Last week’s stock market ‘Plummet’ was a healthy adjustment, producing top-notch buying opportunities
Last week’s massive selloff initially spurred a reversal of recent inflation protection trades. Then, for summary reasons (see Barron weekend article, “Why the Dow just had its worst week in months“for a list), a” risk-free “sales mood blossomed on Friday.
However, this “worst week” must be viewed positively, for three reasons:
- Firstly, a level of subconscious worry had built up over the previous weeks as the market went from a steady rise to a meandering level.
- Second, the cited risks should be classified as de minimis: (1) The lukewarm statements from the Federal Reserve about the possibility of raising rates a bit by the end of 2023 or perhaps reducing bond purchases somewhat next year, and (2) the number of unemployment claims for a week which is slightly higher than estimated
- Third, the breadth and depth of sales is simply out of step with the booming growth now and expected this year and next.
Therefore, now is the time to buy stocks and equity funds, even (especially?) Blue chips.
The image of a buying opportunity
The beauty of last week’s sell-off is that there have been widespread selling of blue-chip stocks. Such a large-scale sale reflects a generally bearish view of the stock market (generally referred to as “risk-free” trading). It can be seen in the Dow Jones Industrial Average down about 5%. This is the fourth time in the past 52 weeks that the DJIA has recorded such an opportunistic decline. Only one went further – at around 10% – for extraordinary reasons. This time, there is no indication that such negatives are occurring. Instead, the fundamentals continue to be a combination of confidence and rising expectations. Therefore, this massive sale seems like another opportunity – not a first step towards more sales.
The chart below shows the Dow Jones Industrial Average 30 stocks’ position on Friday from their 52 week highs.
This metric is a good indication of the opportunity to buy a stock. The different levels correspond well to the general characteristics of each stock (eg reliable growth) and movements (eg price volatility). Therefore, don’t apply the commonly used 10% and 20% rules to everyone. Some stocks offer good buying opportunities with declines of 5-10%, others at 10-15% and still others at 15-20%. This is what happened last week.
Three examples of prime stock buying opportunities
Disclosure: The author owns all three prime shares (Home Depot
The bottom line: don’t let inflation or the Fed disrupt your investment program
Inflation last week and the Fed’s concerns were premature and uncertain. In addition, higher prices and rising interest rates can benefit blue-chip companies. They have sufficient pricing power and resources to take advantage of both situations, which their smaller and / or weaker competitors may lack.