This story was originally published here.
The stock markets experienced an extreme shock last year and it wasn’t the novel coronavirus that caused it. The decision to close the world for business is the source of the global economic devastation. Meanwhile, the honey-badger attitude on Wall Street is propping up stock prices. The bounce from the crash reaction in March was astonishing. In fact, it hasn’t stopped yet because the indices continue setting records. Last week we finally saw some selling but judging by the Wednesday action, the bulls are itching to buy. The appetite for risk is so high that there are still many great stocks to trade, especially after the earnings.
Today we discuss three instances but not all from the same perspective. We suggest rolling out of one and swap it into another. As for the third, we’re going to set up an action plan for the next few weeks. They don’t ring bells to announce perfect entry and exit points, else there would be no reward. That’s why investors need to develop their thesis carefully. Every trade needs to have a reason and goals. I try to imagine every trade like I’m taking it for my mother. If I can’t trust my thesis with her money, then perhaps my conviction is not that good.
Markets have been so strong, but therein lies some risk. Regardless of how good each individual opportunity is, it has to exist inside the collective market. If we suffer a general correction the best thesis is going to also fail. Therefore, it is wise for investors to take smaller risks until we either get more clarity or lose some weight. It is not healthy to have this much fat without shaking some froth out of these indices.
You’ve heard the term cautiously optimistic and it sounds cliché but it’s totally true. I’m concerned to the point where I want to exercise caution. But I’m not bearish enough to outright short stocks. It is not wise to fight the tape, fight the Fed or go against the prevailing themes. We have all of these going on at the same time right now. And this is the strongest Fed we’ve ever had. The actions that they are taking is borderline lunacy. They are conducting an experiment and I hope it ends well. This week the Biden team is pushing for more stimulus and into record debt. We are wading into uncarted waters.
The last time the Fed tried to exit this perpetual stimulus (quantitative easing, or QE) was in 2018 and it ended in a crash. Finally, in December, Fed chair Jerome Powell raised the white flag and announced a 180-degree turn in policy. The day they hint at the possibility of exiting QE the exit doors for stocks won’t be wide enough. There is no way this unwinds in an orderly fashion. We have a preview of it from the taper tantrum when Bernanke tried it. This time the house of cards is even taller. In fact, it’s never been taller.
Here are three great stocks to trade… Story continues here.
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