(Please enjoy this updated version of my weekly commentary published January 27, 2022 from the POWR Value newsletter).
Why do I say this is a beneficial “house cleaning”?
Because a lot of the gains the past couple years accrued to unworthy stocks. For example, Tesla may be the best car company in the world. But they are still a car company and that usually comes with a PE of 10...not 133 which is what it was at its peak.
Even now after a hearty haircut TSLA still trades for 90X next years earnings. It will never make it down to 10X like GM and Ford...but perhaps 30-40X is more realistic.
Same goes for all the BS Meme stocks like GameStop and AMC. They too are coming down to earth.
And the list goes on with a whole host of other over inflated stocks in tech, biotech, EV, cannabis, and all other areas that fuel our imaginations...but are trading at valuations that would make Benjamin Graham roll over in his grave (Benjamin Graham is considered the Father of Value Investing and the famed mentor of Warren Buffett).
The bummer is that this house cleaning is not only affecting these names. Rather it is tossing out all the babies with the bathwater in a classic value reset.
That is the short term negative. The long term positive is that excesses will be squeezed out. And investors will be less likely to take risk in those aforementioned stock groups. Instead more money will rotate to quality investment in the value space.
If true...that means our time to shine is soon at hand!
The next question is to figure out when bottom will be found and the market bounces higher for good.
Right now I believe we are in the midst of that battle to find bottom with test and restest of the 200 day moving average...and further down to the area of a classic 10% correction for the S&P which stands at 4,336 (exactly where the market closed this evening).
I sense the bounce is soon at hand. But don’t be shocked with extended volatility.
One last topic to discuss is the Fed Announcement from Wednesday where they showed increased hawkishness which was to be expected. Meaning they will aggressively reduce bond buying and get to raising rates in March in the hopes of tamping down inflation.
They also noted that the economy is plenty healthy enough for this move and let’s stop acting like a bunch of babies about it. (OK, I may be paraphrasing a little bit on that last part)
The initial reaction by investors was odd. First a burst higher for stocks. Then plummeting lower. And then lower again on Thursday.
The one thing that is clear is that rates will be on the rise which is as obvious as night following day for those who have been paying any attention. But when you start from historically low rates, and still a long, long way off from normal 10 year Treasury rates of 3.5 to 4%, then hard for stock investors to truly be upset by this.
Meaning we still have a goldilocks investing environment with lower than normal rates and improving economy which makes stocks the most attractive investment around. Especially true after this excess valuation house cleaning is done.
Let’s hope others come around to that point sooner rather than later to get back to the more enjoyable parts of bull market activity.
What To Do Next?
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All the Best!
Steve Reitmeister
CEO StockNews.com & Editor of POWR Value trading service
SPY shares were trading at $437.11 per share on Friday afternoon, up $5.87 (+1.36%). Year-to-date, SPY has declined -7.97%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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