We all knew it had to happen sometime. With little news to point to, the stock market dug a hole for itself during several recent trading sessions. Much of the carnage centered around the stocks with the giddiest rises over the past couple of months. Tesla was approaching 500 at the end of August and, as I write this, is down over 20% at 3941. Yikesasaurus Rex.
That’s the sort of damage that can wipe out aggressive trading accounts. Some other market pundits have been warily eyeing Gen Y eagerly trading on apps like Robinhood. I’ll be frank. I’m worried for them or anyone who took a shellacking in the past few days. They may conclude that they are either unlucky or the stock markets are rigged against them, or even both. None of those are likely to be true. The stock markets are rigged against those who don’t watch their sixes, which is military speak for covering your backside.
For long term investors, of course, two days’ trading is a hiccup. They’re thinking about the next ten years. But for those focused on the next year or two, it looks to me as if we’re in a tactical sector rotation sort of market. Sectors are groups of related industries. The S&P 500 has 11 sectors. For example, technology and utilities are sectors. So are consumer staples and consumer discretionary. I’m paying closer attention to attempting to be in the right sectors of the stock market and, even more importantly, trying to avoid the dogs.
There are, predictably, different approaches towards sector rotation. Some might put some extra money into the worst performing sector, assuming that eventually performance will return to the longer-term average. Others might take the exact opposite approach and overweight the best performing sector, thinking that an established trend is more likely to continue than reverse. Academics have conflicting answers on which works better, because their studies depend on when they were looking at returns. A study done in the mid Seventies will come to a very different conclusion than the same one done in the last decade, which has been oodles of fun for momentum investors.
In my day to day money management, I use a process that takes emotion out of the equation. But it’s always interesting to try predicting what the market will do. As much as the past couple of days have been a whole heap of no fun at all, I don’t see any evidence that growth has left the building yet. If a pandemic hasn’t scared people into concentrating on buying value stocks, which presumably would have less room to fall than a high-flier like Tesla, Apple or Netflix then, as much as the past few trading sessions stung, I suspect there are many investors still planning on buying on dips. But the trick is and always will be in determining when that ship has sailed.
1https://www.marketwatch.com/investing/stock/tsla/charts
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way Suite 119, Lakewood Ranch, FL 34202. The S&P 500 Index is unmanaged and cannot be invested into directly. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries. Past performance does not guarantee future results.