Last Week’s Stock Market ‘Plummet’ Was Healthy Adjustment, Producing Blue-Chip Buying Opportunities

Last week’s selloff spurred, first, a reversal of the inflation-protection trades done recently.  Then, for sketchy reasons (see Barron’s weekend article, “Why the Dow Just Had Its Worst Week in Months” for a list), a “risk off” selling mood blossomed on Friday.

However, that “worst week” should be viewed positively, for three reasons:

  • First, a subconscious level of worry had built up during the previous weeks as the market shifted from steadily rising to level meandering
  • Second, the cited risks should be ranked as de minimis: (1) The Federal Reserve’s tepid statements about maybe raising rates a bit by the end of 2023 or maybe cutting back on bond buying somewhat next year, and (2) the one-week unemployment claims number that came in slightly above estimates
  • Third, the breadth and depth of the selling is simply out of line with the burgeoning growth now and foreseen this year and next

Therefore, now is a good time to buy stocks and stock funds, even (especially?) the blue-chips.

The picture of a buying opportunity

The beauty of last week’s selloff is that there was widespread blue-chip stock selling. Such broad-based selling reflects a generally bearish stock market view (popularly called “risk off” trading). It is visible in the Dow Jones Industrial Average declining around 5%. This move is the fourth time in the past 52 weeks that the DJIA has delivered such an opportunistic drop. Only one went further – to about 10% – because of extraordinary reasons. This time, there are no indications of such negatives occurring. Instead, the fundamentals continue to be a combination of rising confidence and expectations. Therefore, this selloff looks to be another opportunity — not a first step to more selling.

The graph below shows the Dow Jones Industrial Average 30 stocks’ Friday position relative to their 52-week highs.

This measure is a good indication of a stock’s buying opportunity. The varying levels correspond well with each stock’s general characteristics (e.g., reliable growth) and movements (e.g., price volatility). Therefore, don’t apply the commonly used 10% and 20% rules to all. There are some stocks that offer good buying opportunities at 5-10% declines, others at 10-15% and still others at 15-20%. That is what occurred last week.

Three blue-chip stock examples of buying opportunities

Disclosure: Author holds the three blue-chip stocks (Home Depot
, Honeywell International, and Morgan Stanley
) and increased the holdings on Friday, June 18

The bottom line: Don’t let inflation or Fed disrupt your investment program

Last week’s inflation and Fed worries were premature and uncertain. Moreover, a rising price level and rising interest rates can benefit blue-chip companies. They have pricing power and ample resources to take advantage of both situations – something their smaller and/or weaker competitors may lack.

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