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Make or Break Week – Buy The Dip, HODL or Sell and Go Away?

Calvin Lo

This week will be big for the stock market due to 3 factors:

  • FOMC meeting on 25 & 26 Jan – Fed to set interest rate expectations for the year
  • Earnings from big names like Microsoft, Tesla, Apple, J&J, GE, McDonalds, Caterpillar, Intel, Visa, Mastercard (just to name a few) – Investors will get clues as to the health of corporate America
  • Stock market indices at or below 200-day MA – S&P 500 (SPX) and Nasdaq 100 (NDX) have both just fallen below 200DMA and if they don’t recover quickly we might see more downside ahead
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Credit: EarningsWhisper @eWhispers

Currently all attention is on the macro environment, namely how hot inflation will run and how fast the Fed will raise interest rates in response. Overnight, the market has forgotten about business fundamentals.

Besides that there really isn’t a huge shock to the market so I’m quite surprised at the speed and intensity of this decline.

Microsoft (MSFT) reported pretty solid results and optimistic guidance last night, so hopefully the rest of Big Tech will follow suit.

If you’ve been saving up capital while the market was going on a tear the past year, I think it might soon be time to consider opening up your war chest with valuations coming down to more reasonable levels.

What I’m doing to handle this downturn

I have around 21% of the portfolio in cash ready to take advantage of any continued weakness. So far this year, I’ve deployed about cash of about 7% of the portfolio into index funds VT and QQQ.

Actually prior to this correction, cash position was around 25% but has grown relatively to the rest of the portfolio due to the steep decline in stocks/crypto.

This week is too uncertain and might be very volatile, so I’m not planning to make any big moves at least until next week when I’ll re-evaluate the situation. Besides index funds, I’ve only been nibbling at Tesla (TSLA) and Palantir (PLTR) which I have higher conviction in.

Currently, Nasdaq-100 (NDX) is down 14% YTD and S&P 500 (SPX) is down 9% YTD. I’m considering deploying a bit more cash, say 3-5%, if the NDX or SPX drops below 18%. Based on what I conclude from the historical drawdowns of the US stock market (chart below), only 4 times in history did a more than 18% drawdown result in a more prolonged 30% or more drawdown.

Source: Portfolio Visualizer

Generally, I see two possible scenarios:

  1. Market reverses end of this week and recovers in a V-shape, or
  2. Market continues a prolonged decline as selling momentum continues but slows

I’ve already deployed some cash to take advantage of scenario #1, but I do want to keep a fair amount of cash on hand for the possibility of scenario #2 happening.

I’m not going to try to time the bottom to buy, or sell now and wait for lower prices (I suck at both by the way). What I’m ok with is to hold and see my portfolio suffer more losses in exchange for the opportunity to pick up more shares in my favourite companies at lower prices.

This works for me because I still have an active income and stocks are not a huge part of my net worth yet. Of course, your situation will differ so just take this is my sharing, not financial advice.

That said, I’m trying not to get ahead of myself buying the dip because I’ve been too excited in the past and ended up going in too earlier.

The only selling I might be doing is to let go of losers I’ve lost conviction in, but that should purely be based on fundamentals and not price action. Yes, it sucks to have bought at the top or expensive valuations but there’s no use beating yourself up about it now.

I do as always have to look at each holding an evaluate if it is still worth holding for the long term, and come back to its valuation (which I admit I’ve also lost sight of the past year).

This year has definitely started on a rotten note. It’s pretty demoralising to see my gains from the past year evaporate within the span of a few weeks, but I’m not losing any sleep. If you’re in the same boat, hang in there and try not to panic sell (unless you’re holding trash, i.e. speculative, unprofitable, high-multiple names).

This is an opportune time to regroup, throw out the trash, and double down on some of your highest conviction names which might’ve been too expensive just a few weeks ago. But maybe don’t go overboard just yet. I’m pretty confident this bout of volatility will set us up for nice gains in the future.

Wishing all a Happy Lunar New Year and good luck with your investments in the year ahead!

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Disclosure: I’m long MSFT, TSLA, AAPL, PLTR, VT, QQQ.

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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