Posted January 24, 2022
By Zach Scheidt
[VIDEO] 5 Charts to Renew Your Faith in the Stock Market
It's been a rough start to the year for investors. And I don't blame you if you're feeling frustrated with the selloff.
But believe it or not, there are plenty of reasons to be very excited about your prospects for making money in the market.
This past week, several clues started popping up and showing that the market may be very close to a major rebound – one that can help you make back recent losses and grow your wealth.
Today, I want to show you five charts that explain where we are and how soon you can expect stocks to start trading higher.
I promise by the time you're finished with this video, you'll feel a lot better about where things stand.
Let's go ahead and get started with the first chart of two of the most important groups in the market.
As you know, growth stocks have been under pressure this year. The orange line is the total return of the ARK Innovation ETF, a basket of some of the most exciting tech companies.
These stocks got bid up to prices that were just unsustainable. And then over the last several months, they traded sharply lower.
You can see a similar pattern for the Vanguard Growth ETF especially over the last few weeks.
This growth index has traded sharply lower as investors are bailing out of the growth stocks because they're so expensive and they're moving their capital elsewhere.
So where is the money going in the market? Check out the second chart here, the Vanguard Value ETF.
Let me start by letting you know that value stocks are simply stocks that are trading at a low price compared to the earnings that they’re generating.
And as we've been talking about for months now, value stocks are where the opportunity is even though they may sound boring on the surface.
Some of these stocks are names like Caterpillar, Ford or GM. They aren't the Teslas of the market. But if you're making money with them, that makes them exciting, right?
Value stocks have been moving steadily higher throughout December and the first couple of weeks of this year while growth stocks have been coming under pressure.
So that's a really good sign of relative strength.
Over the last few days of trading, value stocks came under pressure and gave up some of their gains as well.
But that just brought them back to breakeven for the last three months and down only a little bit on the year compared to some other stocks that are down so much more.
Why is this important? Well, investors have basically been throwing out the baby with the bathwater over the last few trading sessions as people got sick of this whole market and said forget it.
That's typically what happens when we're likely to see a really good rebound in the market because the sellers finally head out.
They're out of the market and the people who are left are the ones who want to own stocks, which brings us to the third chart that I wanted to show you today.
This is a chart of sentiment and it tells us how confident (or how fearful) investors are feeling. As you can see, sentiment dropped low back in 2020.
That was during the most fearful period of the coronavirus crisis. And then sentiment moved higher as we started to realize that the market is going to be okay.
As investors started making money in growth stock and there was a lot of excitement with people investing their money, the market moved steadily higher.
Now we've got a situation where sentiment has come back down and investors are throwing in the towel.
They don't want to be involved in the market anymore. And believe it or not, for us who are committed investors, that's really a good thing because here's how markets work…
When there are more buyers, that drives the market in individual stocks higher. But when there are more sellers than buyers, that's what drives the market lower.
When you get to a situation like we have today where investors are more bearish than they've been in almost two years, that's when the people going to sell have already sold.
And with those sellers out of the market, that's when we're likely to see buyers take control and push prices back higher.
It doesn't mean that markets can't go down any lower.
But it means that we're getting a lot closer to the bottom, and there's a lot more chance that the buyers will take control and push the market back up.
Another chart that I wanted to show you is what we often call Wall Street's fear index.
This is the CBO Volatility Index (or VIX), which measures how much fear there is in the market — and specifically how much traders are willing to pay for options contracts that they use to hedge against a selloff in the market.
As you can see, the last few weeks have pushed the VIX higher. And as the VIX moves higher, it means that people are paying more and more for stock insurance, which means that we're closer and closer to a bottom.
Typically once the VIX spikes higher like this, we see a relief rebound at the very least — and possibly a whole new leg higher with a long-term trend for stocks moving higher.
A really exciting thing about whenever the VIX moves higher is that it's perfect for our Income on Demand put selling strategy, which basically sells insurance to these other traders.
So when you sell a put contract, you're agreeing to buy shares of stock at a specific price while getting paid for that agreement.
When the VIX spikes higher, it means that you're getting paid even more than normal for that agreement. So this is a time that I really like our income strategy.
It has a special way of protecting our wealth while at the same time generating even more income than in typical markets.
Then one final area of strength that I wanted to show you is a chart of semiconductor stocks or the Semiconductor ETF.
Recently we've seen this area pull back to a key support area where the 200-day moving average meets where semiconductor stocks broke out earlier.
And I wanted to show you this because while a lot of areas of technology have been very weak, semiconductor stocks are one of the most important — and one of the most profitable — areas of the tech market.
Back in the day, investors used to look at transportation companies and say that these stocks would tell us what an overall economy is going to do.
Because as more people are buying things, we need to transport the things wherever they need to go.
Well today, semiconductor stocks have taken the place of transportation stocks because the more things we buy, the more semiconductors need to be produced to go into the cars, tablets, computers and even the home appliances that we buy.
So the strength that we've seen in the last couple of months in semiconductor stocks has been a great picture for our overall economy.
The pullback here gives us some reason to be concerned. But at the same time, if semiconductor stocks can find support right here where they are right now, that will give us a lot more confidence in the overall economy and the overall stock market.
So those are the five charts that I think you need to be watching specifically this week.
I think there's a lot of opportunity in the value stocks. And if you'd like to know some of the best areas to buy value stocks, I would say, take a look at RichRetirementLetter.com
That's where we've already written about some of the key value stocks that you need to be involved in right now.
I'd also say to keep an eye on my Twitter feed, where I'll be posting some areas where I'm seeing opportunities in some of the risks that we're seeing in the market.
And of course, we'll keep you up-to-date on what's going on in the market here at Rich Retirement Letter.
So stay tuned!
Here's to living a Rich Retirement,
Editor, Rich Retirement Letter