Last Week’s Stock Market ‘Plummet’ Was Healthy Adjustment, Producing Blue-Chip Buying Opportunities – Forbes

Looking at stock drop from bottom shows opportunity of reversal rise

getty

Last week’s selloff spurred, first, a reversal of the inflation-protection trades done recently.  Then, for sketchy reasons (see Barron’s weekend article, “Why the Dow Just Had Its Worst Week in Months” for a list), a “risk off” selling mood blossomed on Friday.

However, that “worst week” should be viewed positively, for three reasons:

  • First, a subconscious level of worry had built up during the previous weeks as the market shifted from steadily rising to level meandering
  • Second, the cited risks should be ranked as de minimis: (1) The Federal Reserve’s tepid statements about maybe raising rates a bit by the end of 2023 or maybe cutting back on bond buying somewhat next year, and (2) the one-week unemployment claims number that came in slightly above estimates
  • Third, the breadth and depth of the selling is simply out of line with the burgeoning growth now and foreseen this year and next

Therefore, now is a good time to buy stocks and stock funds, even (especially?) the blue-chips.

The picture of a buying opportunity

The beauty of last week’s selloff is that there was widespread blue-chip stock selling. Such broad-based selling reflects a generally bearish stock market view (popularly called “risk off” trading). It is visible in the Dow Jones Industrial Average declining around 5%. This move is the fourth time in the past 52 weeks that the DJIA has delivered such an opportunistic drop. Only one went further – to about 10% – because of extraordinary reasons. This time, there are no indications of such negatives occurring. Instead, the fundamentals continue to be a combination of rising confidence and expectations. Therefore, this selloff looks to be another opportunity — not a first step to more selling.

DJIA weekly moves over past 52-weeks showing selloff buying opportunities

John Tobey (StockCharts.com)

The graph below shows the Dow Jones Industrial Average 30 stocks’ Friday position relative to their 52-week highs.

Distance from 52-week highs for DJIA 30 stocks

John Tobey (FinViz.com)

This measure is a good indication of a stock’s buying opportunity. The varying levels correspond well with each stock’s general characteristics (e.g., reliable growth) and movements (e.g., price volatility). Therefore, don’t apply the commonly used 10% and 20% rules to all. There are some stocks that offer good buying opportunities at 5-10% declines, others at 10-15% and still others at 15-20%. That is what occurred last week.

Three blue-chip stock examples of buying opportunities

Disclosure: Author holds the three blue-chip stocks (Home Depot HD , Honeywell International, and Morgan Stanley MS ) and increased the holdings on Friday, June 18

Home Depot stock chart showing recent selloff

John Tobey (StockCharts.com)

Honeywell stock chart showing recent selloff

John Tobey (StockCharts.com)

Morgan Stanley stock chart showing recent selloff

John Tobey (StockCharts.com)

The bottom line: Don’t let inflation or Fed disrupt your investment program

Last week’s inflation and Fed worries were premature and uncertain. Moreover, a rising price level and rising interest rates can benefit blue-chip companies. They have pricing power and ample resources to take advantage of both situations – something their smaller and/or weaker competitors may lack.

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