On Tuesday, Snap (SNAP) fell 43.08% as the company lowered guidance for the remainder of 2022. On Thursday, the shares were just 4.59%. At today’s close of $14.81 they’re still trading well below the 50-day moving average of $29.86.
Should you chase them here?
Macy’s (M) picked up 19.31% Thursday on an earnings beat and higher guidance.
Should you chase the shares higher?
Or how about Nvidia (NVDA), which gained 5.16% on the day after an earnings beat and some positive statements about future products and product sales yesterday.
Should you buy the shares at Thursday’s close of $178.51? That’s quite a bargain from the $333.76 that the stock sold for on November 29, 2021.
A day like Thursday when the market looks set to break a seven-week losing streak is tempting. Time to put some cash to work, no? Look at all the bargains? And the bear market is over–at least for a while, right?
Bear markets are typically punctuated by days like today and a rally inside a bear market can go on for a while. This one, for example, could easily run into June or even July. I(I’m looking at the Fed’s comments on future interest rate increases at the July meeting to put an end t a summer rally.) And that means repeated temptation to jump back in. And repeated doses of hard to suffer pain as stocks that you’ve sold for sound reasons climb well above your selling price.
Bear market rallies are, I just want to remind you, exactly what make bear markets so damaging. Investors and traders face the losses from the overall market drop plus extra losses generated by buying into what looks like a rally off a bottom that turns out to be just a temporary step to even lower prices.
I can’t see anything that has changed in the lineup that is likely to push stock prices higher in the next six months to a year. The Federal Reserve is still going to raise interest rates. Inflation is still going to run at uncomfortably high rates. The economies of China and the European Union (and quite probably the United States) still look likely to slow. Energy prices? Higher. Food prices? Higher. Global supply chains getting better but still a mess. (Just read the guidance from the CEOs of Intel (INTC) or Nvidia (NVDA).)
Which doesn’t mean that there won’t be a very solid short-term summer rally that will serve to punctuate this bear. It’s just that we haven’t seen the bottom yet and I wouldn’t be buying big positions in most sectors on the hope that prices have bottomed.
Which doesn’t mean you shouldn’t buy anything. This market with its big moves from optimism to pessimism to optimism again is good for profitable swing trades. Stake out positions in stocks where you think you’ve established a clear trading range and buy and sell and buy and sell over and over again. (While keeping a keen eye on the tops and bottoms of trading range.) Right now I’m buying and selling and buying and selling the American Airlines (AAL) September Call Options with a strike price of $17. I’ve been buying when the stock falls below $16 and selling at $17 or above. The gains from this trade so far have been larger than the swing in price would indicate since I think American Airlines gets a lot of attention when the economy looks sour or improving. Thanks to this volatility in sentiment I was able to buy the September 16 Call Options for $170 a contract on May 24 and sell for $250 a contract on May 26.
I’m looking for other swing trade candidates. I was trading in and out of Ford (M) Call Options but the supply chain chaos in the electric car sector destroyed that had been a very reliable pattern. Same with the VIX, the CBOE S&P 500 Volatility Index (VIX), where I used to trade about $22 or so but where the pattern has also become unreliable.
One other thing I’m doing in this rally, since I don’t think it will last very long, is to continue to sell positions that I don’t want to hold if the bear market sinks lower and/or if we head into a recession. It’s always hard shifting gears in a portfolio and I never get all my sells done as quickly as I had hoped. Bear market rallies give me another chance to catch up on repositioning.
And finally, I haven’t given up on all buys. I’m looking for bullish opportunities in stocks and ETFs that aren’t closely correlated to the market as a whole. My recent buys in commodity ETFs are an example of this.
And I certainly don’t mind a short-term trade or two on the long side if the risk/reward math is in my favor. I’m just not seeing very many of these and I’m approaching them all with caution.
