Last Friday was a bad way to end a great holiday break. The S&P 500 tanked 2.27% on news that a discovered COVID-19 variant called Omicron could threaten the economic recovery and lead to more lockdowns and travel restrictions.
It will be a few weeks before we know for sure what to expect from the variant and how current vaccines will fare against the virus, which means prices are likely to remain volatile and choppy this week at a minimum.
This has already been a pretty good year for stocks, so investors taking some profits off the table would not be a surprise, and that could compound some short-term selling before Wednesday.
However, because the data we have right now is still very positive, we recommend going with the historical odds rather than running from the market.
Does a big daily loss like this tell us anything about the next 30 days? Is this a good buying opportunity or should traders hang back and wait for the market to consolidate at support? We have been studying the market for 20 years, and history can help set our expectations if we take a closer look at the numbers.
Over the last 12 years, there have been 107 days where the market lost more than -2%, and those losses have been followed by a positive return over the next 30-day period 75.7% of the time.
The average profit for the month following a big day to the downside is +2.918%, which may not sound like much, but helps put Friday’s market volatility in perspective.
What to Do Now
It is unlikely that Friday’s selling will be the end of any bearishness. We think that this week will continue to be choppy while traders settle down and we all wait to get a little more information about the new COVID variant.
However, later this week, we recommend looking at this pullback as a buying opportunity once prices have started to slow. A bearish market drives interest rates lower which makes this an ideal time to consider tech, real estate, and retail.
- Microsoft Corp. (NASDAQ:MSFT): As in prior updates over the last few weeks, we still think this is a winner, and if there is to be more distance work/learning due to COVID, then demand for MSFT’s collaboration software and cloud services will remain strong.
- Adobe Inc. (NASDAQ:ADBE): Like MSFT, ADBE is a big player in collaboration and subscription software that will be in even more demand if traders want to hedge against business travel restrictions. Prices between $620 and $640 look like a strong buy to us.
- eBay Inc. (NASDAQ:EBAY): eBay has been able to hold onto the edge it developed during the pandemic last year, and more online retail spending is only likely to send the stock higher. Any dips below $70 per share are a great buy opportunity.
Should You Buy Pandemic Stocks?
The short answer to the pandemic stocks question is: no… and yes.
When traders think about stocks that did well in the pandemic, the first names that come to mind are Zoom Video Communications Inc. (NASDAQ:ZM), Chegg Inc. (NYSE:CHGG), Peloton Interactive Inc. (NASDAQ:PTON), and similar firms.
However, these stocks were unable to hold onto their gains when travel restrictions started to ebb, and the stocks tanked. For example, ZM is down 60% from its pandemic highs, and big institutional investors are unlikely to want to jump right back into the big names from the pandemic.
For now, we recommend steering clear of the ZM, CHGG, PTON, Roku Inc. (NASDAQ:ROKU), and Logitech International S.A. (NASDAQ:LOGI) crowd. Any gains in that group are likely to evaporate quickly if the variant news is less bad than expected.
However, stocks like Microsoft, Adobe, eBay, Amazon (NASDAQ:AMZN), and Pfizer Inc. (NYSE:PFE), have done very well defending their gains from the pandemic and will attract the big investors who want to hedge against risks again this time.
We also recommend adding to your list a few retail firms that never gained a rep for being a “pandemic stock” but were able to leverage and hold their position over the last two years to grab more market share. In addition to eBay and Amazon, we would include Target Corp. (NYSE:TGT) and Best Buy (NYSE:BBY) on that list.
From a pandemic/retail perspective, BBY is risky, but we think they may also offer the best short-term returns of the bunch. BBY reported earnings earlier last week and tanked despite crushing estimates because costs are rising, however, online sales are higher margin, and management is responding well to improving in-store sales.
What Else is Coming?
News about the pandemic will likely dominate the market all week, however, there are a few highlights to look out for.
The monthly labor report from the Bureau of Labor Statistics (BLS) is due on Friday, and it will be a market mover. When we compare the official reports (full of guestimates) over the last few months with the data being reported during earnings season, we still feel that the BLS has been undercounting jobs and could make a big correction this month.
The BLS does its best to reconcile the data gathered through surveys with seasonality adjustments and their own best estimates of hiring. However, over- or under-counting can happen when there are so many unique factors. In our view, a surprise to the upside seems very likely, which could come at the perfect time to push the market higher on Friday.
If you thought Friday’s selling was bad for stocks, just look at oil prices. WTI Crude dropped 13% on Friday, bringing it down to the prices we went on record saying were inflated back in September. It seems likely that OPEC will try to boost prices by reducing supply, but pandemic fears will probably overwhelm anything the big producers try to do in the short term.
For now, we recommend staying clear of energy stocks. However, if worries about the new variant fade quickly, there could be some discounted stocks in the group. But that is a conversation for when prices start to settle down.
John Jagerson & Wade Hansen
Editors, Trading Opportunities