Last week, we said that market volatility was likely to continue through the inflation and retail sales reports but that we liked the consumer discretionary and tech for new entries after any pullbacks.
For the most part, that worked out. The home improvement stocks we highlighted skyrocketed, the tech stocks we mentioned — Microsoft Corp. (NASDAQ:MSFT), NVIDIA Corp. (NASDAQ:NVDA), and Adobe Inc. (NASDAQ:ADBE) — also did very well.
Monday and Tuesday of this week are likely to be choppy, and this is a good week to be extra cautious. Yields tanked on Friday, which helps relieve some of the pressure from inflation worries on those same sectors. However, Asian stocks were a little rough on Sunday night, and so far, the U.S. markets are still a little sluggish.
One of the reasons for our cautious tone over the past few weeks is the odd price action we are seeing in the high-yield, or junk, bond market. Bond traders are a unique bunch, and they are laser-focused on risks to cash flow, so they often see things stock traders miss.
So when high-yield bond traders are selling and the S&P 500 is rising, we go on yellow alert. High-yield bonds fell all last week and look likely to continue.
We received a lot of questions about high-yield bonds and how they may predict market trends last week. So, we recorded a video to give you some ideas of what to look for and how these trends might influence your investing. Check that out on our YouTube channel here.
Capitalizing on the Holidays with Continued Retail Opportunities
Even in the best market conditions, however, this is usually a weird week for the market. As you can imagine, the offices and hallways of the big institutional firms start to look a little deserted around Tuesday afternoon as everyone sneaks out for Thanksgiving.
Volume on Thanksgiving week is typically 40-60% below average. The same thing happens the week of Christmas, and to a lesser extent around the New Year.
So, what should you do?
Honestly, there is a narrow window for traders this week to get into something good. Low volumes on Wednesday and Friday can make share price movements too random for our comfort level. We usually sit on the sidelines during the last half of a holiday week so we don’t get snagged by a whipsaw.
However, if you missed some of the best stocks last week, we still think there are likely to be some good dip-buying opportunities on Monday and Tuesday if conditions improve, especially in retail:
- The Coca-Cola Co. (NYSE:KO): The drop in yields should be a big boost for Coke because the stock is valued based on its dividend. Lower rates are good for dividend payers because bonds are less attractive as an alternative. Any dips into the $52-53 range look good for new entries.
- Target Corp. (NASDAQ:TGT): Despite killing expectations and upping their forecast for the holiday season, Target took a hit last week. This is not uncommon; traders are known to “sell the news” following an earnings report, no matter how good it is. The upshot here is that any entries in the $240 to $250 range are getting the stock at essentially a discount.
Will “Pandemic Stocks” Make a Comeback?
This is also a good time to address the issue of rising COVID rates in Europe and Asia because that comes with fears of lockdowns.
In our view, although rising cases are a tragedy, the rate of change hasn’t accelerated to the point that we are worried about stocks in general.
Does this mean “pandemic stocks” will surge again? Probably not. Stocks like Zoom Video Communications Inc. (NASDAQ:ZM) or Chegg Inc. (NYSE:CHGG) may attract some buying interest this month, but those bubbles popped fast, and traders are going to remember that.
However, there were a few quasi-pandemic stocks that have done a great job of capitalizing on economic growth as well as distance work, learning, collaboration, and shopping that could still be very interesting.
On Friday, we’re going to do something a little different. We’ve teased it here and there over the last few weeks, but we’re going to reveal the top five income stocks on our 2022 watchlist.
John Jagerson & Wade Hansen
Editors, Trading Opportunities