After two days in the green, it seems like the inevitable correction induced by the so-called Evergrande contagion is now off the table. The S&P 500 Composite Index plunged just a hair shy of 5%, and if that’s the best we’ll get, those paying too much merit to some of the more bearish forecasts on the Street are now wondering if they’ll be left from the 4-5% dip empty-handed.
Indeed, buying on dips, especially those sparked by exogenous events with systematic potential, can be very scary. It’s easier said than done. After all, in the heat of the moment, it would have been foolish (notice the lower-case “f”) to start buying after a 4-5% drop, when many market strategists are calling for a 10-15% drop, with some of the bigger bears open to the idea of a 20% plunge.
Undoubtedly, the Evergrande situation was extremely complicated. And its potential impact was a large question mark. Would it cause shockwaves through the global markets? With commentators bringing up “Lehman Brothers,” Monday’s session of trade was pretty horrific.
Combine that with stretched valuations and endless negative forecasts made by big banks and it took a truly fearless contrarian to make most of the very brief pullback we were given over this past week.
Is that it for the Evergrande-induced 5% “correction”?
Like it or not, 5% dips may be the largest we’ll get by year-end, with some analysts pointing to a nice rally in time for the holiday season. Most notably, JPMorgan is pointing to the S&P 500 at the 4,700 level by the conclusion of this year, with at least 5,000 in the cards for next year.
Indeed, it seems as though the big institutions went from fearing a meltdown to calling a melt-up. For investors, the recent tug-of-war between bulls and bears should be taken with a grain of salt. While market strategists are savvy, forecasts aren’t guaranteed to come true. And there is limited accountability if such forecasts are entirely wrong.
For investors, it’s wise to temper any excess bullishness or bearishness. There will always be extreme views out there. While they are certainly possible, they’re less probable. You should be prepared for bear- or bull-case scenarios, but you shouldn’t bet on them without hedging your bets.
In short, investors should be prepared for anything, including extreme events. But they should not feel enticed to subscribe to either an extreme bull or bear thesis. As we learned over the past few weeks, doing so can cause you to miss out if stocks continue grinding higher.
Over the long run, stocks tend to go up. But over the short term, stocks may not always go up. As such, it’s vital to check your emotions at the door when looking to make moves with your portfolio!
A defensive stock that sold off on Thursday
Check out Fortis (TSX:FTS)(NYSE:FTS), which pulled back drastically on Thursday, as sentiment on the Street went from bearish to bullish in what seemed like an instant. Shares of the defensive utility plunged 2.2% in what was a big up day for markets.
Undoubtedly, it was a rare red arrow in a sea of green. The negative correlation could continue to take hold. While investors are breathing a sigh of relief following the U.S. Federal Reserve’s comforting words, I would not let one’s guard down and would certainly not subscribe to the extreme bull case.
Indeed, uncertainty is up ahead. And Fortis is arguably one of the best foundation stocks to get you through such periods. As shares dip on reignited optimism, now may be the time to get in, as some choose to ditch defence to play offence.
