For Investors, This Is the True Color of Opportunity
You’ve heard me say this before and I’m sure I’ll say it again…
My favorite color is red. It should be every investor’s favorite color.
Because red days in the markets are like Christmas. Or Blue Light Special days at Kmart.
Everything is on sale. Everything is priced at a discount.
Markets have ebbs and flows. And though green days (and months) are great, the real money is made when there’s a hint of panic in the air.
Which is why red fans like me were celebrating on Friday…
The Moment We’ve Been Waiting For
Oh joy of joys!
At the end of last week, the Dow Jones Industrial Average shed more than 270 points, dropping the blue chip index below 18,000 for the first time since February 23.
Almost as significant, the Dow moved below 17,900, approaching its 50-day moving average of 17,808.
If the blue chips were to move lower and strike that level, that would, in turn, take the index negative for the year.
Normally, the month of February is synonymous with the color red because of Valentine’s Day. But with all the major indexes coming off their single-best month in years, investors saw a lot of green. The Dow, S&P 500 and Russell 2000 gained more than 5% while the Nasdaq shot up nearly 7%.
If you targeted stocks in January using the 100-day moving average as a buy signal you were probably very happy.
The big move higher in February was great for money already in the market. But over the last few weeks, new entry points have looked a little pricey.
Fortunately, the Dow and the S&P are retreating back to support levels…
Now, previously I had written about buying when the indexes hit their 100-day moving averages in January.
That’s because January is traditionally one of the worst months for stocks. Despite what anyone tells you, it is volatile – even for small caps.
The Dow and S&P have ended the month of January in negative territory nine times since 2000. The Russell 2000 has ended 10 times in the red.
This is where the 100-day moving average comes in.
Using it as a line of support, we can see why January typically offers a great bounty of buying opportunities.
As do February, March and April.
Waiting for Spring’s Green
The Russell 2000 hasn’t ended February in the red since 2009. It’s ended the month of March down only twice since 2002 – a 0.10% loss in 2014 and a 2.99% decline in 2005.
Likewise, the S&P hasn’t ended February down since 2009. And it’s finished March in the red just twice since 2006 – a 0.21% decline in 2011 and a 0.58% decline in 2008.
The Dow’s February track record is the same as the others, while the month of March has had two losses since 2005 – a 0.01% loss in March 2008 and a 2.46% loss in 2005.
It’s also worth noting that the Dow hasn’t finished April in the red since 2005.
In these less volatile months, because of the seasonal strength, I like to focus on the 50-day moving average for support, instead of the 100-day.
So now the question is: Does this most recent pullback signal a major problem with the markets? Should investors be concerned?
And should folks who consider red their favorite color be getting excited?
I don’t think so.
And the reason is this…
Earnings season – outside of energy and telecoms – was solid.
Sixty-nine percent of the S&P 500 companies that reported saw earnings growth that exceeded Wall Street expectations. Meanwhile, 57% of companies that reported saw revenue growth that exceeded expectations.
Those percentages would’ve been better, but telecoms, energy and consumer staples really stunk and brought down the entire index’s average.
So, the sell-off that took place on Friday wasn’t due to poor performance. It was over fears that the Federal Reserve would raise rates this year following a jobs report that trounced expectations.
The Dow, S&P and Russell exited this earnings season at all-time highs. The Nasdaq broke above 5,000 for the first time since the dot-com collapse and is within spitting distance of a new all-time high.
In short, this is just one of those “good news is bad news” situations.
You can expect the permabears to come out in force and rabble-rouse about impending doom. But the markets move in waves. They ebb and flow. You want to attack the troughs, not the peaks.
You should see the color red and love it. Make it your favorite color. And recognize that it’s not the color of fear, but the color of opportunity.
*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.
About Matthew Carr
Matthew’s expertise ranges from classic industries such as oil and mining to cutting-edge markets like small cap tech, cannabis, 3D printing and cloud computing. With almost two decades of financial experience under his belt, Matthew’s knack for finding market trends never fails to surprise us, which is why we keep a close eye on his free e-letter, Profit Trends.