In this week’s Hypergrowth Investing Podcast, Aaron and Luke talk about the current market rally (can it last?) and which stocks to buy to take advantage of a market bottom. Our dynamic duo also check in with our “Big Three” market themes – space, robotics, and clean tech – and answer some of the excellent questions you’ve submitted.
We left off last week with stocks rallying in a major way. And Luke is confident this isn’t another head fake. This rally has legs, and it seems possible that stocks are clawing their way out of this bear market.
To do that, stocks need catalysts. And we’re getting that with an earnings season that has been mostly very strong. Yields are coming off their highs. Stocks have been performing well. There’s talk of a Fed pivot again (which feels much more substantiated than it has previously). Luke has been cautiously optimistic on this rally, believing it could become the start of a new bull market.
Although it may not be happening as fast as some hope, inflation is coming down, says Luke. The Fed is considering slowing its pace of rate hikes. And the bond market has started to react on a global scale. Central banks around the world have capitulated, causing yields to retreat. And now earnings are surprising to the upside.
Altogether, this is creating a recipe for stocks to move higher – at least in the short term and hopefully into the medium and long term as well.
So, if this is the start of a potential long-term rally, does that mean we’ve hit the market bottom? Well, according to Luke, timing an exact bottom is nearly impossible – but he’s seeing indicators flashing across the market, signaling that the bottoming process has begun. And that’s all that matters when preparing for an incoming bull market.
The first signal is valuations. Without a deep recession, bear markets tend to bottom around 14 to 16X forward earnings. And recently, stocks have reached about 15X – very close to that bottoming level.
The second thing our team is watching? Financial conditions. Bloomberg’s financial conditions index – which takes yields, stock prices, commodity prices, etc., into account – dropped below -1 a few weeks ago. Over the past 25 years, when that index falls beneath -1, stocks are close to a bottom.
The third? The S&P 500’s price is well below analysts’ price targets, about 23% below consensus. Historically, the market bottom when the S&P was 20% to 30% below analyst targets. That’s bullish.
Another indicator? Fund managers have record-high levels of cash. That indicates capitulation and money waiting on the sidelines for a more bullish setup. And that’s bullish, too.
Not to mention, says Luke, investor sentiment is at peak-bearish levels. This tends to mark “peak fear,” and it usually correlates with market bottoms.
What about a strong technical indicator? Luke points to the “McClellan Oscillator,” which is a market breadth indicator, just broke below -15 – a super negative reading it rarely breaks beneath. And every time it does – 100% of the time – stocks are higher 12 months later. Indeed, that is a huge bottoming signal for the market.
These aren’t the only signals. The list goes on. It’s clear that we’re due for a big rally here. And it’s possible that this rally could bounce us all the way out of bear market territory. It’s time to prepare for incoming gains and nab the best stocks to buy while they’re still cheap.
To learn which stocks to buy for a market boom, watch this week’s episode of Hypergrowth Investing!