Dear Reader,
Rachel Bodden, Jeff Clark’s senior managing editor here…
Our next podcast is in…
Today, Jeff tells us his thoughts on the markets, where he thinks we’re headed, and talks some good sectors to place your money…
Check it out below, or see the transcript on the website or the Jeff Clark Mobile App (you can find the Android version here and the Apple version here).
And remember, send us your questions, feedback, or topics you want us to cover in the future at [email protected].
Regards,
Rachel Bodden
Senior Managing Editor, Jeff Clark Trader
Transcript
Rachel Bodden: Hello, welcome back to another podcast with Jeff Clark. Last time we met was mid-August and the markets were at all-time highs and Jeff was sitting largely in cash. A lot of stuff has happened since then, including a Fed meeting. So Jeff, what’s the latest?
Jeff Clark: Still sitting largely in cash. You know, it’s interesting because, you know, as we headed into September, everybody recognizes the seasonal weakness that typically occurs in September. you know, seasonality hasn’t really worked very well this year and it did not work in September at all. The S &P I think is up almost 4%.
But the same conditions that had me cautious back in August, and also July and also June have me cautious still. And the primary concern that I have is as the market has been running up, as the indexes have been running up since May, fewer and fewer and fewer stocks are participating. And so what’s happened is here we are as we’re approaching October, which is a seasonally poor month, you actually have, think something like 44 % of the stocks in the S &P 500 are trading below their 50-day moving averages. That’s a sign of relative weakness. know, back in May, you had almost 80 % that were trading above their 50-day moving averages. So what has happened is the strong stocks have gotten stronger and the weak stocks have gotten weaker. So where you normally have this typical ebb and flow of the market, it’s all ebb on one side, and it’s all add to the downside for the other section.
You know, I’ve been preaching this for several weeks now. I do think there is a massive reversion-to-the-mean setting up where you’re going to see some money come out of the hot names and move into the lagging stocks. So while I say I’m largely in cash, the positions I have been taking have been mostly to play some of the lagging stocks in anticipation of a catch-up move. And I’m being very, very careful when I say that because I do think if the performing stocks, the technology, the semiconductors, the artificial intelligence stocks, all the names that have been hot, as money comes out of that, it might not automatically start pushing into the lagging sectors right away. We saw a little of that when we got some weakness last week.
Technology stocks sold off and you saw some strength in the energy sector, you saw some strength in the food stocks, but not that much. And then of course, we’ve reversed that obviously in just the past couple of days as the technology stocks are at all time highs again. But I do think that change is coming, but I think we can take our time positioning for that. So my expectation is as we go through October, which again is supposed to be a seasonally weak month, we’ll take advantage of dips in the market and dips in those sectors that have been lagging to add new exposure from the long side.
On the short side of things, shorting this is tricky and a lot of folks it’s not suitable for and so oftentimes you’re better off just sitting in cash rather than trying to short. But if you do have the capability and the emotional stability to try to short stocks, there’s a lot of stocks now that after we had that dip last week, we’re getting this push back up now. lot of those stocks are set to make lower highs and if they do make lower highs and start to roll over again, that’s usually a really, really, really strong setup for a downside move for the next couple of weeks. So I’m looking for stocks to short. A lot of those are in the semiconductor and technology names, but I’m not, I haven’t jumped into that just yet, but I do think as we close out September and we get the quarter in window dressing out of the way, we’ll open up for some seasonal weakness as we get into October.
How’s that for a long-winded answer to that question?
Rachel: It’s a great answer. What were the things that happened in the Fed meeting that were most notable and that you were waiting on to sort of shake out in the markets?
Jeff: I don’t think anything was surprising with that. The Fed lowered interest rates like they thought they would. My stance has always been that lowering short-term interest rates or lowering the short-term target for interest rates doesn’t do anything to the long-term side if you don’t have quantitative easing going on. So I won’t belabor that point much more other than to say that the Fed has control of the short-term target for Fed funds rates, but it’s the bond market controls the long-term rates.
And as we saw last September when they dropped interest rates in the short term, long term rates went up. We’ve seen the same thing. Two weeks ago, the Fed dropped short term interest rates by 25 basis points. Long term rates have actually gone up. They haven’t gone significantly higher yet, but as you know, we’re starting to see hints of inflation coming back. You know, the PCE came out on Friday at 0.3, which was totally expected, but that’s a 3.6 % annual inflation rate. The target is 2%. So if the Fed’s target is almost half of where inflation is right now, or put it another way, inflation is double what the Fed’s target is.
It’s hard to justify an easing stance and the market has been pricing in two more additional cuts throughout the rest of this year. I don’t know if that actually comes to pass. It’s hard to say, but I don’t think I think at this point that the market has discounted the potential for future rate cuts. They don’t get those rate cuts.
There might be a little bit of dislocation on the market. And even if they do get those right cuts, it’s not going to affect the long end. And I’ve shown this oftentimes to subscribers. When you look at the yield curve and you look at a very long term chart of the yield curve, and we’ve looked at 20, 30, 40 years of yield curve, we’re at the point where the yield curve has gone from an inverted state to more of an upward slope. And the four times that’s happened in the past, it’s always preceded a difficult time in the stock market, a difficult time in the economy. so I, even though four times is not, you know, it’s not a big number of examples we can cite, but those four times, the only four times in my entire lifetime they’ve happened. I got to think that maybe this is the fifth time and it’s probably going to happen also. So I am looking for continued disruption in the market, but just in a different nature than what we’ve seen. Like I said, I think there’s going to be some stocks that perform well because I don’t think the money is going to leave the market.
So as folks sell out of the tech names that are trading for 150, 200, 300 times earnings or 50 times sales or these really astronomical numbers, money comes out of that. They will go into the brick and mortars that haven’t done anything. The stocks that are trading eight, nine, 10 times earnings that have not participated in this rally.
Rachel: So let’s jump a little bit longer term. What do you see the market doing in six, eight months from now?
Jeff: Well, I think the broad averages are going to be lower. I think 2026 is going to be a difficult year for the stock market. This, I don’t want to appear too bearish because when the market does have hiccups like that, that’s wonderful opportunities. You know, I often say everybody can make money in a bull market, but it’s the decisions that you make in a bear market under difficult conditions that can actually make you rich.
And so I look forward to difficult conditions. I look forward to a market that sells off because it gives you the opportunity to put money to work at a much favorable valuation measure. Right now, it seems like almost everything is expensive. And when almost everything is expensive, and I might’ve said this last month, it pays to hold cash.
The only thing that’s cheap right now is the US dollar. So I mean, you look at a chart of the US dollar, the US dollar is sitting at a multi-year low. So there’s a pretty good argument that maybe everything else needs to come down a little bit while the dollar strengthens a little bit. And that includes gold. And I hate to say that because I sold out of my gold a few months ago. I think I was out of my last, I still own my physical gold, but my paper gold, the GLD and the various gold stocks, I’ve been out of for a couple of months now. So yeah, I have missed this fantastic move that’s occurred, but now it’s gotten extreme. We’ve reached a parabolic move up in the gold sector and parabolic moves are unsustainable and they always end badly. And so I’m waiting for that to come home to roost. So, I mean, that’s what I see coming.
I think six months from now, the market’s going to look entirely different than it does right now. I think you’re going to see the hot stocks come down a little bit, and you’re going to see the stocks that have been just cast aside because they haven’t done anything, they’re going to perform well. And when I say cast aside because they haven’t done anything, I think in that group is energy stocks.
There are consumer staples that are in that group. There’s food stocks that are in that group. I mean, I’m looking at a handful of grocery chains and I look at these valuations, they’re trading six, seven times earnings. I don’t recall seeing anything like that since looking at a similar situation way back in 2000 where you had the market going gangbusters, but then you had the staples and you had the food stocks and you had the energy stocks not doing much of anything. And that changed obviously when the dot com bubble bust. And I’m not saying necessarily that we have a bubble that has to go bust here in order for that to happen. But I do think, you know, we’ve got a long time without a reversion-to-the-mean correction. We’ve got a long time where momentum has pushed the hot stocks way up and push the cold stocks way down. And we are way overdue for a reversal of that sort of action.
Rachel: So, I mean, asking for a friend if potentially someone has ridden those gold stocks, you know, through this parabolic move, should we maybe trim profits?
Jeff: Well, yeah, but also, know, I admittedly, I have missed out on the move the last couple of months. I haven’t been involved in it. So I can look at it from this vantage point and the gold sector haven’t helped me on this, but the gold sector, if I ever have the guts to short something in that sector, it looks kind of like we’re heading for that opportunity. I try not to short into a parabolic move because you just never know when that’s going to end, but they do end and when they end they tend to erase a lot. The problem if you are chasing stocks into a parabolic move, there’s no way to determine an adequate support level because the stock has never backed off.
Normally when you’ve got a regular stock that rallies and comes down, rallies and comes down, rallies and comes down, you can trace out some support levels. When you have a parabolic move, there isn’t any support level. So when it starts to fall, you’re pretty much clueless as to where buyers might start stepping up again. That’s the danger in a parabolic move, which is why a lot of times those parabolic moves tend to reverse 100 % of the move once they start to correct.
That I think is in store for the gold sector. Granted, three years, four years, five years from now, most gold stocks I think will be higher than where they are right now, just as I said three years, four years, five years ago. I just think three, four, five months from now, they’re going to look a lot different than they do today.
Rachel: I mean, we don’t have to look that far into the past to see a situation where you were like, things are going to fall, things are going to fall, and people didn’t want to hear that. I mean, I’m thinking about the 2022 Tech Rag. You did really quite well predicting that and helping your subscribers through that. Do see a similar kind of situation coming to pass?
Jeff: Yeah, but it’s not such a matter of predicting. I mean, granted, that’s sort of the nature of the game here is we’re supposed to predict where we think things are going. But the market sort of tells you that when things are abnormal, when things don’t go as they normally should, I try to pay very close attention to that.
And when popular opinion is okay with things not going as they normally should. So one of the things I thought was curious over the past couple of weeks is you have a lot of folks on CNBC and Bloomberg and Fox Business all talking about the AI stocks and talking about, you know, the, and granted they’ve been magnificent performers and they’ve been wonderful rallies, but they talk about the justification as to why some of these stocks should trade 100 times sales.
Nothing logically should trade 100 times sales. I mean, we’ll just back that up a little bit. Granted, you say, yes, it’s high growth. And yes, there’s all these wonderful possibilities that exist with that, that’s wonderful, but how far out in time do you want to price that in? And when you go back to 2000 and you look at the dot com bubble, it was the same thing. You had Cisco and Lucent and Nortel and Broadcom and all these stocks just trading at these unbelievable multiples and folks would say, hey, it’s a different world right now, so we have to use different metrics to measure it. Not really, still, a stock is basically priced based on its forecasted earnings potential. Right now we’re forecasting earnings so far into the future on some of these names that doesn’t make sense to buy them at 150 times sales or 200 times earnings or whatever multiple you want. And what’s happening is these folks on TV are saying well no you have to measure it by a different way.
Remember back in 2000, we had to measure dot com stocks in a different way too. We had to measure it based on page views or eyeballs or all these weird old things. Ultimately, it all boils down to earnings. And when the earnings don’t show up or they don’t show up fast enough, stock prices get hit. And the danger is, back in 2000, it wasn’t so much people buying into that big dot com run up that caused the problem. It was when stock prices started to correct.
This is very important to understand. Back in the dot com era, when stock prices started to correct, it wasn’t people suffering is because they bought into the parabolic move higher. It was people suffering because they kept trying to average down on their positions. So stocks that they bought up here, it would fall a little bit. They plow more money in. would fall a little bit. They plow more money in. It would fall a little bit. They plow more money in. And then by the time everything got wiped out, they were 100 % invested and they got totally shafted, I guess is the word.
That’s sort of the behavior I think we might be setting up for right now when you look at these AI stocks. You see these magnificent runs and it’s fantastic as it’s happened, but as they start to come down, folks are going to start averaging in. They’re going to say, it’s my chance to buy XYZ at this price or whatever AI at this price. And as it continues to fall, remember those parabolic moves, who knows where the support comes in, it just tends to keep falling. They’re going to wind up averaging down on losing positions and winding up with a much larger loss than they otherwise would have had.
Rachel: So what’s the best move, so we don’t average down into oblivion…
Jeff: The act of the exasperated sigh. Again, I’m not trying to be Nostradamus here. I don’t see gloom and doom, but I like the idea of the potential to be able to buy some of these assets at much cheaper prices. And that’s why I’m cash heavy right now. That’s why I was cash heavy last month.
So yeah, I look like an idiot for the past couple of months because I’ve been preaching caution, but at the same time, I know prices are going to come in. I know we’re going to have a chance to buy these stocks at cheaper prices. Yeah, maybe I missed the shot at buying the stock at 20. It goes to 25 or 30 because I think it’s going to 15. I’ll hold out 15.
Rachel: Let’s just keep telling our readers to put down the ice cream and not downsize into oblivion. I’ve heard of more than one great investor getting really wrecked by following names that they thought would recover and go back up and just never did.
Jeff: Well, yeah, there’s I mean, the internet is forever and you can go on YouTube and you can find any number of pitchmen from 2000, 2001 talking about these wonderful stocks and how you buy it to buy them and the future of all these and so many of them don’t exist anymore. So there’s that.
Rachel: What’s your favorite strategy for right now?
Jeff: Right now, like I said, I’m hoping to use weakness in certain sectors to position for the long side because I do think you’ll see strength in certain sectors. Energy stocks look good to me going out several months. If you say, know, where are the opportunities for the next six months, I think energy stocks, food stocks. I think there’s some retail stocks.
I’ve recently been talking about Target, you know buying Target. Target’s a beaten down retailer, but it’s trading at 11 times earnings, which I can’t recall the last time Target traded 11 times earnings, and I think it has a 5 % dividend.
That seems to me to be pretty cheap, know, relative to, you know, competitors in the space. If you look at Walmart or you look at Costco or you look at some of the other big box retailers that out there. So Target looks cheap to me. I’m not just arbitrarily jumping in and buying stuff, but I think that looks cheap. I think there’s a lot of food stocks that look cheap.
I won’t give the names out here because I’ll save that for subscribers, but we’ve had a couple of food positions that we’ve done decently well on recently. And those have been beaten down names. I think energy stocks are in the same group as well. I used to talk bullishly about the healthcare stocks, but they’ve had such a phenomenal game of catch-up since last month when we talked about them, I think, in the podcasts last month that I kind of hold back now because they’ve run up 25, 30 % many of them.
So I’d wait for those to come in a little bit. There’s nothing in the semiconductor space I can find much value in. I think that’s not that that sector has to come in and there’s nothing on the gold space that I can find much value in. And those have been the two hottest sectors. So sort of, you know, I’m looking kind of like an idiot for not participating in that in the last two months, but I think we’ll have better opportunities to buy into those sectors in the months ahead.
Rachel: Sounds great Jeff. I have 2 questions from the same newbie trader and I think that you can help with him. His name is Steve and his 1st question is pretty standard, but I think it’s always kind of worth repeating. He asks, what do you recommend my initial deposit be?
Jeff: Well, that’s an impossible question to ask because I don’t know the person’s personal circumstances. If you employ the sorts of strategies that I do, where I trade options, and this is probably a good time to talk about how I trade options. I’m a very conservative option trader. What I try to do is if I like a stock, let’s say I like Target, and Target goes for something like $88 a share right now. So 100 shares of Target would cost me $8,800.
What I try to do is I figure out what I’m willing to risk on target. So if I buy a hundred shares in stock at $88, so it’s 8,800 bucks, and maybe I’m willing to risk a 10 % move. So $880. So I’d be willing to put in 8,800 for 100 shares of target, and I’m willing to risk 10%. So I would suffer a loss of 10 % and I’d say, okay, I’m wrong, I’m out of the trade. That’s 880 bucks.
Rather than buying the stock, I would take that 880 or probably a little bit less than that, and I’d go over to the option market and I’d see if there’s an option trade that I can make using that $880 that allows me to increase my profit potential while limiting my risk.
Oftentimes what I’ll do is I’ll cut that in half. I’ll take $440 over. So now no matter what happens, I’m going to lose less in my option trade than I was willing to risk on the stock trade. And then in the option market, I can probably buy two or three or four option contracts, call option contracts, giving me the right to buy target. So I’ll utilize that type of a strategy. That way I’m using $440 in my option trade. The balance of that, the other as I work out to $8,360 is sitting nice and tidy in my bank account or money market fund or whatever, earning whatever interest, and I still have a similar position, but my risk is dramatically reduced.
That type of trading, it’s conservative option trading, but it requires a much smaller account size. So I would say, if you have $10,000 or so, if you’re starting off with $10,000, then you can, using that as a good example, implement a lot of the buying options strategies that we utilize in my services. If you start talking about uncovered options, and we sell a lot of uncovered puts, we’ve done combination strategies, that sort of thing.
Most brokerage firms require you have at least $10,000 to do that. And I think it’s probably more conducive if you have closer to $25,000 because that opens up the opportunity of doing spreads and straddles and some of the more complex option combinations. So minimum 10,000.
Preferably 25,000 and it’s from there. But really it’s how much do you want to risk on any one position? I usually tell folks not to risk more than two or 3 % of your account on any one position. And if you utilize the strategy the way I’ve just described, or you’re whatever it is you’re willing to risk and you’re taking that over to the options market and just using a portion of it, then I think you can do that with a small account.
Rachel: You inadvertently answered a second question as well. So good on you, Jeff. Way to go. Incredible. Well, that’s really all we have time for for today’s podcast. But I look forward to getting together with you next month and doing the same thing. And remember, if you have questions, comments, feedback, we absolutely need to have it here so we can answer more things for you guys. So remember, write that to us at feedback at jeffclarktrader.com.
And we’ll answer your question in a future edition of the podcast.
Jeff: Yeah, and I’ll also say if there’s something you want me to talk about that we haven’t talked about before, hit us up. Let us know that that’s the subject matter you’d like to see discussed. Because I don’t think we talk about Bitcoin much. We don’t talk about currencies or anything like that much. Everything’s out there. So we can do anything.
Rachel: So, let us know what you want to hear. We’re doing this for you guys. Thanks Jeff.
Jeff: Thank you, Rachel. Take care.