Bulls and bears have it wrong, as usual.
Volatility has continued in the new year, and it seems as if every bull is bullish only because they think the Federal Reserve is going to cut interest rates this year.
I am not sure most bears care what the Fed does in 2023, although some are following the same playbook as the bulls and would probably cover their shorts if the Fed were to cut later this year.
In the meantime, it seems bulls and bears alike agree on one thing — the stock market SPX, +2.28% is likely to decline early in 2023.
Any playbook that is so widely agreed upon is unlikely to work out, because it is probably already priced in.
What I expect is a strong rally for stocks over the next few weeks. I have started to buy the dips and slowly scale into call options.
I often tell newer readers that I’m not shy of pounding the table and being aggressive when the risk/reward appears to be favorable. We are not quite at that point yet, but if we do get another 10%-15% selloff in the broader market early this year, I will be building long positions. Easy does it for now. We don’t have to draw a line in the sand and declare all-in or all-out.
Perhaps the most bullish part of the near-term market setup is that so nobody is having fun right now. This is when novices learn that investing is hard work and sometimes frightening.
Then again, we may need to get to the point where people are apathetic about the stock market before we hit bottom. That’s what happened at the bottom of the dot.com/tech/telecom crash in 2002 and 2003.
I launched a technology-centric hedge fund in October 2002, just 10 days before the Nasdaq Composite Index COMP, +2.56% put in a bottom that was more than 70% below its year 2000 high. Nobody wanted to invest in tech at that time. Then in 2003 when I was pounding the table, telling my readers I was loading up on Apple’s AAPL, +3.68% shares and call options, it seemed everybody thought Steve Jobs was a joke. My readers weren’t mad that I was buying Apple, but they didn’t care.
One of the things to look for, if the coming bottom for tech stocks is going to be similar to that of 2002, is that such a large decline in valuations means that good companies trade for less than the cash on their balance sheets.
That’s where Apple was when I was buying in March 2003. Many great tech stocks bottomed back in October 2002, a full six months before Apple traded down to its all-time low, and I was able to build a forever position.
I don’t have any easy answers and, of course, had no idea the Apple purchases in March 2003 would turn out so well.
When I bought Google (now Alphabet GOOG, +1.60% GOOGL, +1.32% ) on the day of its IPO in August 2003, it was difficult. When I bought Facebook (now Meta Platforms META, +2.43% ) in the $20 range, it was hard. When I bought bitcoin BTCUSD, -0.06% at $100, it was rough going. Then when it doubled after I bought it and then dropped back to $100 for a year or two, nobody cared. But it was difficult to listen to my subscribers tell me to stop writing about bitcoin and how to buy it.
When we bought Nvidia NVDA, +4.16% at a split-adjusted $7 per share about seven years ago, it was because it was positioned so well for the AI, driverless and other Revolutions. But buying it was hard and few people believed in an also-ran GPU company that was down from its highs from years prior and had been stuck in the mud for a decade.
Nvidia’s split-adjusted prices, charted monthly from the end of 1998 through the end of 2022.
FactSet
The hard trades and investments can turn out to be the best ones. The fun ones rarely are. I expect that some of the stocks we’re buying these days are putting in their bottoms and are going to be the next batch of 10-100 baggers that I’ll write about in another 10 or 15 years. It won’t be easy along the way, but it will be fun to have a few more of those as this down cycle plays itself out and the next phase eventually begins.
