3 Steps to Indentifying the Market Environment
Markets Teach us to Adapt & Evolve.
Paul Tudor Jones is a billionaire hedge fund manager and philanthropist best known for making ~ $100 million during the Black Monday crash of 1987 and more than $7 billion throughout his career. Over the years, Jones has given investors many tidbits of advice, but his most quoted, profound, and simplest to understand statement is, “You adapt, evolve, compete or die.” You can undoubtedly relate to the PTJ quote if you have been involved in markets over the past few years.
For example, coming into 2020, stocks were on a tear until the major indices like the S&P 500 Index ETF (SPY) and Nasdaq 100 ETF (QQQ) got crushed by more than 3% in a single session on news of the coronavirus spread in China, and never looked back. In fact, the major indices did not so much as provide investors with a countertrend rally of more than a few days.
Image Source: Zacks Investment Research
Next, the economy and investors were flooded with stimulus money in the form of “Covid relief” packages. The Trump administration sent $2,000 COVID-19 relief checks to many lower income-retail investors. Couple the relief checks with the “new normal” of many retail investors working from home, and the speculative juices began flowing. As a result, stocks such as GameStop (GME), Bed Bath and Beyond (BBBY), and Virgin Galactic (SPCE) soared to nose-bleed levels.
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Pictured: When money was "easy", speculation was in vogue.
Finally, towards the end of 2021, the rampant pandemic induced spending led to a spike in inflation. As inflation began straining the economy in early 2022, the Federal Reserve was forced to raise interest rates rapidly to deter inflation. The end result was that the stocks that gained the most ground and were often part of the high-flying Ark Innovation ETF (ARKK) began to take on heavy selling pressure. In the coming months stocks such as Zoom (ZM) and Teladoc (TDOC) fell by more than 50%, crushing performance chasers.
Know What Market Environment You’re In
Though markets, the economy, and the intricacies that move stocks can seem daunting, investors are best served to take a focused approach and simply listen to the clues that the market is providing in the form of price action. In other words, “if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”
To better navigate the market, you can utilize these 3 tips:
Differentiate between market cap stocks: For example, QQQ (the Nasdaq 100), which contains tech-juggernauts such as Alphabet (GOOGL), Nvidia (NVDA), and Apple (AAPL) is minting 8-month highs.
Image Source: Zacks Investment Research
Pictured: Quality growth stocks are driving QQQ higher.
Meanwhile, the Nasdaq Next Gen 100 ETF (QQQJ), which tracks the next largest 100 Nasdaq tech stocks, is lagging far behind.
Image Source: Zacks Investment Research
Pictured: QQQJ is living below its 200-day MA while QQQ is breaking out.
Interpretation: Investors are flocking to large-cap tech stocks.
Differentiate between profitable and unprofitable stocks: Outside of Tesla (TSLA) and a few other stocks, the Ark Innovation ETF (ARKK) is a good proxy for unprofitable/speculative growth stocks. Currently, ARKK Is breaking down, while QQQ is breaking out.
Image Source: Zacks Investment Research
Pictured: Unprofitable stocks within the ARK ETF are causing it to break down.
Don’t overthink it: Stick to what is working from a price, fundamental, market cap, and industry perspective. In the current rising rate environment, has been a flight to large-cap tech, quality growth such as NVDA, Microsoft (MSFT), and Advanced Micro Devices (AMD), and profitability.
Image Source: Zacks Investment Research
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Apple Inc. (AAPL) : Free Stock Analysis Report
Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
GameStop Corp. (GME) : Free Stock Analysis Report
Bed Bath & Beyond Inc. (BBBY) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Teladoc Health, Inc. (TDOC) : Free Stock Analysis Report
ARK Innovation ETF (ARKK): ETF Research Reports
Zoom Video Communications, Inc. (ZM) : Free Stock Analysis Report
Virgin Galactic Holdings, Inc. (SPCE) : Free Stock Analysis Report
Invesco NASDAQ Next Gen 100 ETF (QQQJ): ETF Research Reports
