The Market Is Volatile — I’m Focusing On Undervalued Trades Like This…
As I look at the market action over the past week, I remain cautiously bullish.
We have experienced a 5% pullback in the S&P 500 from high to low. That is the first 5% pullback since last November, which was about 10 months ago. And that’s exactly what we’d expect. Since 1945, the stock market has experienced a 5% pullback about every 11 months (on average).
A steeper decline of at least 10% occurs, on average, every 30 months — or about once every two and a half years. The most recent 10% pullback occurred about one and a half years ago.
Average durations of market moves indicate this bull is young, but that’s not enough of a reason to be bullish. There’s also the extreme shift in sentiment I noted here. That indicates individuals are nervous:
But investors seem to be caught up in the short-term headlines. Sentiment declined sharply last week, according to the American Association of Individual Investors survey.
A large number of individuals turned bearish after a 3% drop in the S&P 500. This isn’t unprecedented. We often see sharp shifts in sentiment. But the investors making those changes are often wrong.
For investors, nervousness cuts both ways. They may be worried about potential losses. But they may also be worried about missing potential gains. This fear of missing out seems to have increased in recent months as investors read about large gains in meme stocks and chase returns that may be unrealistic. But, as they chase those returns, they add money to stocks that will be owned by index funds, and they will drive a recovery in the more rationally valued stocks.
How I’m Trading Right Now
I’m also nervous, but my nerves keep me from being reckless. I believe stocks will rally, but I also understand that there’s a risk that the decline could continue. That means that while I’m looking for trades, I am focused on the margin of safety.
If you find yourself in that camp, then you could consider a stock like Dell Technologies Inc. (NYSE: DELL). Once a growth stock, Dell is now a relatively safe and undervalued technology stock.
The stock has below-average volatility, which is a plus in the current market environment. However, this week’s trading has lifted the volatility premium for options in the stock and put it on my radar for a trade over at my premium service, Income Trader.
DELL is trading at about 10 times this year’s estimated earnings, an unusually low valuation in the current market. The stock is widely covered by analysts and has exceeded estimates in nine of the past 10 quarters. The only miss occurred in the first quarter of 2020 when companies faced unprecedented pandemic pressures. Given its track record, DELL could exceed estimates and be even more deeply undervalued than it appears to be.
That’s a good value case for investors. But rather than simply buy the stock, over at Income Trader, we’re interested in using the stock as a vehicle for short-term income.
The chart of DELL is trending bullishly higher, and the stock recently triggered an Income Trader Volatility (ITV) “buy” signal.
The chart also shows the relative strength of DELL compared to the broad market. DELL was one of the few stocks that closed higher on Monday, the day a global panic pushed stocks lower all around the world. The fact that DELL was up indicates other traders share my analysis that the stock is undervalued and a potential safe haven in the current volatile market.
But like I said, rather than simply buy the stock and hope for the best, our plan over at Income Trader is to use our simple, proven options strategy to generate immediate income from the stock. If all goes according to plan, we’ll make a quick 4.1% on our capital in 59 days or less, or 25% annualized. And because this is a short-term trade, we can turn right around and make a similar trade again for even more income.
Trading this way is the closest thing to having your own personal income machine. It’s easy to learn, and you’ll generate far more income than you ever thought possible. In fact, you could easily generate thousands of dollars per month trading this way.