How to Survive the Carnage in the Stock Market

2015 has been the year of the “FANGs.” Investors have fixated on just a handful of glamorous tech stocks – Facebook, Amazon, Netflix and Google (now Alphabet) – that have held the broader market afloat, even while earnings this year overall have been disappointing.

Throughout all this the “average” stock has actually fallen. So for lack of anywhere else to go, the investing public has crowded into a very small handful of recognizable names.

Consider the relative performance of the growth and value segments of the S&P 500.

Standard & Poor’s breaks the S&P 500 into two roughly equal halves based on valuation, momentum and other factors. Year-to-date through November 12, the S&P 500 Growth index – which includes the FANG stocks – was up 3.9%. Its sister, the S&P 500 Value index, was actually down 5.5%.

This is a peculiar market. Cheap stocks are getting cheaper while a handful of extremely expensive names keep getting more expensive.

As a case in point, look at the advance-decline line, a simple measure of market breadth.

NYSE Advance-Decline Line 2014-2015

Starting in April, the advance-decline line started to trend downwards. Apart from a brief rally in October, it really hasn’t stopped sagging since.

This means that fewer and fewer individual stocks continue to rise, even while the market grinds slowly higher.

In a “healthy” bull market, the advance-decline line rises along with the major stock indexes.

So when you see an “unhealthy” market like this, one of two things has to happen. Either investors start to spread their bets across a wider swath of the market and market breadth improves… or they finally throw in the towel and sell the few remaining leaders.

So, how on earth are we supposed to invest in a market like this?

You really have two options.

The first is the approach Rodney takes in his Triple Play Strategy. Rather than fret about the high valuations, Rodney is simply riding the momentum of some of these glamor names while it lasts.

Sure, the FANGs are expensive. But that doesn’t mean they can’t get a lot more expensive in the short term. So, riding the momentum is a perfectly viable strategy – so long as you’re ready and willing to sell at the first sign of weakness.

The second option is to look for deep values amidst the carnage – stocks that are already so cheap you don’t mind if they get cheaper.

Plenty of stocks are down 30% or more this year, even while the S&P 500 Value index is down only 5.5%. Several midstream oil and gas pipeline stocks are currently sitting at multi-year lows and are sporting cash distribution yields I never expected to see again.

And of course, there is always the third option: stay mostly out of the stock market altogether, and wait for better prices across the board.

My recommendation? Try some combination of the three. Keep your long-term portfolio heavy in cash and deep-value opportunities, but set a portion of your portfolio aside for more aggressive short-term trading.

Charles Sizemore

Editor, Dent 401k Advisor

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Categories: Investing

About Author

Charles Sizemore is a research analyst with Dent Research. His primary research focuses on income, retirement strategies and fundamentals.