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I always like to be open-minded when I analyze the market. As an active portfolio manager, I look at the positives and negatives and then adjust my investment levels accordingly. The key is to be flexible. One of my favorite Stanley Druckenmiller quotes is: “Probably one of my greatest assets over the last 30 years is that I’m open-minded and I can change my mind very quickly.”
The biggest positive in the market is that there are sectors and companies with incredible secular growth themes. 1) Aerospace and Defense. Many companies in this sector have backlogs of $100M to over $2B. If you want a satellite launched by SpaceX or Rocket Lab, good luck. You’re likely waiting 24-48 months. 2) Semiconductors. Speaking of backlogs, Nvidia’s is currently over $500B. Micron and Taiwan Semi wouldn’t be expanding their manufacturing facilities if business was slow. 3) Energy and Data Center related. Again, good luck doing business with COHR, LITE, GLW, etc. With over 500 data centers being built in the US, the need for infrastructure and equipment continues to be strong. 4) Biotech. Big Pharma is expected to generate over $1T in free cash flow in the next 4-5 years. Merck is estimated to be $100M and Eli Lilly $450M. This bodes well for continued growth and M&A in the sector.
The biggest negative is that the weight of the market is holding them back. This is important because 4 out of 5 stocks move with the general direction of the market. In other words, I don’t care how strong a company is growing, if the market is correcting, its stock will have trouble making consistent progress. A perfect example of this is Apple in 2008-09. The company just came out with arguably two of the biggest products of our lifetime (the iPhone and iPad) and still corrected over 60% because of market conditions. I don’t think we are heading into a severe bear market from here, I’m simply illustrating my point.
So, what does one do from here? There is no right or wrong answer. It all depends on your time frame and your risk tolerance. For example, if you are a shorter-term trader, there’s nothing wrong with keeping some cash and using lighter than normal positions, so you don’t get chopped up with the excess volatility. If you are an investor, then you simply have to be patient during market corrections and accept that it’s part of having a longer-term time frame. Either way, you have to have some form of risk management as part of your strategy.
From here, I’m waiting for market conditions to improve. Specifically, I would like to see the Nasdaq Composite and S&P 500 hold their respective 200-day moving averages, signs of the selling to slow down, and see the big institutions come back into the market with more CONSISTENT buying. The headlines aren’t as important to me because when things improve, it will show up in the tape. Also, why should I stress over Blue Owl when I thought it was a coffee company just last month? That’s partially a joke but also making the point that very few people heard about them until recently. They are not going to take down the entire financial system as some people (aka miserable bears) are suggesting. Another positive from a contrarian point of view is that many sentiment measures are reaching extreme bearish readings. Hopefully, this can help stabilize the market over the near term. Again, patience and discipline are very important until we see better signs of health.
I can be reached at: jfahmy@zorcapital.com.
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