Corrections
September is coming in weak (as predicted). The major indices have been down for six of the last seven days and unrealized gains are slipping away in most people’s accounts. There had been a drop of 1.8 percent since Sept. 1. That is a tangible pullback, painful for most of us in the market. There is probably more to come. Why? Because there is no clear positive catalysts out there. Earnings are over. The Delta variant has delayed the ‘back to normal’ post Labor Day promise. Kids are back in school but for how long? Office returns have been pushed back indefinitely. Meanwhile, tax increases are looming, our government is bickering like spoiled toddlers, the Afghan mess and a variety of economic indicators are suggesting the anticipated re-opening boom may be more like a burp. The mood of the market is cautious and a bit grey.
Market participants seem to be pulling out and cashing up, holding off doing anything until the skies clear a little. With people on the sidelines, there is limited stock purchases going on so nothing to stop the slide. For example, the casino stocks took a dive today as the Chinese continue their shotgun approach to their economy, this time they blasted gambling in Macao. Most of the big casino players fell by 10% or more, which would have normally brought in some bargain hunters. But today, keeping with the sideline mentality, there were very few buyers of these stocks (Mind you, I did buy some MGM). The lack of the ‘buy the dip’ players means that there is no way to halt a downturn and the slide will probably continue.
How much will we slide? Well, 10% off the high will mean we are in a correction. A correction is more than a ‘pullback’ (single digit declines) but less than a ‘crash’ (20% or more). I think we could see correction this month, but it will be selective. A lot of people do not realize that a large portion of the major indices (20% or more) is made up of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon.com (AMZN), and Facebook (FB). These stocks need to fall a lot to really see a major slide in the indices. Fortunately, these five stocks are also considered some of the safest stocks in market so people are unlikely to let them go into free-fall. If they do, there is likely to be buyers out there waiting to scoop them up. So any large slides are likely to be driven by the more speculative stocks, which have already been struggling. The correction is likely to hit selectively.
I say the best strategy is to have a shopping list ready. As the slide progresses be prepared to sell losers which are more speculative and don’t have earnings. Understand that many people have ridden out Covid with good jobs and their savings levels are high - what are they likely to spend money on as Covid wanes? Buy the stocks of the companies who will benefit most from consumer’s comeback. Think healthcare, travel and beauty. (Be careful though, people have discovered that they do not need as much ‘stuff’ as they bought before Covid. A new frugality is upon us.) Think also about building materials (the infrastructure bill and housing shortfalls) and environmental related plays (EVs, solar, HVAC improvements.) Use this downturn to get into stocks you have been waiting to buy, and sell losers now to have cash to invest. Look for good companies whose stocks have low P/Es as they generally fall less in downturn. Treat corrections as the opportunities they are. Remember, even if we are down 10% in September, the market will still be up 10% for the year.
Market today: After a muted inflation report, the market rallied only to slide again after the initial thrill wore off. This inability to hold a rally is telling. Again, I held back writing puts as there is an option expiration day this Friday and I will be put a fair bit of stock due to this downturn. I continue to make money on calls, however. I did take advantage of the overreaction of casino stocks to the Chinese government noise over Macau to buy some. If there is a jump tomorrow, I will probably sell for a quick profit.