When markets break down, or up you should be looking to either buy or sell. In the first case, many analysts, TV pundits, and market professionals will generally tell you why the market is going down.
“Interest rates are rising, multiples are falling, or valuations are extended, they say. That means the market needs to cool down, and stocks should be lower. Better to wait this out before buying.”
That was typical advice all during last spring and summer. Recently it has been similar. “The market has moved up too high. Tech stocks are too expensive. Look elsewhere or wait until interest rates stop rising.”
Look to buy the most extreme asset class taking a hit during that period. I suspect soon it will be something like commercial real estate or financial assets. The key is to try and identify the most despised asset class. Then buy it.
This has been one of the most fundamental reasons why some of the Reddit stocks like GameStop, AMC Entertainment, etc., have jumped. There were too many lemmings on the short side of the trade.
I write a lot of articles about stocks. One of the most despised stocks last year that I completely missed was Nio (NYSE: NIO). I remember writing one article over a year ago stating in no uncertain terms that Nio stock was worthless and the company was likely to go out of business. I was the market. I was following the crowd.
What I could not understand and foretell was that China was not going to let one of their premier electric vehicle companies go under. The stock fell to below $1.00 per share. But then suddenly, the company was rescued by a governmental entity.
It took me a while to realize that Nio would survive and could raise even more capital. At first, in March 2020, when the stock was below $3.00, I suggested the company could survive, but I did not recommend it. By the time I changed my attitude in late August, Nio stock was almost at $20.00.
In other words, I was too rational. I should have put myself in the seat of the CEO and the board. They were determined to survive. I should have followed my contrarian impulses more fully. Sometimes that does not mean all questions are answered. Today the stock is at $39 and change and has been as high as $62.84. In fact, now might be another chance to look at the stock again.