Light at the end of the tunnel

Is the light at the end of the tunnel a sun or a train? Today the S&P 500 entered correction territory as it broke through the magic 4,300 level, or 10% down from its peak. It remained there for the most of the day before recovering in the last hour. This was different from the few previous sessions when strength during the day was replaced by a selloff before closing (bearish sign).

The volatility and fear indicator, VIX, during the day came close to 39 (with normal values below 20) pointing towards panic selling and increased pressure from margin calls, before closing around 30 (still high).

As Warren Buffet once said, “be fearful when others are greedy, and greedy when others are fearful.” We believe the time to start carefully buying certain names (for a long-term) has arrived. However, catching a falling knife still a risk, as the market could continue its freefall or rebound in a short-term and fall further into a bear market territory (more than 20% down from the peak) there after.

It is possible that this correction will cease later this week, following the speech of the Fed's Chairman, J Powel, who has an unmatched ability to pacify the markets. Even though an overall rebound is likely, the possibility of a further downside remains especially for the FAMANGs (Facebook, Amazon, Microsoft, Apple, Netflix and Google (maybe not Netflix after the recent fall)) as they still have extremely high valuations. These companies represent a large share of the S&P 500.

However, the longer term prospects are more hopeful. If we look at a 12 month horizon, it is very likely that the US stock market will recover and even achieve some positive returns, like during the last 11 out of 12 cycles (starting from 1950's) when the Fed increased rates. During those periods, the annual market return was positive averaging 9%. Therefore, buying some shares of airlines, cruises, restaurants, hotels, energy and oil and gas service companies at these levels (for a long-term) seems sensible.

This blog does not provide investment advice. Please talk to professionals before investing.

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