Last week, the S&P 500 dropped by -0.7%. And immediately, the headlines began…
Is the Stock Market About to Crash?
Stock Market Crash Warning
Where Are the Bulls?
The media started pedaling fear, throwing that loaded C-word around left and right. But this dip is exactly what I’ve been talking about for weeks now.
The fact is that this market has been acting normal.
So far this year, we’ve seen the S&P 500 rally about 4.5% higher in 2021 – a healthy and expected move.
But if things remain normal, then the rally won’t continue forever. Historically, the final two weeks of February and much of March see volatility rise and stocks drop. I’m talking about an average 3-4% dip over the next three weeks of trading.
And the worst performances in the last 20 years have all fallen on the ninth week of the year.
Of course, which week is this? Yup, lucky number nine.
We’re about to get a chance to “buy the dip” on the market. A slight pullback is in the seasonal cards, and it seems it’s already begun.
So, get your buy list ready. Here are the top two stocks to capitalize on an upcoming correction…
Use My “Market Almanac” To Determine Your Best Buy-the-Dip Stocks
Over the weekend, I dove into the nitty gritty of the seasonal trends of the S&P 500 and other indices. It was something like writing the “Farmer’s Almanac” for trading.
I spent days looking at all the trends over the last 20 years, month-by-month, week-by-week to find the trends that are predominant in the market. I also spent that time determining the shifting trends in volatility and when we’re likely to see the VIX and other “Fear Gauges” start to spike.
In short, we’re talking about nailing down the trends that reoccur often enough to be reliable so that you can make an accurate investing plan to get ready for the next rally.
Just like the Farmer’s Almanac helps to determine the right time to sow your seeds for the best harvest outcome, my market almanac is telling me the right time to buy the stocks that are going to provide the best yield for my portfolio. And the time is coming.
Over the last 20 years, the S&P 500 shows a definite trend of weakness as we head towards March’s trading. Study after study revealed a soft patch that the market may go through over the next three weeks. Is it the end of the bull run? No, just a healthy rest, according to the trends. But that rest should turn into a great buying opportunity, so start getting your “stock wish list” together now.
Now, why would a trend like this develop and turn into a regular event?
Look to the calendar for that answer. Late February to early March is a relatively quiet time for market headlines. Most notable is the drop in earnings reports as we get later into the quarter. The excitement level around the market drops a bit with fewer earnings reports hitting the wires each day, serving as the primary cause for the quiet markets.
It’s those “quiet markets” that often result in a slight drop in the indices over the next few weeks. But don’t worry, there are still some notable earnings results that will be coming to keep one area of the market moving…
Retail companies are known as the late-reporters for the season as companies like Macy’s Inc. (NYSE:M), StitchFix Inc. (Nasdaq:SFIX), American Eagle Outfitters Inc. (NYSE:AEO), Abercrombie & Fitch Co. (NYSE:ANF), and Best Buy Co. Inc. (NYSE:BBY) are all preparing to provide their quarterly results to the market over the next two weeks.
From my perspective, the retail sector is one of those that is climbing the bullish “Wall of Worry.”
What I mean by that is that these companies, for the most part, have been cast aside as untouchable for the last year as the pandemic brough retail – at least in-person retail – to a screeching halt.
As a result, we’ve seen investors and the analyst community pull away from retail companies in favor of sectors that were more resilient for the last year. Sectors like large-cap technology, biotechnology, and small-caps have been the leaders as many of these stocks offered pandemic-resilient operations and returns.
Things are changing for the better in the retail sector now. Shoppers are already getting back out into the brick-and-mortar establishments. Progress on the vaccination front is bringing new promise to a return to normal circumstances, and one of my favorite seasonal trends is about to get started six months later than normal…
Historically, the period from Labor Day through November is strong for the retailers. So strong that it is a portfolio allocation I make each year. But in 2020, this seasonal trade failed to live up to its potential as the SPDR S&P Retail ETF (XRT) returned only 4% over the three-month period. For reference, it usually averages about 12% each year.
But with many schools returning to some form of in-person learning in the spring and some workers heading back into the office, it’s time once again for a mini “back-to-school” event to contribute to stronger retail performance.
Just last week, Mastercard Inc. (NYSE:MA) announced an unexpected spike in retail activity as shoppers returned to stores. Look for that trend to continue and for the next few weeks to reflect some good news in the retail sector.
On the analyst side, opinions of the retail sector are shifting. We’ve started to see upgrades to these stocks ahead of a full-blown re-opening of the economy.
In 2020, many of the retail companies saw analyst downgrades from “buy” to “hold” as the uncertainty of the pandemic lowered expectations for retail stocks – an appropriate reaction. But now, as we’re seeing a slow re-opening event unfold, analysts will rethink the sector’s potential looking forward, resulting in a wave of upgrades, which means a flow of investor cash into the sector.
We’re early in this new trend, which means that there is much more upside to this trade as the market shifts and migrates to fresh investments. Here are two you need to be watching this week…
- Carnival Corp. (NYSE:CCL)
Travel-related stocks are starting to draw the attention of longer-term traders, and it’s going to pay off with strong long-term trends. Few travel companies were hit harder than the cruise industry, which is just one of the reasons that investors can expect a longer-term recovery.
At its bottom, CCL had lost 90% of its value in roughly two years. Shares broke into a bear market in mid-2018, a full 18 months before the pandemic became just another headwind for the industry.
Today, the stock sits more than 200% higher than the 2020 lows and after forming a long-term technical foundation at $20, it’s ready to rebound higher.
The cruise operator will go through some meticulous steps to get its fleet back into operation, which will cause another hit to revenue, but long-term investors can take some stock in the fact that the worst of the revenue storm appears to be over.
Competitor Royal Caribbean Cruises Ltd. (NYSE:RCL) announced its quarterly results on Monday morning with little commentary or outlook. The company beat analyst expectations of $0.17 while missing revenue targets. The top line beat sends the message to investors that RCL’s management has found a way to work with less, a result that should be expected from CCL as part of its next earnings report.
With a strong technical picture, a potential fundamental bottom, and the industry facing a likely re-opening in late 2021, CCL shares appear ready to set sail for higher prices. I’m targeting a move to $40 over the next four to six weeks.
- American Eagle Outfitters Inc. (NYSE:AEO)
I’ve already hammered the retail story home earlier, and that seasonal story holds true for shares of AEO.
This Pittsburgh-based company is considered an “American lifestyle clothing and accessory” company that appeals to a younger retail shopper.
I mentioned my “Back to School 2.0” theory as a bullish catalyst for certain retail stocks, and AEO shares are right in the sweet spot of this group.
The company’s target market includes teen and college-aged consumers, a group that is in the process of heading back to school after almost a year of distant learning. During one of my “Walk Down Main Street” research trips a few weeks ago, I found the teen retail traffic to be heavier than what we’ve seen over the last year. The increase in traffic makes sense as COVID-19 cases are on the decline and vaccinations are rapidly increasing.
On top of the Back to School 2.0 trade, AEO and other retailers participate in a strong spring seasonality trend as inventories are swapped from winter to spring and summer clothing lines, and the students flock to switch their look to the newest trends.
We’ve seen the stock do a dance at the $25 price level for the last two weeks as shares prepare for their next rally, which targets $28 over the next four weeks.
The company will provide quarterly earnings results on Wednesday, March 3. Expect another quarter of improving results to help drive a stronger technical rally to move the stock into new all-time high territory above $30 where short sellers that have been betting against the continuation in AEO’s climb will begin a short squeeze that targets yet another rally to $35.
Another sector seeing a pullback is cryptocurrency.
Crypto has been riding sky-high lately – but this morning, my colleague Tom Gentile recommended a coin that’s running for just $41.
To learn how you can get all of Tom’s crypto recommendations, click here.
On Wednesday, I’ll reveal even more stocks to add to your buy list. Keep an eye out…