|“It’s been a long year, and people are tired as hell. Rightfully so.”|
Man, I feel those words in my bones. How about you?
We’re in the final stretch of 2022 with just a few weeks left in December. At Friday’s close, the market was sitting a little below 4,000, although it feels like we’ve taken the most exhausting path to get here.
|And, of course, we have another big Fed meeting scheduled for the middle of this week, which means we’re probably in for another bumpy ride.|
If you’re like me, you’re tired of wondering what’s going to happen… and you’re looking for a little direction.
Lucky for me (and you!), I work at a place where I have total access to dozens of the market’s top analysts and gurus.
So I set up a call with Investors Alley analyst Serge Berger.
Serge has an interesting trading methodology that divides markets into different time frames and characters, allowing him to determine which strategies to apply in which situations without emotion. By focusing on only the highest probability trading setups, he’s found a way to maximize overall profitability and minimize stress and volatility.
That sounds like a combination we could all benefit from right about now. Especially the “minimize stress” part.
As our video call started up, I got straight to the point and asked him where he thought the market would be on December 31. His response: Get ready for the chop.
“People are so tired. You know, everyone I talk to on the fund manager side, like our peers, everyone’s just really tired, so I think the rest of this year is going to be really, really choppy.”
“Usually the market tends to hold up. You could have some crazy down days, some crazy up days… it’s just rebalancing portfolios and this and that and all sorts of uselessness. But as we get into January, I do think we could start to see things get pretty gnarly again.” (Keep reading for Serge’s plan to weather the bear market.)
And if you think this year was bad, just wait until you see what 2023 has in store for us. According to Serge, things still have to get worse before they can get better.
“We’re moving into a different phase, into the latter stages of the bear market, which will probably be quite violent. It’s usually when people capitulate. And then the market goes lower, and then people panic, and that’s usually when things go from bad to worse.”
“I’d say Target 1 is probably 3,550 to 3,600 area, which is where we were in October. But reasonably, you’re gonna see something closer to 3,200 is kind of my thinking.”
“A lot of estimates out there are calling for $200 in earnings per share for the S&P; if you say the market will trade at a multiple of 15 or 16, it gets you about 3,000 to 3,200 [in the S&P 500 index].”
For anyone not permanently attached to their Calculator app, that’s an 18.6% drop from here. Woof.
Of course, if the S&P 500 is falling, it’s only because individual stock prices are dealing with selling pressure.
“Something that will be interesting to watch is what the Teslas and Apples are going to do, companies like that. I think that will be the last battle fought by the bulls. I think we could see TSLA go down to $140, maybe even $100… and that’s nothing to do with Elon, it’s just positioning.”
|“I think once that’s over, once we see some real pain there, once people capitulate that will probably be where we start to see better buying opportunities. We’re not quite there yet.”|
Serge makes a good point here. And it’s not all doom and gloom. Once the sellers have finally been shaken out of the market, there will be awesome buying opportunities and a lot of money to be made. We’re just not there yet.
So, all signs point toward more pain ahead, most likely in the coming year. Serge’s plan?
“We’re gonna wait through CPI, PPI Tuesday, Fed Wednesday, and then make a decision somewhere probably between Christmas and New Year to tilt the portfolios net short again.”
“But not everyone wants to do that or can do that or should do that for that matter,” he added. It depends on the time horizon and what you have the stomach for.
For example, if you agree with Serge and worry the market could have 20% downside from here, there’s little risk to simply selling a portion of your stocks so that your capital is less exposed to a massive drop.
“If one has a similar view and believes that we can see more downside from here, to the tune of 20%, I see little reason not to derisk in the equities. Let’s say someone is in a 60/40 allocation — a fairly common portfolio allocation — I see very little reason not to lower equity exposure to 30%. Even though we’re late in the bear market, the market can go much lower.”
And for those with a bit more of an appetite for risk?
“If one is a bit more nimble and wants to be more aggressive, then there’s no harm to buying put spreads for protection, the VIX is still low. I don’t necessarily like inverse funds.”
You can keep up with Serge’s ongoing market outlook on the Investor’s Alley website, where he posts a weekly video update that details what he’s seeing and what he’s keeping an eye on. He’s also the brains behind 11-Day Trader, a trading service that uses options credit spreads with an income focused approach.