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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
We’re only a couple months into 2022, and all the major indices are already down.
The ongoing falls this week now have the S&P 500 down around 12% from its all-time high (January 4).
And the Nasdaq?
It looks worse…
The Nasdaq is close to hitting a 20% fall from its all-time high (November 22). That drop would officially place the Nasdaq in bear market territory.
It’s certainly a long way from where we were last year when the market just kept soaring higher…
Most of the recent heavy falls are due to escalating tensions leading up to the Russian invasion of Ukraine.
But we’ve known that the market was already feeling the pinch since January.
Although the Russian invasion can cause disruption (including vital energy supplies into Europe) the truth is that after a tough start to the year, fearful investors were already looking for an excuse to sell.
This Is Only Part of the Picture
Let’s put Ukraine aside for a moment…
Inflation and the size and scope of anticipated rate rises from the Fed initially caused stock prices to fall. And it will continue to drive market sentiment.
While the major indices may give a broad outline of the health (or otherwise) and performance of the market, they only tell part of the picture…
Because when it comes to the tech sector, there’s a lot more pain than what the Nasdaq index tells us.
There are literally hundreds of tech stocks whose share prices are destroyed. I’m talking losses of 80%, 90%, and higher.
For many, it’s going to take more than a miracle for them to catch up…
So when I see losses of around 20% on the Nasdaq, I know that there are plenty of investors who are sitting on even higher losses on individual tech stocks.
But the indices are also hiding just how much they rely on a dwindling number of stocks for their performance.
Many investors were already aware of just how much the run-up in the major indices these past couple of years was because of outperformance in Microsoft, Facebook, Amazon, Apple, Netflix, and Google (FAANG) stocks.
Due to their market weight, they have an outsized influence on the performance of the index.
But the latest earnings season was not so kind to some of these stocks…
Earnings reports saw both Facebook (FB) and Netflix (NFLX) fall heavily. And with Amazon (AMZN) down about 25% from its November high, that means that just three stocks (Apple, Microsoft, and Google) will have to do more heavy lifting.
With Apple currently trading around $160, Microsoft at $294, and Google around at $2,650, they’re still a lot higher than they were last year.
That’s a stark contrast to March 2021, when Apple was trading around $115, with Microsoft at $225, and Google at just over $2,000. If these stocks retrace half of that gap, there will be more drops ahead than most investors realize.
That’s why the market will continue to be extremely volatile, despite how the Russian invasion of Ukraine unfolds.
Our job as traders is to watch vigilantly and prepare ourselves to act.
So, you can rest assured I’ll be here each day telling you what I see and how to profit… despite any ensuing chaos.
For now, though, the most important thing investors can do is to avoid making any rash decisions.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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