I ended my recent post “This looks like the Bear Market rally I’ve been waiting for” on my subscription JubakAM.com site by saying “Enjoy the ride but look to sell shares of companies that look most exposed to the return of recession/high interest rates/inflation worries.”
That post had been up for all of 18 minutes before I got the perfectly reasonable question “Like what?”
And I promised an answer so here are my preliminary thoughts on what I’d look to sell in a Bear Market rally. (I’m posting this on my paid subscription sites and on this free site because, gosh, I think it’s important.)
Bear Market rallies are notoriously difficult to sell into. Difficulty #1: Nobody wants to sell when stocks are climbing. Ever. It’s really easy in a time of rising prices to say, Yes, I should sell but I’ll wait until I see signs telling me to get out. Which brings me to Difficulty #2: It’s really hard to read a Bear Market rally. The reasons that stocks are rising can be very vague and based mostly on ephemeral sentiment. What will turn the rally into another downward leg on the Bear is a shift in how the bulk of investors perceives the news. Not what the news is, notice, but what the perception of the news is. So right now sentiment sees modestly bad economic news as good news since it means the Federal Reserve will stop raising interest rates sooner rather than later. Tell me exactly what sign you’re looking for here to indicate that the Bear Market rally is over? Difficulty #3: Forecasts of a continued Bear Market rest on a belief in a coming recession and continued relatively aggressive interest rate increases from the Federal Reserve. Those are forecasts, not guarantees and those of us who believe in a coming recession and more aggressive interest rate increases from the Fed could be wrong.
And then there’s Difficulty #4 in devising a strategy for selling in this Bear Market rally. In the last few weeks, we’ve seen some stocks rack up big gains in this rally. Some of those gains are a result of the Inflation Reduction Act of 2022 and its provisions on subsidies and rule changes to benefit companies involved in efforts to control global climate change. And remember that the bill hasn’t actually passed yet. First Quantum Minerals (FQVLF), for example, gained 7.79% on Friday, July 29. Ford (F) picked up 6.14% on Thursday, July 28. Some of these stocks have the potential to soar substantially higher if the Bear Market rally continues for a few weeks. (I think that’s especially true for stocks connected with electric vehicles, which seem to be a big winner in this bill. More on that in a post tomorrow, August 2.) And they certainly have the potential to show big gains once we finally do put in a bottom (2024 is my timeline). So in deciding what to sell now in this Bear Market rally I’ve tried to balance potential risk and potential reward.
So rather than advising you to ride the rally to the top and hope that you can time a sell to beat the resumption of the Bear Market, I’m going to use what we have learned about the economy and sector trends over the last few weeks to create a strategy for taking some money off the table here by selling shares of companies that are more exposed than the average business to the continued slowing of the economy. Everyone and my Aunt Sally is saying that we aren’t in a recession yet because the labor market remains strong or consumers are still buying or whatever. I disagree with the timing of a recession call. I think we’re in one now. But the important thing for investors here is that the sentiment “We aren’t in a recession YET” stands good odds of being resolved as “We are in a recession NOW.”
And I’d like to be ahead of that shift.
Where am I looking to sell?
I’m going to divide those sell recommendations into three parts operating on three slightly different time schedules.
I’m going to include stocks that are members of my portfolios and stocks that I don’t own but that might be in your portfolio.
First selling group–stocks that I’d look to sell NOW on what we know (or can reasonably intuit) about the economy from recent events and trends.
Advertising has presented a mixed bag recently with companies like Snap (SNAP) reporting a big turndown in online ad revenue and companies like Alphabet (GOOG) saying that things aren’t as bad as they feared. The trend suggests deepening weakness ahead. So I’ll be selling Omnicom (OMC), one of the biggest full-line ad companies, out of my Jubak Picks Portfolio on Monday, August 2. I added the stock to this portfolio on December 7, 2020, and the position is up 7.46% from that date as of the close on Friday, July 29. The stock is down only 3.03% year to date and up 9.41% in the last month. One reason to sell is that the company doesn’t next report earnings until October 15, which removes a potential catalyst for the shares (if the company were, for example, to say “Revenue didn’t fall as much as expected.) Wall Street is looking for earnings of $1.65 a share, flat with this quarter in 2021.
Retailers facing the Walmart problem. What’s the “Walmart problem”? It’s a decline in sales in some higher-margin sectors, such as apparel and appliances, as a result of high inflation, wage increases that aren’t keeping up with inflation, and a slowing housing sector thanks to the Federal Reserve. All retailers are going to have trouble growing revenue and earnings in this economy but at least retailers with big grocery sector sales will be able to keep people coming through their doors and spending–even if those grocery sales come with smaller margins. I’d be looking to sell retailers such as Home Depot (HD) and Lowe’s (LOW) on the housing market slowdown and full-line retailers without grocery exposure such as Macy’s (M).
Stocks of commodity mining companies are looking at a drop in demand in a recession. But the potential upside in a continued Bear Market Rally and end of the recession rally is huge. So here I think you need to apply some careful risk/reward balancing. Copper has been in a significant downtrend from historic highs. The U.S. Copper Index Fund, for instance, is down 20.21% for 2022 as of the close on July 29. But copper has a tremendously attractive long-term story that rests on increasing copper use in electric vehicles and alternative energy technologies such as wind power. The result of that long-term trend is a strong move to the upside on a Bear Market Rally day like Friday, July 29. On that day Freeport McMoRan Copper & Gold (FCX) gained 5.77%, Southern Copper (SCCO) rose 4.01%, First Quantum Minerals (FQVLF) climbed 7.79%, and the U.S. Copper Fund (CPER) added 3.24%. Copper is a commodity that’s very closely correlated with the direction of the economy. So a slowdown in the U.S economy (and especially the home building sector coupled with the continued troubles in China’s real estate sector puts considerable downside pressure on copper stocks. On the other hand, I’m reluctant to sell copper into a Bear Market rally that has a strong global climate change component to its upward trend. Weighting risk and reward on copper stocks I come down on continuing to hold copper until this Bear Market rally shows signs of topping. (One event that I’d look for is the actual passage of the “Joe Manchin Global Climate Change Bill”–AKA The inflation Reduction Act of 2022. Last week’s huge moves in most things global climate change related came on news that a bill had cleared the Manchin hurdle in the Senate and might pass. My guess is we’ve got more drama before that bill hits President Joe Biden’s desk and that passage isn’t a sure thing. So I’d expect more upside in its “sector” as the bill advances.) I’d take the same approach to lithium stocks: lithium is a climate change essential but demand looks likely to fall with a slowdown in sales of electric vehicles in a recession. On the other hand, metals such as aluminum and iron don’t look to have that same big near-term upside potential and I’d look to trim these stocks here on recent gains. Aluminum has its own positive long-term, global climate change story on the metal’s role in reducing the weight (and thus the energy requirements) of things like cars. And it too was up on July 28 (2.79%) and July 29 (3.69%). But I don’t see the same big potential upside in aluminum to outweigh the risk of overstaying my welcome in the Bear Market rally. The stock is up 11.1% in the last week and that has helped trim my loss in my Jubak Picks Portfolio to 34.92% since I added it to the portfolio on February 18, 2022. (That buy was an attempt–wrong it turned out–to build a commodity hedge against sanctions on Russia’s aluminum sector.) I will be selling Alcoa out of my Jubak Picks Portfolio on Monday, August 2. I’d put iron ore producers such as Vale (VALE), Rio Tinto (RIO), and BHP (BHP) in the same sell category as Alcoa. I’m also thinking about selling some of the oil positions I added as a hedge on Russia’s attack on Ukraine. Oil looks to be reacting more to worries of a recession than worries about war and sanctions on Russian oil. My thinking at this point is to keep the oil companies with natural gas exposure, such as ConocoPhillips (COP) and Equinor (EQNR), and sell oil-heavy picks such as Pioneer Natural Resources (PXD). Stay tuned on this.
Second selling group–stocks that look like they are exhausting near-term positive news (or seeing positive news fail to emerge.) I’d be looking to sell these if the Standard & Poor’s 500 fails to break above near-term resistance at 4177 (the index was at 4112 at 1 p.m. New York time on Monday, August 1.) If the S&P 500 does break through that resistance, I’d look to sell this group at 4563, the next major upside goal in this market.
Gaming stocks are facing disappointing news from both Macao (where China Covid lockdowns continue to reduce traffic) and Los Vegas. According to the Las Vegas Convention and Visitors Authority, total visitors remain 7.8% below levels from 2019 while hotel occupancy slid to levels 9% below 2019 trends. RevPAR (Revenue Per Available Room) is up 17.5% from 2019 as average daily rates increased over 30%. But I don’t want to pin a stock pick on an increase in prices as we head into a slowing economy. I bought MGM Resorts International (MGM) back on March 14, 2022, in order to profit from the return of travel as the Pandemic receeded. Doesn’t look like the trend is going to be as strong as I hoped. The stock had a strong July, gaining 13.06% in the last month, although it’s still down 19.78% since I made my pick in the Jubak Picks Portfolio. I think shares will continue to gain along with the general market, but I don’t think this one, or anything in the sector, has anything like independent legs.
Airline shares are in the same boat. Yes, travel volumes have rebounded and continue to rebound but the strength of that trend is less than I hoped for. Delta Air Lines, which I added on January 31, 22, was up 9.77% in July. That almost exactly tracked the general market. So at the first sign of the resistance, I noted above (or when the market hits that first technical goal), I’d look to sell these shares out of my Jubak Picks Portfolio. Same stance on American Airlines (AAL), United Airlines (UAL) and other stocks in the group.
Quick Service Restaurant stocks had a strong run in July, but as with gaming and airline stocks, I see their fortunes lashed to the mast of the general stock market and economy. Starbucks (SBUX) gained 10.98% in July, for example. (The stock is still down 28.68% for the year) Shake Shack (SHAK) was up an even stronger 30.34% in July (and is now down “only” 28.69% for 2022 to the July 29 close.) I think these stocks and others in the sector are vulnerable to a shift in sentiment about the economy and Federal Reserve interest rates. I’d take my profits on the schedule above.
Third selling group–stocks that look to have major company- or sector-specific gas that could power them higher and longer than the general market. I’d still look to be selling these–the S&P 500 goal at 4563 upside goal is a good “check-in” point–but I’d look for them to outperform the general market during this Bear Market rally. That being the case, I’d like to let them run as long as I can without risking too much in a reversal of momentum.
Electric vehicle stocks–a group that includes electric charging stocks–got a huge boost from news that Democrats might be able after all to push a climate change bill through the Senate. As written the bill contains major boosts to electric car makers from a new schedule of subsidies for the purchase of a car, and from a new higher limit on how many cars a company can sell before those subsidies phase out. I think the market has grasped the significance of the first boost. I don’t know that it has fully factored in the second. Which is way more significant to companies such as Tesla (TSLA), General Motors (GM) and Ford (F) that were at or over the old limits and therefore about to lose those government subsidies. I expect to see this sector move higher if the bill actually passes the Senate (I think it will but it’s certainly not a 100% sure thing) and when investors fully appreciate the effects of Boost No. 2. Which gives these stocks a solid chance at outperforming the general market in this Bear Market rally. Ford, for example, is up another 4.15% as of 2 p.m. New York time on Monday, August 1. I own shares of Tesla and Ford in my online portfolios. I’m going to continue to hold them until–well, until later.
Same logic but less faith in the strength of the upward trend for chip stocks. The sector is riding its own momentum and the boost from passage of the Chips Act. I think that gives stocks in this sector a solid chance of, like electric vehicle stocks, outperforming the general market in this Bear Market rally. But I want to keep my eyes on two milestones to track when I might want to sell. First milestone, earnings from Advanced Micro Devices on Tuesday, August 2. Wall Street has forecast very strong earnings and revenue growth, and there’s a good chance that the company will turn in another positive surprise this quarter. That would be good news for stocks in the sector as a whole. Second milestone, earnings from Nvidia (NVDA) on August 24. Wall Street is nervous about these results, fearing a falloff in sales at the company from a drop in demand from cryptocurrency miners and cloud service providers. Right now the consensus is looking for $1.03 a share. That would be up from 89 cents a share in the same quarter of 2021, but down sequentially from $1.18 a share in the last quarter. If Nvidia doesn’t warn on guidance for the quarters ahead or if, better yet, the company surprises and beats the earnings per share from the sequential quarter, then I think we’re looking at another leg up in chip stocks in particular and tech stocks in general. (I’ve hedged market nervousness about Nvidia’s results with a Put Option in my Volatility Portfolio. the stock is a member of my long-term 50 Stocks Portfolio.)
This won’t be my last word on selling into this Bear Market rally. But it exhausts the advice I can offer right now given what I think we know.
More, I’m sure, on this topic to come.