It is in the history books now, but during the first half of 2022 the Nasdaq was down about 29%, which is its worst first half on record. The Dow Jones Industrial Average was down 15.3%, which is its worst first-half performance since 1962, and the S&P 500 was down 20.6%, which is its worst first half since 1970.
It has been miserable out there and what is even worse is that the indexes don't fully reflect how bad the action has been in many sectors of the market. Growth stocks, biotechnology, special purpose acquisition companies, crypto-related issues and many other speculative groups are down 50% or more.
We can discuss at great length how ugly it has been out there, but the only question that really matters is, "What's next?"
No one knows the answer to that. There is no shortage of predictions, and you can find bears who are convinced it is going to become much worse and bulls who are convinced that we are on the verge of a magnificent recovery as inflation tops out and fears of recession fail to develop.
I have absolutely no idea what will happen next, but here are four things I do know:
- Charts are in terrible shape and do not offer compelling entry points. It will take time for them to develop. Many market participants cannot resist the temptation to bottom fish and they are depleting their valuable capital very quickly.
- Many stocks look fundamentally solid and have attractive valuations, but that just doesn't matter right now. Good valuations will not protect us from forced selling and liquidations.
- When the market does improve, there will be plenty of time to put capital to work. It is not necessary to guess when the exact low hits. That is an exercise in ego rather than strategy. When a new uptrend and bull market eventually develop, there will be weeks and months in which there will be attractive entry points.
- If you want to trade right now, then keep time frames very short and stick to technical action rather than fundamentals. This is not a market for stock-picking or building longer-term positions.
Keep those four things in mind as we head into the second half of the year. No one knows what is going to happen, but I'm absolutely, positively certain that we are going to have exceptional opportunities for profits if we keep slogging away.
