The Unexpected Secret to Surviving Crisis Markets
It should come as no surprise that investors spend an awful lot of time trying to figure out which stocks they should buy.
But some of that effort is misplaced.
You see, particularly in volatile environments like the one we’re in now, sometimes the key to investing success isn’t buying the right stocks… it’s avoiding the wrong stocks!
Recently, I’ve been doing research on crisis market environments.
History never repeats, but it often rhymes. That’s why examining what’s worked in other, similar situations can be valuable when market conditions get unstable and uncertainty reigns.
The data don’t lie — buying what works and steering clear of what’s not working can have a huge impact on your portfolio in crisis market environments.
To put some actual numbers behind that, I looked at the times we’ve seen market crises similar to the one we’re in now — sell-offs of 25% or more from all-time highs over the last 35 years or so.
There are three: 1987, 2001 and 2008.
No surprise, buying stocks that are working makes a big difference. Starting about where we are now in the sell-off cycle, stocks had about a 50/50 chance of winding up higher a month later.
But if you only look only at stocks that had already been up during the previous 180 days — the ones that were holding their own during the rough market conditions — they had a whopping 78.4% chance of being higher a month down the road.
That’s a big difference.
But things become even more surprising when we look at avoiding the laggards.
Not only do the stocks that lagged the market tend to fare even worse than the 50/50 win rate you get by buying stocks randomly after a sell-off, but they also tend to be more volatile. In other words, the ones that wind up down are down a lot.
So what are the sectors to keep avoiding right now?
Energy, financials and industrials are currently the three groups that are generating awful performance. While other sectors have bounced higher since the lows last month, these three continue to look awful.
None of those should be a surprise given the pressure the COVID-19 shutdown is putting on each of them.
For now, it makes sense to steer clear.
Meanwhile, tech continues to look best in breed.
The three names we looked at last week, Nvidia (NASDAQ: NVDA), Amazon.com (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), have all ripped higher in the sessions since.
And those trends are likely to continue.
Meanwhile, it’s worth giving your portfolio a once-over right now to make sure that you’re positioned for the biggest upside potential. Remember, sometimes the biggest gains come from now owning the worst stocks
Jonas Elmerraji, CMT