Get Ready for a Washout Buying Opportunity

Editor's note: This Weekend Edition, we're taking a break from our usual fare to share an update from our corporate affiliate Chaikin Analytics. In this adaptation of a Chaikin PowerFeed essay, Marc Chaikin explains the three forces that are pushing stocks down today. He also reveals the sectors that are set up for success... even before the next stock rally takes off. 

I've spent decades using data to track Wall Street. But sometimes, Wall Street just comes right out and tells you exactly what it's thinking...

JPMorgan Chase CEO Jamie Dimon is Wall Street's ultimate insider.

In early June, he warned folks to get ready for a financial "hurricane." And he followed it up by saying that he "just wouldn't bet" on the hoped-for "soft landing."

Now, the phrase "soft landing" is important. Dimon is alluding to the Federal Reserve...

The Fed hoped to cool inflation while avoiding a major recession. But that looks less likely by the day. And now, Wall Street's ultimate insider is echoing that sentiment.

It's not surprising. Inflation is rampant. And the Fed's plan to tame the beast involves a series of large interest-rate hikes and a rapid unwinding of its balance sheet.

During 15 years of monetary and fiscal stimulus, price inflation didn't occur – but asset inflation did. Growth stocks, cryptocurrencies, special purpose acquisition companies ("SPACs"), leveraged buyouts, and more all benefited from the Fed's "easy money."

Mega-growth stocks, story stocks, and bitcoin alike defied gravity and soared to excessive heights during the golden era of quantitative easing and fiscal stimulus.

But that has all changed now.

The Fed's unwinding of these excesses isn't over. And the day of reckoning is getting closer.

In short, a threefold dynamic is driving stock prices lower...

  1. Rampant inflation higher than 8%, year over year.
  1. Impending interest-rate hikes and deleveraging of the Fed's balance sheet.
  1. A collapse in price-to-earnings (P/E) ratios – particularly for the megacap and speculative growth stocks that led the bull market to all-time highs.

This last part is important. Valuations have tumbled. The P/E ratio for the S&P 500 Index has already fallen substantially from its peak. But the thing is... it can drop even further if growth hits a wall.

In previous Fed rate-hike cycles that happened quickly, like today's, P/E ratios didn't bottom out until well into a bear market. That's when analysts started cutting their earnings estimates.

That brings us to the biggest unknown – and the biggest risk – for the stock market...

I'm talking about corporate profits in the second half of 2022.

Wall Street analysts are still looking for a robust rebound in corporate profits. But that seems too optimistic...

You see, inflation is rising sharply. As a result, so are wages and cost of production. With that in mind, company guidance in second-quarter earnings reports could be weak... And that could lead Wall Street analysts to lower their full-year 2022 estimates across the board.

That would cause a further contraction of P/E ratios... which could lead to another mass sell-off. But it's not all bad news...

Because that's how market bottoms form.

You should be prepared for a washout buying opportunity to happen later in 2022. It could happen as soon as September or October. By then, the S&P 500 will likely be between 3,400 and 3,600 points.

For now, the market is telling us to keep looking for opportunities in the best-performing sectors: energy, metals and mining, chemicals, food, aerospace, defense, and health care.

And on the flip side, we want to avoid struggling sectors, like technology, consumer discretionary, and telecommunications.

Until a bottom forms, we need to stay patient and focused. It's always tough to stick to your game plan in turbulent markets... But fortunately, the next opportunity could come sooner than you realize.

Good investing,

Marc Chaikin

Editor's note: Marc says the historic shift that's underway will pummel investors. But it's not too late to prepare for it... or even profit from it. That's why he's coming forward with a warning from his system, sharing the specific stocks in danger of crashing next – along with a massive opportunity that could create multiple 300% to 500% winners, once the dust settles. Learn all the details right here.