Take advantage of stock declines

AAs the saying goes, “Out of the ashes will rise a phoenix”. And the same can be said for our current market.

Fortunately, the Fed recently acknowledged strength in household spending, industrial production, business investment and a robust labor market in the first quarter. They even expressed optimism for a solid second quarter and solid GDP growth for the rest of the year.

While this is very good news for our economy, there is no way to time the market or predict adverse economic events. This is why investors should pay attention to what the Fed says – so they can put themselves in a better position to weather the impending market volatility.

Because investor sentiment, at the moment, is more pessimistic, there is the possibility of buying stocks that have been burned, but still have the potential to soar, which is the secret to gaining momentum. ‘silver.

This article will help you find more of these stocks.

There is a somewhat new phenomenon called “V” shaped recovery. It’s basically a quick downward motion followed by an equally quick upward motion. People who watch every tick of almost every stock will have an advantage over most investors; they know the best time to go back.

This leaves most investors out in the cold unless they have the guts to resist big dips. But who among us hasn’t panicked even a little during the Coronavirus fix?

Markets come back, some stocks not

Reeling from the effects of the pandemic, it seemed almost every stock suffered from the market-wide sell-off. But most have regained the ground they lost, and more! Glamorous stocks, those that enjoy wide media coverage, are among the first to recoup these losses.

The problem is, the speed at which glamorous stocks are regaining traction can be mind-boggling. Actions that don’t recover all at once should be the ones you should focus on. The problem is that there are just too many of these actions and some of them will never be in the media spotlight.

Fortunately, there are stocks that get beaten up, stop at or near the bottom, and then start to rally higher. These stocks usually have something in common; it’s a combination of upgrades and revisions to higher earnings estimates.

After . . .

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measuring fear

Often, market-wide sales are based on macroeconomic events. Sometimes this happens when a major economy seems about to slip into a recession (Germany). Other times, it could stem from a turbulent business climate and slower-than-expected economic growth (China). These macro events tend to cause sudden and severe price changes in all markets.

There are, however, signals that tell us when traders expect a big change in the direction of the markets. It’s not a foolproof signal, but it has warned traders many times in the past. The indicator I’m referring to is the VIX, a measure of market volatility.

Without going into too much detail, suffice it to say that as the VIX increases, so does the fear in the market. Professional traders who have the powder dry often hold their noses and plunge into the mess of the markets when the VIX hits highs. As the index begins to return to more acceptable levels, regular investors tend to follow suit.

Analysts call the bottom

While traders and day-to-day market watchers have the VIX to watch, those who focus on day work most of the time find themselves with a different barometer. One of the greatest sources of information on market developments (which does not come directly from the company itself) are analyst reports from brokerage houses and specialized research firms.

Most analysts will simply weather the volatility of their respective foxholes and keep their heads down. There are some, however, who will come out on a branch when they think the time is right. I’m not talking about the analyst improving the glamorous stock, it’s the stock few have heard of that fell single digits.

These big corrections give analysts the chance to really go out of their way and start hedging or upgrading one of those unloved stocks that have dropped dramatically in price. These events don’t happen often, but soon after things start to improve, upgrades will bring these actions back into the double digits.

The best part of the upgrade

When analysts improve a stock, they tend to say that the story has changed and the outlook is improving. Following a major macroeconomic correction, some stocks are slipping below the double-digit threshold and this is perhaps what has some analysts salivating.

It’s no surprise to most when I say that some upgrades are better than others. The total reversal from selling to buying is large, but the upgrade that carries the most weight is the one that comes with a large increase in earnings estimates.

Not only is the analyst saying the stock price is undervalued (thanks to the macro correction), but the outlook has improved significantly and earnings estimates are being revised up accordingly. Other analysts see this upgrade and after some homework might come to the same conclusion. The best outcome is a series of upgrades with an equally strong series of revisions to higher earnings estimates.

While there are plenty of market sources reporting daily upgrades and downgrades, few monitor estimated revisions as closely as Zacks Rankings. And you can use the Zacks Ranking in conjunction with macro sells to find stocks analysts like and forecast improved earnings.

Surfing the rebounds

If you are looking for one of the most potentially profitable ways to profit from rebounding stocks, I invite you to join the investors by following the trades live in our Stocks Under $10 wallet.

We focus on companies that are ready to make big upside moves. We enter when the Zacks Ranking and other proven metrics point to upcoming success and lead them to serious growth. For example, we recently closed positions with gains of +108.6%, +110.4%, +393.8% and even +995.2%

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Better,

brian

Brian Bolan is our aggressive growth expert and the editor of Zacks Stocks Under $10 wallet.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by the editors of the Zacks Investment Research newsletter and may represent the partial closing of a position.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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