in Iran. This is not an easy task. There is little clarity about either the length or the magnitude of the dramatic events.
The uncertain political repercussions are one matter, but the uncertain economic impact is roiling markets around the world. The biggest immediate problem is that higher oil prices will cause inflation to rise dramatically as they work through all areas of the economy. There is also the added concern that these higher prices may cause economic slowing. The main worry right now is inflation, but the longer prices stay elevated, the greater the impact on economic growth. The stagflation danger is building and that is what is causing extreme market stress.
Conditions are staying difficult early on Monday morning, with no improvement even though oil is already well off its early highs. Brent crude briefly touched $119.50 a barrel overnight before pulling back to around $106 as the G7 reserve release discussion provided some relief. The national average gasoline price reached $3.41 per gallon over the weekend, up $0.43 in a single week. The conflict is spreading beyond Iran itself. Bahrain's national oil company declared force majeure after an Iranian attack set its refinery complex ablaze, and Saudi Arabia shut some units at its Ras Tanura refinery after a drone strike. The Qatari Energy Minister warned last week that all regional producers could soon be forced to halt production and that prices could hit $150 if the Strait situation does not resolve.
Breadth is running around four-to-one negative, and the number of new 12-month lows remains relatively contained at less than 250 names in the early going, though growing fast. The limited number of new lows is largely due to a rotational correction rather than a broad, indiscriminate selloff, but that is shifting.
Related: Stagflation Fears Sweep Global Markets as Oil Spikes Above $100
Top-Down Selling and What It Means
The action so far on Monday is a classic top-down selloff, with the Russell 2000 (IWM) leading the downside, down around 2%. The Magnificent Seven (MAGS) is not far behind with a 1.5% drop and both groups are breaching key technical levels.
The most important thing to keep in mind about this action is that it is being driven from the top down. Investors are selling indexes, exchange-traded funds, and various baskets of stocks. In the Nasdaq 100, only 18 of 102 stocks are higher. The S&P 500 is even worse, with just 49 of 502 stocks in the green.
The key point about top-down selling is that many very solid stocks are being sold without regard to their individual merits. It does not matter how good the company or the stock might be in an environment like this. If it is a member of an index or ETF, it will be sold as part of the basket. Eventually, this creates meaningful mispricing and genuine opportunity, but it will require patience and planning.
What To Do With the Volatility
In volatile and uncertain markets like this one, traders and even long-term investors often feel compelled to act. There is so much movement that doing nothing feels wrong. The reality is that many market players handle this environment poorly because they lack clear time frames, and they let trades become investments and investments become trades. That confusion is costly.
The best approach right now is to stay focused on identifying the values that are developing. They will have poor charts at this point but start tracking them and watch how they behave as conditions change. The best stocks will develop support and then show signs of an uptrend when some of the uncertainty lifts. Those are the names you want to begin buying on a smaller scale. Move incrementally with small initial positions. There will be plenty of time to build larger stakes when better market conditions develop.
I will be discussing names I am watching throughout the week. Currently, I'm doing little trading but plenty of research for new ideas.
At the time of publication, DePorre had no position in any security mentioned.
