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How to Best Navigate the Ship Through This Choppy Market Environment
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A strong performance out of the gate this year has put the bulls back in charge. While the underlying strength is certainly a welcomed sight, not all sectors have participated in the bounce higher. Even as technology has outperformed with the Nasdaq surging nearly 14% year-to-date, many other areas have lagged, frustrating investors in the process. The choppy, back-and-forth price action is toying with investor emotions from hope to fear and back again, making for a difficult market environment.
Still, there are a host of reasons why stocks can continue rallying in the current investment landscape. We have positive seasonality underway, with the bullish latter half of April upon us. We have technology leading this year, which is the opposite of what we saw last year. We have treasury yields falling, providing another tailwind for equities.
Inflation Trending Down
We also have inflation continuing to subside from a 40-year high. Yesterday we learned that March CPI rose 0.1% for the month, lower than the 0.3% expectation. CPI increased 5% year-over-year, also below the 5.2% consensus estimate – and a full percentage point below February’s 6% gain. Core figures of 0.4% month-over-month and a 5.6% yearly increase both met estimates.
Continuing the trend, this morning we received March PPI data from the Bureau of Labor Statistics, which showed producer prices in the U.S. declined to 2.7% on a yearly basis. The reading was down from 4.9% in February and lower than the median projection of 3%. Annual core PPI dropped to 3.4%, matching expectations.
Despite the March inflation data pointing to a sustained cooling off period, markets sold off yesterday. Minutes from the Federal Reserve’s most recent policy meeting showed that officials forecast the economy would likely slide into a recession later this year. Committee members expressed concerns over the recent banking crisis and scaled back their future rate-hike expectations.
Still, the possibility of a May rate hike is very much on the table, with current odds showing a 63% chance of a 25-bps hike.
How to Navigate This Market
How do we go about operating in such a choppy environment? Our Zacks Rank system can help identify industries and individual stocks that can sidestep the volatility. By focusing on stocks that are witnessing increasing earnings estimate revisions, which have been shown to be the most powerful force impacting stock prices, we can tilt the odds in our favor.
We want to stick with the leading groups. The Zacks Internet – Software industry group, which currently ranks in the top 22% out of approximately 250 industries, contains a high number of top Zacks Rank stocks. Targeting individual stocks contained within the leading industry groups provides a constant ‘tailwind’ to our investing success. We can see the steady outperformance this year below:
Image Source: Zacks Investment Research
Also note the favorable characteristics for this industry below:
Image Source: Zacks Investment Research
Because it is ranked in the top half of all industry groups, we expect this group to outperform the market over the next 3 to 6 months. Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
Let’s examine a top-ranked stock in detail within this leading industry group.
Sea Limited engages in the digital entertainment, e-commerce, and digital financial service businesses internationally. Its entertainment platform offers users access to mobile and PC online games as well as eSports operations. SE’s e-commerce platform provides a mobile-centric marketplace designed to integrate payment and logistics infrastructure and seller services. In addition, SE offers payment processing and mobile wallet services.
Sea Limited has surpassed earnings estimates in three of the past four quarters, with an average earnings surprise of 69.65% over that timeframe. Just last month, the company posted Q4 earnings of $1.25/share, beating the -$0.75 Zacks Consensus Estimate by 266.7%. SE stock has surged more than 60% on the year.
Image Source: Zacks Investment Research
Earnings estimates have been on the rise as of late. For the full year, analysts have raised ’23 estimates for SE by an astonishing 2,376.9% in the past 60 days. The Zacks Consensus Estimate now stands at $2.96/share, reflecting staggering growth of 329.5% relative to last year.
Image Source: Zacks Investment Research
Keep an eye on the tech sector to uncover leading stocks like SE.
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How to Best Navigate the Ship Through This Choppy Market Environment
A strong performance out of the gate this year has put the bulls back in charge. While the underlying strength is certainly a welcomed sight, not all sectors have participated in the bounce higher. Even as technology has outperformed with the Nasdaq surging nearly 14% year-to-date, many other areas have lagged, frustrating investors in the process. The choppy, back-and-forth price action is toying with investor emotions from hope to fear and back again, making for a difficult market environment.
Still, there are a host of reasons why stocks can continue rallying in the current investment landscape. We have positive seasonality underway, with the bullish latter half of April upon us. We have technology leading this year, which is the opposite of what we saw last year. We have treasury yields falling, providing another tailwind for equities.
Inflation Trending Down
We also have inflation continuing to subside from a 40-year high. Yesterday we learned that March CPI rose 0.1% for the month, lower than the 0.3% expectation. CPI increased 5% year-over-year, also below the 5.2% consensus estimate – and a full percentage point below February’s 6% gain. Core figures of 0.4% month-over-month and a 5.6% yearly increase both met estimates.
Continuing the trend, this morning we received March PPI data from the Bureau of Labor Statistics, which showed producer prices in the U.S. declined to 2.7% on a yearly basis. The reading was down from 4.9% in February and lower than the median projection of 3%. Annual core PPI dropped to 3.4%, matching expectations.
Despite the March inflation data pointing to a sustained cooling off period, markets sold off yesterday. Minutes from the Federal Reserve’s most recent policy meeting showed that officials forecast the economy would likely slide into a recession later this year. Committee members expressed concerns over the recent banking crisis and scaled back their future rate-hike expectations.
Still, the possibility of a May rate hike is very much on the table, with current odds showing a 63% chance of a 25-bps hike.
How to Navigate This Market
How do we go about operating in such a choppy environment? Our Zacks Rank system can help identify industries and individual stocks that can sidestep the volatility. By focusing on stocks that are witnessing increasing earnings estimate revisions, which have been shown to be the most powerful force impacting stock prices, we can tilt the odds in our favor.
We want to stick with the leading groups. The Zacks Internet – Software industry group, which currently ranks in the top 22% out of approximately 250 industries, contains a high number of top Zacks Rank stocks. Targeting individual stocks contained within the leading industry groups provides a constant ‘tailwind’ to our investing success. We can see the steady outperformance this year below:
Image Source: Zacks Investment Research
Also note the favorable characteristics for this industry below:
Image Source: Zacks Investment Research
Because it is ranked in the top half of all industry groups, we expect this group to outperform the market over the next 3 to 6 months. Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
Let’s examine a top-ranked stock in detail within this leading industry group.
Sea Limited (SE - Free Report)
Sea Limited engages in the digital entertainment, e-commerce, and digital financial service businesses internationally. Its entertainment platform offers users access to mobile and PC online games as well as eSports operations. SE’s e-commerce platform provides a mobile-centric marketplace designed to integrate payment and logistics infrastructure and seller services. In addition, SE offers payment processing and mobile wallet services.
Sea Limited has surpassed earnings estimates in three of the past four quarters, with an average earnings surprise of 69.65% over that timeframe. Just last month, the company posted Q4 earnings of $1.25/share, beating the -$0.75 Zacks Consensus Estimate by 266.7%. SE stock has surged more than 60% on the year.
Image Source: Zacks Investment Research
Earnings estimates have been on the rise as of late. For the full year, analysts have raised ’23 estimates for SE by an astonishing 2,376.9% in the past 60 days. The Zacks Consensus Estimate now stands at $2.96/share, reflecting staggering growth of 329.5% relative to last year.
Image Source: Zacks Investment Research
Keep an eye on the tech sector to uncover leading stocks like SE.