February 3, 2021 4 min read
This story originally appeared on ValueWalk
I don’t want to lecture anyone or say that I told you so. During one of my newsletters last week, I even said that I tip my hat to anyone who profited from this — l the respect in the world.
Me personally, though, I would never trade like this. Monday (Feb. 1) and Tuesday’s market (Feb. 2) was nothing more than a reality check. GameStop’s stock has lost nearly half of its value, and other Reddit darlings like AMC, Blackberry (BB), Koss (KOSS) and Silver (SLV) tanked.
Stocks don’t go up forever.
Stonks especially don’t.
Who knows? Maybe the party’s not over. But I think the plummet in the Reddit stocks was bound to happen. Bubbles always eventually pop.
The market seems happy that the earth is back on its axis in stockland. The indices have recovered nearly all of last week’s losses already.
Calling the GameStop Short-Squeeze
I didn’t call the GameStop short-squeeze, but I had called last week’s downturn for a while. The recovery so far this week wasn’t entirely surprising either.
Be that as it may, I remain concerned about complacency in the markets and overstretched valuations, plus the potential return of inflation. But the breather last week was needed and brought the indices to less overbought levels.
Generally, investors and analysts are bullish these days. According to a recent Bank of America survey of 194 money managers, bullishness on stocks is at a three-year high, and the average share of cash in portfolios, which is usually a sign of protection from market turmoil, is at the lowest level since May 2013.
We have still not declined 10% from the record highs — the minimum needed for a correction. Although the market needed last week’s downturn, we’re once again mostly right where we were several days ago.
I know what you’re thinking: Amazon (AMZN) and Alphabet (GOOGL) are the latest companies to crush their earnings estimates. How could we possibly have a correction?
For one, there are still things to be concerned about from a public health and economic perspective.
Long Overdue for a Market Correction
We are also long overdue for one. We haven’t seen one since last March. Corrections are healthy for markets and more common than most realize. Only twice in the last 38 years have we had years without a correction (1995 and 2017). A correction could also be an excellent buying opportunity for what should be a great second half of the year.
We’re no longer as close to those same buy levels as we were after market close on Friday, but we’re not quite at sell again, and I still think we’re a few pullbacks away from making more buy calls with conviction. In other words, welcome to no-man’s land.
In my last newsletter, I cautioned against making manic moves and trading with emotions. We saw our worst week since October last week and declined in two of the previous three. Much of that was due to the GameStops and AMCs freaking out Wall Streeters. But I reminded you then, and I’ll remind you again. Shares of Eastman Kodak surged by 1,481% in three days last July, and the broader market seems to have done just fine since then.
Avoid the Noise
Do not let the noise deter you from your goals. My goal for these updates is to educate you, give you ideas and help you manage money like I did when I was pressing the buy and sell buttons for $600 million-plus in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra-high net worth.
With that said, to sum it up: While there is long-term optimism, there are short-term concerns. A short-term correction between now and the end of Q1 2021 is possible. I don’t think that a decline above ~20%, leading to a bear market will happen.
Hopefully, you find my insights enlightening. I welcome your thoughts and questions and wish you the best of luck.
We’re all in this together!