With These Five Moves, You Can Step Back from the Stock Market’s Pain – And Get Ready for the Wealth Window to Come

May 06, 2022

Just one day after the U.S. Federal Reserve ignited a stock-market rally worth $1 trillion, blue chips and tech stocks on Thursday experienced their worst single-day free falls since 2020. The tech-focused Nasdaq Composite dropped 4.99% to hit its lowest close since November 2020. And bitcoin dropped to its lowest level in more than two months.

Those are numbers – or what the experts might refer to as a “macro” view.

But it’s easy to forget that these headline events have a real impact on real people. And if you take the time to look around you – to be a careful observer – the fallout is there to see.

I just returned from a West Coast speaking engagement. In fact, I travel extensively in my role as CEO of TradeSmith – and get to speak to a lot of people in different businesses, at different income levels, and in different slices of the economy.

And what I’ve seen firsthand tells me there’s trouble in River City.

Want a “real” example? Let me tell you about a trip my son and I took to Home Depot just the other day. We were there to pick up a 20-pound tank of propane – but I also picked up a bad case of “sticker shock.” The propane that cost me about $25 just two years ago now rang up for about $65.

My shopping anecdote gets better from there. As we waited to pay, my son and I watched as a man tried to wheel a trash can stuffed with pilfered goods out of the store. A cashier chased him out into the parking lot. Upon her return, a co-worker lamented: “That’s happening like five times a day now – and it never used to happen before.”

(Speaking of trash cans, one of my managers – who grows trees as a hobby – says the plastic ones he uses to house his bigger seedlings have doubled in price over the past 12 months or so).

The cracks are visible. In my travels, I see that restaurants are much less full than they used to be. And the service isn’t up to snuff. Prices are higher everywhere – in the grocery store and at the gas pump.

Where am I going with this? That’s easy. Thanks to these firsthand snapshots, I can say with conviction that recession fears are widespread and very real. Inflation is hitting Americans hard; the conversations have escalated from “navigating inflation” to “surviving” it.

Now more than ever, you need to find income and minimize risk. It’s crucial to keep what you have, protect your money, and avoid the costly investment mistakes that can undo all your hard work and wipe away several years’ worth of gains. With the risk levels I’m seeing, it would be easy for that to happen.

That’s the bad news.

But there’s good news, too, which is that you are in control of what happens next.

But you need to act immediately. You need to position yourself in a way that mitigates risk and reduces the opportunities for mistakes. To help you do that, I put together a checklist of “urgent moves” you should make right now – today.

It’s short and it’s simple. But it’s powerful, too.

Let me walk you through those five moves now:

1. Lower Your Risk

When you have the best stock-market day in several years – and see all those gains wiped out the very next day – you are not talking about a normal market environment. Markets, sectors, and stocks are breaking down faster than rational folks might expect. And by not taking this step, you risk undoing all your hard work of the last few years.

Specific actions to take: Evaluate your holdings. Look to cut loose anything you can’t make a case for keeping. Tighten your stops where it’s warranted. Be judicious when trading options (more on this in a minute).

2. Take a Deep Breath

I’m not being flippant. There’s a good reason the proverb “haste makes waste” is repeated time and again. The stock market is pretty efficient over the long haul. But it gets tricky at inflection points like the one we seem to be navigating right now. At times like this, emotion trumps logic and well-thought-out game plans get trampled by panic. Taking a moment to gather your thoughts can help you avoid the knee-jerk decisions that lead to more pain.

Specific actions to take: Accept the fact that it’s OK to stand down for a bit – meaning you’re not buying or trading anything right now. There’s nothing wrong with holding cash during times of extreme turbulence like we’ve seen in the last 24 hours. Sometimes the best move is the one you don’t make.

3. Avoid These at All Costs

If you do feel the need to trade or invest right now, put the odds firmly in your favor.

Specific actions to take: If you’re a TradeStops subscriber, steer clear of those Red Zone stocks – the momentum is terrible right now. If you’re a CoPilot subscriber (or just enjoy trading options for income, as I do), look for the highest probability of profit when selling, even though that means less of a return. Do not chase premium. And no matter what you do, avoid the shares of companies that don’t have an identifiable economic “moat” – the pricing power, proprietary technology, brand identity, or market position that gives them a margin of safety during tough times and a hefty upside during good stretches.

4. Start Assembling a “Shopping List”

I’m not contradicting myself here — not even in the face of stock-market corrections (falls of 10% to 19%) or bear markets (declines of 20% or more). The reality is that bear markets – despite all the uncertainty, pain, and outright fear they create – are accompanied by two certainties. The first is that bear markets always end – eventually. The only question is “when.”

The second is that the steep sell-offs create tremendous bargains – opening some of the biggest wealth windows you’ll ever find. Want proof? Just look at the post-Covid-correction Nasdaq, which zoomed as much as 136% from its March 2020 lows. That’s an extreme example, but stocks lose an average of 36% in bear markets.

And bear markets are typically short – an average of 289 days, or 9.6 months, according to research by Hartford Funds. By contrast, stocks gain 114% on average during bull markets, which last an average of 991 days, or 2.7 years. As of Thursday’s close, the Nasdaq is down about 24% from its highs in November, but didn’t achieve bear market status until early March. That means the tech bear is only about two months old. The S&P 500 is off about 14% from its highs in early January, meaning that broad bellwether is still in “correction” territory.

Specific actions to take: Assemble a “watchlist” of companies you’d like to own at the right price. This can include “forever stocks” – shares of companies that have the definable economic “moat” I just talked about. And because I believe income is critical right now, this watchlist can include companies with strong dividends (which can be found in TradeSmith’s Dividend Growers strategy).

5. Trust Our Tools

At this point, you probably have three questions:

  1. How long do I need to lay low?”
  2. When should I buy back in?”
  3. What, specifically, should I buy or trade?”

All great questions. And all answers you can get from our tools.

Specific actions to take: I recently wrote, in our TradeSmith Daily newsletter, that TradeSmith’s tools indicated Jan. 21 was an optimal time to sell streaming king Netflix Inc. (NFLX) when it entered our no-go, get-out-now Red Zone. The stock ended that day at $397.50. It closed yesterday at $188.32 – a free fall of nearly 53% in a bit more than three months, including a drop of 7.69% on Thursday alone. That’s the kind of damage I was referring to a moment ago when I talked about “undoing all your hard work.” The pain gets even deeper when you look at the stock’s 52-week high of $700.99. Run the numbers and you’ll find that Netflix shares have plunged 73% from that peak. Our tools can help you avoid such missteps. And they can tell you when the time to buy arrives again – and will zero in on the best candidates.

There you have it: Five moves you should make now.

What moves have you made? How are you navigating this market? If you have any questions or comments on today’s editorial – or any previous Money Talks topics – you can always reach me directly at [email protected]. I can’t respond to every email, but I read them all.