Let’s get this out of the way right from the get go. This is not the beginning of a bear market. The market is not about to fall apart à la 2007. And we are not on the verge of another recession. October has a history of being a volatile month for the markets, and that brings out lots of fear mongering this time of year.
But in reality, October volatility often offers us the best buying opportunity of the year.
October usually marks a market low. Panic sales in October are often the "washout" low…the psychological capitulation we need before stocks can rise again. Just look at last year…there was a terrible stock pullback in October 2014. The market tanked 458 points on October 15. And October 21 was the most volatile day of the year.
But it was short lived. The second half of the month was marked by overwhelming buying power. Those who followed my advice to take advantage of that buying opportunity are richer today for it. That was no fluke.
And we have the same opportunity in front of us today. This correction has been very thorough—every sector has taken a hit—and the correction may be nearing exhaustion.
And this is another great buying opportunity. But you are running out of time to make your move.
The market’s quick 1,200 point surge from its lows shows you just how fast this market can turn. Before we talk about what that means you should be doing today with your investments, I want to tell you how I expect the rest of the year to play out so you know what to expect.
What we’re experiencing today is not another 2007. But it is remarkably similar to another recent market downturn. The stock market is tracking the sharp decline and recovery of 2011 in a nearly-lockstep pattern.
In both years, markets plunged in August. This year, the Dow cratered more than 1,000 points at the opening bell on August 24, ending the day down 3.6%. It was the Dow’s worst day since August 8, 2011 when it fell 5.4%. From there, both years delivered very rocky Septembers before the market started moving back up in October.
That market pattern isn’t the only similarity. There are other extraordinary parallels between 2011 and today. During both years the markets were plagued by…
A debt ceiling showdown in Washington, DC.
In 2011, fear of a government default rocked the markets. The U.S. came perilously close to not being able to pay its bills when Republicans in Congress refused to raise the debt ceiling in a showdown with Democrats and the White House over spending.
Showing just how dysfunctional Washington has become, we’re having the same argument again today! We’re about to hit the debt ceiling and a looming crisis is once again on Wall Street’s worry list. Treasury Secretary Jack Lew says the government will be unable to pay its bills starting on November 3 (just 9 days from now).
Hand wringing over the Federal Reserve’s next move.
In 2011, investors were fretting over the end of the Fed’s Quantitative Easing. (If you remember, the talking heads said the markets would collapse when QEII ended…they didn’t.) Today investors are fretting about when the Fed will raise interest rates. (The markets are once again "supposed" to collapse when that happens—they won’t.)
Right now, it’s anyone’s best guess when the Fed will finally raise rates. There is nothing the market hates more than uncertainty and that has added to market volatility. As respected money manager David Kotok put it, "This is a confusion led sell off."
Overwhelmingly negative sentiment.
Bearish sentiment among investors soared in September. Investors hate the markets so much that cash is more popular than stocks or bonds for the first time in 25 years! Sentiment among newsletter writers—often a great contrarian indicator—is terrible too, with more bears than bulls.
According to BusinessWeek, “bearish newsletter writers surpassed bullish ones three other times during the last 6-1/2 years, in April 2009, August 2010 and October 2011.” Every one of those match a market pullback. And every one of those pullbacks turned out to be great buying opportunities. The S&P 500 rallied for two straight quarters after each one, with gains of more than 20% each time!
The pullback was overdone.
Take a look at this chart. It shows you the percentage of stocks that are below their 50-day moving average.
Whenever 80% of stocks are below their 50-day moving average, it historically indicates the market is oversold. That’s what happened during that huge August 24 plunge this year as you can see by that red dot.
The last time it happened? August 4, 2011.
So What Happens Next?
In the third quarter of 2015, the Dow shed 16.3% from high to low. Since then, it rocketed 1,130 points in just two weeks. In the third quarter of 2011, the Dow shed 16.2% from high to low. Then it soared almost 1,000 points in just two weeks.
And it just kept going. The Dow jumped 11.9% in 4Q of 2011. That’s the biggest quarterly gain in market history.
And that, my friend, is where 2011 and 2015 part ways.
I do not expect a huge year-end rally like that for the Dow or S&P 500 this year. The reason is simple…earnings.
The strong dollar continues to hammer large and mega cap companies that get revenue from abroad. That is crushing earnings and sales growth.
Only 11 of the top 50 S&P 500 stocks will post positive sales and earnings in the third quarter. And in my latest analysis 10 of the Dow 30 stocks earned a D or F sell now rating!
Given that very strong headwind I think it’s unlikely the broad S&P 500 and Dow will suddenly soar double digits from here. But that doesn’t mean you have to give up on making significant gains this year.
It just means that if you want serious gains in the months ahead, large multinational stocks are not the place to be. Those of us who want double-digit growth from our stocks need to look at a different corner of the market.
Here’s the Bottom Line…
While large and mega cap multinational stocks continue to struggle, I expect small and mid cap stocks to continue to lead the market.
They were outperforming by a 2-to-1 margin this year before this pullback. And here are just a few of the reasons I think that outperformance will continue—and even pick up steam—in the weeks ahead:
- No currency exposure. Small and mid-cap companies tend to get the vast majority of their sales from here at home. This focus means they have no currency risk from strong dollar.
- Falling oil prices. They benefit from lower costs for everything from energy to transportation to goods. Plus, low oil prices are good for consumers who save money on gas and spend it elsewhere.
- Made in the USA. Small and mid-cap companies do most of their business in the US, so a slowdown in China or the rest of the global economy is not a risk factor.
- A pick up in mergers and acquisitions. In a slow growth economy, large companies are looking for ways to quickly add to the bottom line. One way for companies flush with cash to do that is to snap up other businesses. Small and mid-cap stocks are prime takeover targets.
- Happy consumers. The consumer confidence index climbed to 103 in September, the highest level since January. That’s one factor driving and increase in consumer spending. Spending increased 3.6% in the second quarter, and will likely continue rising as unemployment stays low and $2 per gallon gasoline is spreading throughout the U.S.
- Cheap borrowing costs. Fueled by record low interest rates, smaller companies continue to have access to cheap credit that keeps costs low and allows them to invest in growth.
- A Goldilocks economy. We are in a darned near perfect environment right now – low interest rates, low inflation, low unemployment, moderate economic growth and an accommodative Fed.
The economic data continues to be mixed, but it shows a slow but clearly growing economy.
Yes, the September payroll report was disappointing, coming in well below estimates. July and August payroll figures were also revised lower. But the unemployment rate remains unchanged at 5.1% and data continues to show the U.S. economy creating jobs, even if it is at a frustratingly slow pace.
That improved jobs market plus cheap gas is helping to fuel consumer spending. And strong consumer spending should continue to boost overall GDP growth.
Plus, with global economic growth clearly slowing down, the U.S. continues to be the best game in town.
So we know that the market is giving us one last buying opportunity for the year…we know that large and mega cap multinationals are in trouble…and we know that small and mid-cap stocks are the sweet spot in the market today.
The only question that leaves is how to find the best small and mid cap growth stocks for your money today…
In Today’s Market Only AAA Rated Stocks Will Do
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The average S&P 500 stock posts a measly -3.2% sales growth and -4.6% earnings growth. And that just isn’t going to cut it. The stocks my system has uncovered today deliver mind-boggling growth that put that to shame. The stocks on my buy list boast an average 23% forecasted annual sales growth and 44% forecasted earnings growth!
Now, finding stocks that can deliver this kind of blockbuster growth stocks isn’t easy.
Of the more than 5,000 stocks I analyze, only 1% will meet my stringent criteria and have the potential to make the cut for my elite Ultimate Growth buy list.
The ones that do are the crème de la crème—AAA rated stocks with superior fundamentals that can deliver explosive profits in the months ahead.
These highly quality stocks are like fresh tennis balls—they have a big bounce. And they’ve already started to move. When the market jumped the second week of October, 13 of our Ultimate Growth stocks posted double-digit gains. I’m looking for even bigger gains in the next few weeks as our stocks announce fantastic third-quarter earnings.
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Next 30 Days with Absolutely Zero Risk
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