The rally on February 15 sure looked like a speculative blowout of the kind that often signals a market top.
For me, it was the last straw and I’m selling into the rally. This post tells you what I’m selling and how I arrived at these decisions.
But first, a few words on Wednesday’s move.
On the news of stronger-than-expected retail sales growth in January, stocks rose. But the gains in the indexes were modest. That makes sense since the good news in retail sales growth and its signal of a stronger economy is certainly balanced by the bad news that a stronger-than-expected economy will lead the Federal Reserve to raise interest rates more than had been expected. For the day, the Standard & Poor’s 500 was up just 0.28% and the NASDAQ Composite rose a stronger but still restrained 0.92%.
But speculative stocks soared. QuantumScape (QS) was up 32.3% on the day. Wayfair (W) gained 10.4%. Evgo (EVGO) rose 8.56%. Roblox (RBLX) talked on 26.4%. Roku (ROKU) added 12.1%. Shopify (SHOP) increased 6.6%. AMC Entertainment (AMC) gained 14.1%.
Contrast this to the relatively modest gains from the big company stocks that had been leading the 2023 rally. Tesla (TSLA) added 2.38%. Meta Platforms (META) actually lost ground with a 1.29% retreat as did Nivdia (NVDA) with a 0.90% drop
This kind of pattern is typical of rallies that are reaching their final blowout stage.
I think it’s time to sell and take some profits.
On January 30 I posted “Sell any post-Fed rally–stocks are way ahead of themselves on the Fed, interest rates, and inflation.” I said I’d be a seller into any post-Fed meeting rally. Especially if we got negative earnings and revenue guidance from Apple (AAPL), Alphabet (GOOG), Amazon (AMZN), and Meta Platforms (META). Which we did. (If you want to argue that we got good news from Meta Platforms, go right ahead. I don’t think a big share buyback and a sudden “discovery” of efficiency by CEO Zuckerberg count as good news. Cynical window dressing, I’ll give you. But I still don’t think Meta Platforms has a realistic growth strategy.)
All of which poses the question of what I would sell.
And an answer to that question seems especially timely with January jobs numbers pointing to a labor market that refuses to show any signs of slowing, with a January CPI inflation report showing that the rate of decline in inflation may be slowing, and with a robust retail sales report for January showing that the consumer economy is still alive and well.
And, of course, with signs of a blowout top on Wednesday, February 15.
All the good news of the last few days means, of course, that the Federal Reserve is less likely to pause its cycle of interest rate increases after its May 2 meeting and that the peak for the Fed’s benchmark interest rate is likely to be well above 5%, and that the Fed won’t deliver any interest rate cuts in 2023.
That “good news is bad news” means in my opinion that the odds favor stocks moving lower from here.
My January 30 post wasn’t, to be clear, a call to dump everything and move 100% to cash. I don’t see the end of the world as we know it.
I do see a “retracement” that takes back a good portion of the January gains in the riskiest stocks that have rallied the most in the return-to-risk rally that began 2023. Any correction is likely to be a typical move from risk-on to risk-off and the stocks that will get hit the hardest are those that soared the most during the risk-on rally.
I’m still looking for a retest of the 2022 lows later this year in what I see as a continuing bear market. But I don’t expect the current retracement of the risk-on rally to be truly harrowing. I’d rather put new money to work after the true bottom, I grant you, than now. But the stocks that have held up best in this bear should come through the retracement bruised, perhaps, but not broken.
On the other hand, some of the stocks that showed the biggest–and least justified by the fundamentals–gains in the risk-on rally are likely to retreat significantly. And investors and traders who sell some of the risk-on rally winners should be able to buy their favorites in this group at lower prices later this spring. (And again in any June/July bottom to the bear.)
And we’re witnessing the kind of receding tide–caused by tighter money and inflationary pressure on margins–that shows what companies have been swimming naked. The market is getting skeptical about funding companies that aren’t profitable and that don’t have a clear road to becoming profitable. And we’re seeing companies from Meta Platforms to Twilio (TWLO) slash jobs and costs in an effort to convince Wall Street that they really do have a path to profits. Some of those companies will pass the test–their troubles will turn out to be cyclical–and others will fail.
All this boils down to four rules for deciding what to sell right now.
What to Sell Now Rule #1: In my selling right now I want to avoid giving back all the gains from the risk-on rally of January and riding a stock back to the lows that were in place before this rally began.
Some of those gains are startling, given that we’re looking at just about a month and a half. (And note that these gains don’t include the February 15 move in many of these stocks.
For example, in 2023 to date (as of February 10) shares of Tesla (TSLA) were up 59.8%. Shares of Wayfair (W) were up 58.6%. Shares of Meta Platforms were up 44.7%. Shares of QuantumScape (QS) were up 44.8% (plus another 32.3% on February 15 on the company’s earnings news). Shares of Shopify (SHOP) were up 39.2%. Shares of EVgo (EVGO) were up 41.39%. Shares of Nvidia (NVDA) were up 45.5%.
Selling any of these stocks after this kind of gain amounts to sensible profit-taking.
What to Sell Now Rule #2: What you sell now should be influenced by how disciplined you are as an investor. Some of the stocks that look ripe for profit-taking are stocks that I really, really want to own for the long term. Nvidia, for example, is a key stock in artificial intelligence and massively parallel processing for automated driving and machine vision to name just two applications. My two questions to you–because only you can answer them are First, do you have the investing discipline to buy back these shares in four months or so at a lower price if I’m right about stocks finally putting in a Bear market bottom in June or July or so? Emotionally this should be easy, right? And the bookkeeping isn’t too hard either. All you have to do is keep a list of these “I want to own for the long-term stocks” with a note on the price where you took profits. And then to keep an eye out for the next big buying opportunity. (Which I’ll be working to identify too.) Second, and this is harder, do you have the investing discipline to buy back these shares in four months or so, if I am wrong about a Bear market bottom and these stocks are more expensive then than when you sold them now? One of the things you should try not to do as an investor is to compound your errors. If you were wrong to sell one of these stocks now, you won’t correct that mistake by refusing to buy back one of these long-term winners at a higher price in the future. YOU WILL SIMPLY BE COMPOUNDING YOUR MISTAKE. There is very little harder in investing that NOT letting your chagrin over the past lead you to make decisions–or non-decisions–that magnify the original mistake. So before you sell anything that you think has a golden 10 years ahead of it in an effort to take profits now and buy back with a lower basis price make sure that you really do have the discipline to rebuy those shares if selling now turns out to be a mistake. Will you buy back at 10% or 20% higher if that’s what it takes to make sure a stock has a place in your longer-term portfolio?
What to Sell Now Rule #3: Don’t forget that some of sells right now aren’t just profit-taking. The end of cheap money and Wall Street’s belated recognition that a company does need to make money someday hasn’t yet resulted in a wholesale reevaluation of extremely high-multiple growth stocks. In fact, the 2023 rally has postponed the day of Price-Earnings-Ratio reckoning for many stocks where profits are taking longer to materialize than business plans suggested or where revenue and earnings growth seems to have run out of steam. I’d take advantage of this rally as cover for fundamental problems at specific companies as an opportunity to sell before those fundamental problems show up in a stock’s price. For example, if I still owned Meta Platforms (AKA Facebook), I’d be selling now because I don’t think the company has a plausible growth strategy that justifies its slightly higher-than-market average PE ratio of 20.62. I’d use the 47.2% gain for 2023 to date (as of February 15) and the 29.9% gain in the last month as an exit opportunity. I’d be looking at the streaming players–Disney (DIS), Netflix (NFLX), and Roku (ROKU)–from the same perspective. The streaming business looks increasingly like the airline industry to me: Companies spend lots of money to generate traffic (to put fannies in seats in the case of airlines and to add subscribers in the case of streaming companies) but profits remain a will-of-the-mist. In its most recent quarter, Disney said it sees profitability for Disney+ in 2024. Unless, of course, the company has to spend more billions on content in order to keep those subscriber eyeballs. I’d be selling Netflix and Roku here, if I owned them. And I will be selling Disney out of my online portfolios. Disney shares are up 25.7% for 2023 through February 15 and up 9.9% in the last month. (Netflix shares are up 22.6% for 2023 to date and 8.6% in the last month. Roku shares are up 56% for 2023 to date and up 24.9% in the last month.)
What to Sell Now Rule #4: The absence or presence of attractive alternatives isn’t a make-or-break reason to sell a stock (or not), but it doe have an influence. The 5% or so risk-free yield you can find on a one-year CD now or receive by buying a 6-month Treasury (4.95% yield on February 15) is a tempting alternative to stocks when the bullish position on stocks is forecasting a 10% gain by the end of the year–with a significant change of smaller gains and substantial volatility. I’ll be taking a look at some of those 5% alternatives–and their risks–in a post tomorrow, February 17.
Now a quick list of 12 stocks that I’d sell here. Stocks marked with an asterisk are stocks that I hold in one or more online portfolios and that I will be selling out of those portfolios tomorrow February 17. (I have previously shld Tesla and Meta Platforms out of my portfolios.)
Meta Platforms (META)
ChargePoint Holdings (CHPT)*
Ally Financial (ALLY)
If I am correct that we do see a retracement and a true bottom for this Bear Market in June or July of 2023, I’d look to rebuy Tesla, QuantumScape, Twilio, Nvidia, and Disney.
Need a little math help:
Based on a real 10 year rate of 1.46 how would you calculate the
implied P/E ratio for the S&P500?
Thank you so much!
What portfolio should I select in Jubak if I want to be overweight in oil and have a 2-3 year window?
C R Blohm
What portfolio should I select in Jubak if I want to be overweight in oil and have a 2-3 year window?
C R Blohm