Fundamentals Rule

By John Del Vecchio  |  January 25, 2019

Nobody knows whether this is the start of a really bad bear market or the end of a short-term correction. And nobody will know until it’s over.

At that point, it’ll be easy to see if it’s just a minor blip or another 100-year storm (only 10 years after the last one…)

Yes, the rally since the beginning of 2019 has been very powerful. And the market has risen in the face of a lot of potential bad news: a government shutdown… trade tensions… waning consumer confidence. These are just a few.

Now, we’ve entered earnings season. And what we’ve seen so far hasn’t been good.

Most notably, Apple (Nasdaq: AAPL) announced an expected revenue shortfall, due in part to weak iPhone sales in China. It may only get worse from here as the news trickles in.

The market was due for a bounce. It was extremely oversold, and sentiment got too bearish. But those conditions are working themselves off.

That’s reflected in one particular indicator I follow. It’s a short-term sentiment indicator from Ned Davis Research. Near the end of 2018, it hit a 13-year low.

Now, we had a major crisis during a similar timeframe back in 2008, so that’s awfully bearish just a couple of days after Christmas.

But, after the hot start in 2019, it’s already back into the neutral zone…

It doesn’t matter to me if we get back to over-optimism or not.

Rather, I’m more zeroed in on the fact that those oversold conditions have been worked off to a degree. Longer-term market sentiment did not remotely make a 13-year low amid the smash-up in late 2018. But it did trend down. It’s bounced back, too.

Here’s one thing I do know: Stocks don’t make 2%, 3%, and 5% intraday swings during bull markets. They just don’t. All of this bouncing around is symbolic of a bear market.

Also, the market is firmly below its 200-day moving average. As far as technical indicators go, the 200-day moving average is a line in the sand.

Since 1929, when the average is rising, the market is up 7.53%. This happens 69.01% of the time. Since 1929, when the average is falling, the market is up 1.38%. This happens 30.99% of the time.

Right now, the average is falling. That’s all you need to know.

Maybe the market will rally from here. Maybe the Federal Reserve won’t raise interest rates in 2019. Maybe the Fed will actually cut rates. Maybe President Trump will be impeached. Maybe the sun will stop shining.

Who knows?!

What I do know is that the S&P 500 Index is below its 200-day moving average, and it’s trending down. So, I think it’s best to resist the temptation to put good money after bad.

With all that in mind, I’ve made a broad call for the Hidden Profits portfolio: Current advice for all open positions is to hold. But there are two exceptions, what I refer to as “Zombie Apocalypse” stocks.

What separates them? Well, there’s some negative sentiment surrounding them. And they’ve been hit hard amid the recent volatility.

But financial and operating fundamentals for both companies are strong. These businesses are built to survive and thrive.

If the market rallies from here and this turns out to be a bump in the road for stocks, many Hidden Profits positions should rebound sharply – and much more so than the broader market.

First, value stocks got hit first and harder than the market. Second, “value” is extremely oversold. Third, nothing has changed fundamentally with these positions.

So, it all sets up well for significant outperformance if a rebound is in the works.

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John Del Vecchio

John Del Vecchio is the author of the bestselling book, Rule of 72: Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio.

As the in-house stock market guru and forensic accountant for Dent Research, John stood on the shoulders of the great David Tice, James O’Shaughnessy and Dr. Howard Schilit, and built a framework of algorithms and a multi-factor grading system that has made him one of the more successful short-sellers around.

John is also the executive editor of our Hidden Profits newsletter and our trading service Small Cap All-Stars.

He graduated Summa Cum Laude from Bryant College with a B.S. in Finance and was awarded Beta Gamma Sigma honors. He earned the right to use the Chartered Financial Analyst designation in September 2001.MORE FROM AUTHOR