Momentum, fear & the case for buying the dip

0:09Steven Cress:I am very happy to welcome back Mr. Steve Cress to our Investing Experts podcast. It's always great to talk to him. Welcome back to the show, Steve. Hey, thank you so much for having me and organizing this. I appreciate it. So I don't know if our listeners know, but you and I have started to talk every single morning right at Market Open. And we have been releasing those conversations at Crest Top Stocks on YouTube and TikTok and Twitter, otherwise known as X. I will leave those links in our show notes. So you and I have been talking broad strokes of the market this past week, last week. And it's a bit of a confusing time, especially as that market then gauges its sentiment on specific stocks, much to the surprise of us passive watchers, intensive observers, etc.

0:59Steven Cress:How would you articulate what the market is looking like these days? Yeah, I feel like when we talk in the morning, every morning it's been comprised of stocks that have reported results, often results that are good and the stocks are getting slammed. But it's been interesting to talk about these stocks as it's occurring. And I think there's a reason and a simple reason to put forward the CNN fear and greed index. It's actually a sentiment indicator, and it's made up of a number of underlying metrics that are meant to give a view into what is happening with the market in terms of sentiment. And there are a number of different options, derivatives, high-low indicators in it.

1:47And, hey, it's CNN, but they hit all the major, I'd say, benchmarks that I think are fairly good for sentiment. So that's why I shot. So what's really interesting is right now we are at a fear level of 34. A week ago, we were in neutral territory. and probably about two weeks ago, we were actually in the greed zone. So the markets have changed, but I would certainly say going back way more than just a few weeks, if we went back to the beginning of June, we found that we were sort of in a period where a risk was on the table and a number of AI stocks and semiconductor stocks were hitting highs.

2:33and it was sort of around that period that a bunch of headwinds started to emerge in combination with a lot of investors and traders believing that ai stocks were overvalued and it sort of started this period where uh the socks the philadelphia semiconductor index which is known as the socks index is now roughly off about 25 % from its 52-week high. And sort of bringing down or, you know, the stocks that have brought that down are made up of some of the semiconductor companies and AI companies that have had absolutely stellar record results in terms of their revenue and in terms of their earnings, but the stocks have been brought down.

3:21So what are some of the headwinds that are out there. We've been dealing with a situation where inflation has been a little bit stickier than expected. And with the new Fed chair coming in, he's actually been a little bit more hawkish than most people expected. So as a result of that, I wouldn't say the market has gone into a panic, but it definitely went into a rotation phase. We wanted to risk off. And investors and traders started shifting to safe haven stocks and cash. So we saw an outflow coming out of IT and specifically AI stocks and semiconductors and a flight of capital more into real estate, into some consumer staple stocks, finance stocks as well.

4:05And as the weeks have progressed since the beginning of June, the war with Iran has not gotten any better. there were probably, I'd say in April, May, a lot of discussions going on in regards to treaties, and that seemed to just fall apart. And in fact, we've had a couple of hot points since June that have just made it worse. On top of that, you are now entering a seasonality effect from September. September historically is the worst of months for the market. And we are also entering midterm elections. And going back to 1925, during midterm election years, there has always been a pullback from the 52-week high.

4:50So we've been experiencing a number of these just happening at the same period. This negative sentiment has been aligned. People have been fearful. This rotation has occurred. And as I mentioned, even companies that are coming out with good numbers are not doing Well, case in point, if we looked at NVIDIA, they just came out with their results about a week ago. And despite having those strong results, which maybe temporarily lifted chip stocks for a day, it immediately turned around. And people, investors, traders focused on higher yields and rate concerns. And it drove continued profit taking out of many AI stocks and semiconductor stocks.

5:31So fast forward to today, the markets are actually up quite nicely. And it was led off by one of the governors from the Federal Reserve saying that inflation actually has not been as bad as they expected. And there could be a case where we do not see rate hikes occur for the rest of the year. I'd say interest rate traders and investors have been pricing in one to two interest rate hikes for September and going forward. And it looks like immediately today, the interest rate traders have lowered their probability of that rate hike. And that has really helped out a number of stocks in the overall market.

6:15Particularly, we found Snowflake, a software company. And software stocks were some of the first technology stocks to really come off. So even though we saw an incredible year for many AI stocks and many semiconductor stocks, software got hit particularly hard because investors felt that AI would take away from the SaaS-based stocks. And lo and behold, Snowflake reports and says that AI is actually helping to make them more efficient, more profitable, and increase sales. So today we've seen a big pickup in the software stocks. Semiconductor stocks still are not doing well. But really what happens if the case proves out for the software stocks, it actually proves that the infrastructure build out for the data centers and the servers is falling into place.

7:06So it actually validates the AI infrastructure and semiconductor story if we see the software stocks do well. Also, as I said, we're hitting sort of a seasonal period. And when you hit seasonal periods, there are peak periods. There are chaff periods. And we're coming upon the period where negative sentiment and fear will sort of max out fairly soon, though we'll probably be exhausted amongst many investors trying to figure out the rotation. So a lot of the stocks that have fallen sharply will probably start to bottom out fairly soon. So what I wanted to highlight was a number of these growth stocks that have been in the AI segment, either directly or indirectly, have been quite a crowded trade.

7:50A lot of hedge funds have been invested in there, institutions have been invested in there, and retail investors have been invested. So what we saw as a terrific period in July, which is captured by a momentum index. So there are a couple of core factors that we look at from a quality perspective. We look at value, growth, profitability, analyst EPS revisions, and momentum. and we have studies that go back almost 250 years where there's empirical data that shows momentum is one of the best factors and as a factor, it was working out really, really well in July, but then as it went into August, it fell 9 % and that is a dramatic fall for an index in a one month period.

8:36I believe it was one of the greatest falls that we've seen in a 19 year period for momentum. So momentum Often people will say that's sort of like chasing stocks. Again, it is a very good indicator. It's very predictive in terms of future stock price returns. But when it doesn't work, it can hurt hard. However, when we look at the past 10 corrections of 10 % or more in the momentum ETF, we found that the ETF gained an average of 12.4 % over the next three months and more than 24 % over the following year with positive returns roughly in 90 % of the cases. So what that tells us is when you have companies that have strong fundamentals, as many of these do, quarter after quarter, they've been exhibiting record revenue and record earnings.

9:28This last quarter was exactly the same. We saw the companies with great results, but simultaneously, many of these stocks got hammered. So what the momentum indicator tells us is that the reversal back is often quite strong. So whenever it falls, as it has in August, in the following three months and in the following year, there is a sharp, violent rally back, which is very positive. So in essence, it's saying get your shopping list ready. Look at companies that have good fundamentals that have been hit hard. This is a chance to buy on a dip. And history has shown here, particularly with this particular benchmark, in 90 % of the cases, that it had a significant rally back in a matter of three months and 12 months.

10:16AlphaPix, which is a product that has performed incredibly well, has suffered this on a number of occasions in the past. So I wanted to point out some examples from past performance during periods where negative sentiment and moves to defensive safe haven sectors were having a big impact and a big negative impact on the portfolio. So we go to April 15th, 2025. We were hitting a period then where tariffs were being factored in, inflation fears were rampant as a result, and the year-to-date performance for Alphapix, which almost always has outperformed the benchmark, had really reversed. overall since inception, it still significantly outperformed the S &P 500.

11:01But in that year of 2025, at that point in April 15, the portfolio was down 15 % versus the benchmark down 8%. And a three-month return was down 17 % versus the benchmark down 7%. So how quickly can momentum have a positive impact. And when negative sentiment fades and investors return back to fundamentals, this displays how quickly things can turn around. So we're looking at April and then we're looking at June. So you have April, May, June. Okay. Really within a two month time period, the year to date return flipped from negative 15 % to flat. And the three month return went from negative 17 % to a positive 18%.

11:48And that was basically for a two-month period. It was flat out of the year. When we finished the year in 2025, AlphaPix was up 41 % compared to the benchmark up 17%. And the previous year, AlphaPix was up almost 50 % compared to the benchmark up 24%. And in 2023, AlphaPix was up 58 % compared to the benchmark up 26%. Going back to 2025, you can see we finished a year up 41%. And if you go back to that April period, remember, it was down 15%. So AlphaPix, which focuses on stocks with strong fundamentals, went from a position of being negative 15 % to finishing the year up 41%. So I sort of wanted to touch base to let you know, when you do get into periods where there is risk off from risk on, negative sentiment impacting the market, negative headwinds, and the headwinds right now are inflation, interest rates, AI stocks that were overextended, that really no longer are overextended.

12:58Of course, seasonal September weakness and midterm elections coming up, and a war. There's a lot out there to introduce negative sentiment, that has been discounted into the stocks at this point. And probably relatively soon, I was looking at a study from Citadel Securities, where they were looking at the September effect and midterm elections. And they figured that the lowest point of the market typically was right around the beginning of October. And if you bought into the market during that period, you did incredibly well following it. So, Rita, let me open it up to any questions that you might have.

13:35Steven Cress:Well, last time you were on, we were talking also about this market uncertainty and you were recommending this barbell approach as you like to do, as has been evidenced by the success in that barbell approach, one for growth and one for income. What would you say in terms of the approach in this specific moment and what you've seen based on how stocks have recovered, based on how strong fundamentals have really proven their worth. What's one or two stocks that come to mind as evidence of this strategy or as a way to showcase to investors how stocks can move even as the market whipsaws back and forth?

14:16Yeah, I think we're definitely at a phase still where the market is whipsawing back and forth. And it could change week to week with some of the economic indicators that could be coming out. if any of the economic indicators that there is wage inflation or other elements of inflation that will put fear back into the markets. And it looks like they're based. And the Fed was pretty clear that target rate inflation of 2 % is where we want to be and we're not there. What they're trying to wrap their heads around is inflation going to get worse or will start to settle down. I believe what they're saying is if inflation settles down and it's not too bad and the labor market is okay, they can leave rates unchanged.

15:04So that could be a likely scenario based on some of the data points. Tomorrow we have a data point coming out. So the market really could still continue to whipsaw. What I will say is that a number of stocks looking at the barbell approach and looking to be opportunistic uh if we zero in on that there are a couple stocks that have gotten slammed so if we take a look at a company like credo technology this stock has really fallen just on august 17th so just a couple weeks ago it was 282 and right now it's currently trading at 165 dollars uh which is crazy because when we look at the company they just reported results.

15:46And we could see that their EPS of$1.20 beat by three cents and their revenue of$479 million beat by$7.29 million. So it beat both top and bottom line, but the market was absolutely ruthless. It was off about 20 % the other day. And the guidance really wasn't that bad from the management team. What happened is their gross margins were a little bit lower. And typically what happens when you have a stock like this that's growing as fast as it does. Overall, quant grade is A +, and there's a good reason that it's A+. Revenue growth is growing at 106%. That's Wall Street consensus. Bottom line number is EPS per share consensus is growing at 139 % compared to IT growing at 17%.

16:37So this is a major, major growth story. And the valuation framework is actually fairly attractive, comes in as a B. Some of the conventional metrics, such as PE, are at C -, which more or less puts it in line with the sector. But if we look at PEG, that's an A - on a PEG basis, which is where you combine both PE and growth together. So it's a much more encompassing metric that I really like to use. From that valuation standpoint, the stock is at a 71 % discount to the sector, 71 % discount. So when we look at that from a valuation perspective and the unbelievable growth, this to me ends up being a huge opportunity.

17:17Again, the stock currently trading at$165. It was off 20 % a day ago, and it is off significantly from its June 18th high of 271. I think in coming weeks, this stock will probably be bottoming out. And when investors start returning to fundamentals and fear and sentiment and anxiety fade, they'll probably come back to a stock like this because the growth is so strong for the company.

17:48Steven Cress:Can I ask a question that was asked in the comment thread? Please. For those AlphaPix subscribers, Steve wrote an article on this topic recently called Why Conviction Matters in Uncertain Times. and I thought there was an interesting comment, especially in the face of how jobless claims are pushing the market, how interest rates are such a big part of the conversation, what or what isn't going to happen there, and how that may or may not affect the market. So RxG267 said, despite the choppy recent performance, I love this system, meaning Alphabix, and I agree with you that we shouldn't judge the quality of recommendations based on short-term performance impacted by factors that we can't predict.

18:30Steven Cress:I was wondering, though, if there is value in adding an economic filter to this purely quantitative system to prevent or reduce drawdowns because of known predictable events. For example, if we know that bond yields are going up without an immediate end in sight, can we add an additional layer that recommends the percentage of cash that we should temporarily hold? Alternatively, we could issue slightly more aggressive sell signals based on the macro rotation outlook, leading to moving out of high beta stocks in a risk-off environment? Okay. So I think that is an excellent question. And probably a lot of people are wondering if we could do something along those lines or sort of questioning the quant model and how it incorporates economics.

19:14So first, I should say this is really a bottom-up approach. it is a systematic model that is looking for companies that are collectively strong on value growth profitability positive eps revisions and momentum so those are the five core investment characteristics that we look at and we screen out companies based on those characteristics on a relative basis to other companies in the sector so that enables us to separate the strong from the week when we combine those metrics together. And that's how we identify if a stock is a strong buy. In regards to sort of the macro environment, I would say even though we're using a bottom-up approach, our model is both historical-looking and forward-looking.

20:03So I mentioned when we look at revenue growth and EPS growth, we're using consensus forecasts from analysts. Many of those analysts will often bake into what's happening either from a macro level or micro level into their stocks. So to a certain extent where the analyst makes those adjustments, that does get baked into the forward forecast that we use. Again, it's a consensus forecast from analysts, and many analysts will take a look. If interest rates move up to a certain level, what impact will it have other companies? They will build that into their earnings models. And when we take a look at the consensus for earnings, that is usually a way that works its way in.

20:44So I feel like indirectly, we do have that in the model. Directly, we don't. We're not looking at economic metrics and trying to make decisions. We're trying to make decisions based on a bottom-up approach. For the most part, we really would avoid listening to an economist or a market strategist or any talking head. And what we try to do is just stay disciplined and then find the stocks with really good fundamentals. Now, what we've been seeing is that we have stocks, particularly in AlphaPix, I think 33 of the 41 companies in the portfolio just reported better than expected earnings and better expected top line.

21:27So the stocks in the portfolio are actually performing in accordance with what we would expect with regards to the fundamentals of the company. What's not performing well is the stock price because stock prices are being impacted by sentiment. Sentiment is being impacted by war, rising interest rates, inflation, and fear and anxiety in general. And that we have found historically is not a good way to invest. But simultaneously, what we have found is when fear and anxiety are running very high, that is actually an opportunistic time to buy stocks that have good fundamentals when those stocks are low.

22:05And at the end of the day, the name of the game hasn't changed. It's buy low and sell high. So when these opportunities become apparent, it's a great time to buy in the dip. So hopefully that answers your questions to a certain extent. We are data-driven approach, a bottom-up approach, but we do believe since we incorporate forward estimates into the model through consensus, that that does reflect what's happening with the economy and the moves that analysts make based on their foresight.

22:34Steven Cress:Can I read another comment that I feel like speaks very much to, I guess, well, I think it speaks for itself. I'm not even going to intro it. I'm just going to read it. I think it's a great comment. It's by BlueBlack, and it's also on the same article. As someone who has been following Alphapix stocks since 2024, I've seen many selected stocks fall into the red only to recover massively and outperform the market. As such, I think Alphapix is a great service. The stock market hasn't been abolished, so there's no reason why many of today's red Alphapix stocks won't be mega winners in time. 2026 isn't Alphapix's first rodeo.

23:10Steven Cress:I think the main problem we've seen here is that some folks are unwilling to accept that they're not really long-term investors, even though they signed up to a long-term investing service. Nobody likes to see red in their accounts and losing money hurts without a doubt. Basically, that's the that's the crux of it. It's a great comment in general. But yeah, I said it. Well, I thought so, too. I thought so, too. Well put. Well put. You know, unfortunately, when I was going through some of the comments on the article, I used a couple of quotes from Peter Litch and Warren Buffett in regards to basically like not panicking when you come into environments like this.

23:46Warren Buffett's famous is, be greedy when others are fearful, and fearful when others are greedy. Peter Lynch was basically saying, one of the keys to the stock market is learning how to stay in the stock market and not be a scared way when markets turn. And despite all those quotes and all the charts and tables I put in there, somebody basically said, I'm selling all my stocks here. And it was so painful to read. And I feel like, and some, there was another comment that came in that followed up after that saying, wow, whatever, that's an indication of the market bottom. And it really hurts to read something like that.

24:28What we're trying to show all this, these past track records, indicators, indexes, we performed a study actually in April of 2025 when the market was taking a downturn. We took a look at the last five market corrections where the overall market was down 15%. And here we're not even in that situation. We're experiencing more of a rotation. Certain sectors are getting killed. Certain sectors are doing better. The overall market is not down 15%. At that point, the market was down almost 15%. So we hided the last five market corrections where that had happened. And if you just bought the S &P 500 when the market was down 15%, and in many cases, it ended up going down more than 15.

25:19But if you use that sort of as the line in the sand and said, okay, I'm going to buy the S &P 500 when it's down 15%. If you held it for two years, on average, you were up 50%, 5-0%. And if you use that same line in the sand and you bought the top 10 quant strong buys and you held those for two years, you were up 117 % on average. So here, we're probably not going to touch that type of correction level. To a certain extent, the market is self-correcting. It's coming off in some sectors. It's appreciating in other sectors. And as the economic indicators come in and this sentiment gets worse, it has a harder impact on some of the risk sectors.

26:06But then what happens is it sort of just normalizes. And people bake in the uncertainties. Those uncertainties become a little bit more certain. People know what to expect. And that's when the markets start taking off again. And, you know, I appreciate that the comment that you read, somebody really realized that. having been with the Alpha Pigs for a while. It's really unfortunate the person that sold, they let fear get the better of them. And it's too bad. I feel like they should have read the article twice.

26:38Steven Cress:You know, I think some people could read that article 15 times and it still might not be for them. I mean, that's what makes horse races. Everybody has a different risk tolerance and a risk appetite. And, you know, some people can handle the trials by fire and some people don't want to handle those trials by fire. But of course, they miss out on those fiery gains. So it's a trade-off. And it becomes a fiery, stinging loss when you panic sell. That really hurts. Yes. But the psychology of the markets is ever-present. Steve, any other words of encouragement? Any other things to note? any other stocks to highlight before we let you go?

27:23Credo, Sterling are stocks that both have buys. They're not even strong buys, but when I look at the growth side to these companies and the results that have come in, they look fantastic. So I would say people should put those on their shopping list. And when they're ready and they have the courage to go into the market, they should look at those. Sandisk is another name that looks great. Terrific growth story, terrific valuation story, Micron technology as well, a really great growth story and great valuation framework as well. So those are a couple of names that people can add to their shopping list.

28:00And in a number of weeks, you know, we still sentiment could whipsaw the market, but history has shown by the time you get to the end of September, mid-October, that's a good time to get to the market because November and December historically are great months.

28:14Steven Cress:Absolutely. And check us out at Crest Top Stocks on YouTube and TikTok and Twitter, otherwise known as X, and find our daily market emissives there. Steve, talk to you next month. Appreciate this conversation. Yeah. Happy investing, everybody. And thank you so much for organizing this today. Just a reminder, anything you hear on this podcast should not be considered investment advice. This is for entertainment purposes only, and you should seek advice from a licensed professional before investing. If you enjoyed the episode, leave a rating or review on your favorite podcasting app. And we'll see you soon with a new episode.