Windows of Opportunity

Times like these, when stuff really is hitting the fan, fearmongers come out in droves.

Right now, my email inbox is brimming with emails with titles like:

“Meltdown Indicators (not good news)”… “Is this the day America will die?” … ”Stocks are still in Mega-Bubble Territory”… “5 year down market coming”…

And that’s just since around 6 A.M. Most of these will join the thousands of other similar emails like them, that sit unopened in my inbox.

But I gotta say, I’m curious about that “…day America will die?” one. I mean, you know, I’d hate to be sitting there while the bombs rain down thinking “DAMMIT!! Why didn’t I read that email??”

Seriously though, the assumptions the people who send these emails make about the recipients – ie, you and me – are pretty insulting if you get right down to it. They figure you’re running around like a clueless chicken with its head cut off, and if they can throw just the right amount of economic jargon at you that you will greet them as a savior (and pony up a couple grand for their highest level newsletter.)

Like we’re all a bunch of rubes.

Anyway. I let these sky-is-falling emails accumulate in my email inbox for a very good reason that I’ll share with you in a minute. But first, I gotta offer up my Cliff’s Notes on how this whole economy-stock market boom and bust cycle works…

The World According to Me

I started in this biz in 1998, just as the internet bull market hit its stride. Needless to say I was pretty green, but I still managed to make some easy loot in the markets for a couple years. Because that’s the nature of a bull market…

Then, the years 2000–2001 sucked. I managed to give back some of the loot I made, because that’s the nature of bear markets. 2002-2007 were pretty good. 2008-2009, more sucking. 2010-2021, pretty darn good…

When the economy is expanding, when more people are getting jobs and spending money, when economic data is improving and investors anticipate more revenue and higher profits for corporations, it’s a pretty good bet that the majority of stocks will be moving higher.

In that kind of bull market scenario, you can pretty much put your money in the stocks you like and let the market’s nature take its course. The rising tide of a bull market trend typically lifts all boats…

And the fact is, the economy and the stock market will trend higher the vast majority of the time.

There’s a very simple reason for this. As Americans we all want to live the good life. We go out to dinner, we take trips, go to the movies…

We open businesses and sell stuff. We go to work, drive our cars, buy news when we want, get them fixed when they break. We love spending money. So we get better at our jobs so we can make more money. As each of us increases our productivity, the companies we work for or the businesses we own get better at making and selling stuff. A rising population ensures that there’s always more people to sell stuff to. Throw in a bit of inflation so prices and salaries rise and you get the virtuous economic cycle.

Obviously, that’s not where we are right now.

It’s Hitting the Fan Right Now…

Shit happens every so often, and the economy and the stock market will have a bad couple of years.

I hope you don’t mind my simple breakdown of the U.S economy over the last 25 years. I could make it a lot more complicated if you want delve into the Asian Currency Crisis from 1997, the absolute mayhem of the Internet Bubble, the existential fear that gripped post-9/11 America, how the Greenspan Fed bungled the build-up to the housing crash and how the moral depravity of Wall Street investment banks nearly destroyed the global economy, or how a Fed Chairman with zero experience as a policymaker ignored the Fed’s primary mandate 18 months ago and let inflation hit 8% before smelling what the economy was stepping in….

And there will be times when my articles dig into the details of these market-moving events. It might seem masochistic, but I really do enjoy fitting the million or so jigsaw pieces together. But in the big picture, all the whys and wherefores don’t really matter too much.

For most of us, our lives improve financially until something goes a little haywire, we have to retrench for a little while and it might feel like things will never be good again.

But they will. We’ll get back to living our lives without worrying about inflation, or COVID, or Russia, or our retirement investments, or whatever else it is that keeps you awake at night.

…Could Somebody Maybe Open a Window?

Now, about those emails in my inbox…

I’m an unabashed sucker for a good subject line. I’m an investment newsletter guy, and so I’m also a marketer. And I know very well that the reason we’re all getting these increasingly hysterical emails is because, like I said before, the people who are sending these emails believe that we – the individual investors – are getting increasingly hysterical.

And they’re right. The more stock prices fall, the more afraid investors become. This is part of the dynamic of a bear market, part of its nature.

And the more afraid investors become the more opportunity there is for stock prices to surprise everyone and take off on a sharp rally higher. When fear gets bad enough, when investors finally throw in the towel, that’s when we will see the capitulation event that marks the end of the bear market.

So I pay close attention to the rising fear levels I see in emails. I keep close tabs on the Volatility Index (VIX). I listen closely to Wall Street heavyweights when they make dire predictions about the stock market and/or the U.S. economy, like JP Morgan (JPM: NYSE) CEO Jamie Dimon did on Tuesday…

If you missed Dimon’s warning, don’t worry about it. Nothing earth-shattering, he said the U.S. was likely to fall into recession within the next 6 months and that stocks could fall another 20%. But the timing was interesting…

Because two days later, on Thursday October 13, the latest inflation data came out. It wasn’t good. Index futures plunged right before the market’s opened. The Dow opened down +500 points from Wednesday. It looked like Thursday would be a massacre. What investor would step in and buy stocks in that environment…?

I’ll tell ya who: Wall Street investment banks like JP Morgan.

The Dow reversed course just a few minutes after the opening bell rang at 9:30. By the end of the day, it was up over 800 points. That’s a 1300 point swing from the lows. You can make a lot of money when the Dow moves 1300 points in a few hours.

Trading revenue is important for investment banks like JP Morgan, Goldman Sachs, Morgan Stanley, etc. You better believe they work to open windows of opportunity where they can push stock prices around.

I think this window of opportunity for an upside move will stay open for a couple weeks. We just got the latest inflation, so that’s out of the way. The Fed doesn’t meet again until November 1-2. And earnings are just getting started and there have already been a couple pretty solid reports from, Pepsico (PEP: NYSE) and guess who – JP Morgan (JPM: NYSE).

If you’re looking for an upside trade, semiconductors should be a good place to look. Both Qualcomm (QCOM: Nasdaq) and Nvidia (NVDA: Nasdaq) have been whacked hard.

For small caps, I got my eye on three; Aehr Systems (AEHR:Nasdaq), StoneCo (STNE: Nasdaq) and Jumia (JMIA: Nasdaq). Small caps are more risky for sure, each of these three could roll +20% higher in the blink of an eye.

Until next time,