This Is Where the Best Market Values Are Today

It’s a tough market to find good values in, but there are bargains to be found if you know where to look for them. The idea is to look where the mainstream media isn’t paying attention, and to let the data be your guide instead of hype and speculation.

This requires you to ask questions that most short-term stock traders don’t want to ask. Is it the Magnificent Seven leading the market now, or just the Magnificent Three? How much longer can NVIDIA, Apple, and Microsoft prop up major market indexes containing hundreds of stocks?

When large-cap stocks suffer from a case of “bad breadth,” only a few leaders can pull the NASDAQ and S&P 500 higher because bigger companies get bigger weightings in these indexes. This can give a false impression that the entire stock market is in rally mode.

Given this backdrop, it may be tempting to keep an all-cash position. After all, the economy isn’t exactly running on all cylinders. Inflation still isn’t close to the Federal Reserve’s 2% target, and whatever progress has been made on inflation is mainly attributable to a recent dip in oil prices.

Moreover, the idea that consumer spending will save the economy is a misconception. The University of Michigan consumer sentiment survey for June shows that sentiment is at its lowest level in seven months. More specifically, the consumer sentiment index came in at 65.6 for June, down from 69.1 in May and far below the 72 reading that economists had expected.

Courtesy: Yahoo Finance

Shockingly, a TransUnion survey found that a record 84% of U.S. adults were worried about inflation for everyday goods, such as groceries and gas. Yet, only 25% of survey respondents were afraid about future stock market performance; this is the lowest share in more than two years.

There’s fear about the future among hardworking American families, but large-cap stockholders remain surprisingly complacent. The current situation is reminiscent of the dot-com bubble of 1999 and 2000; just last week, the NASDAQ had five consecutive record closing prices.

It’s a recipe for disaster, as the Magnificent Seven (or Magnificent Three) are very richly valued and vulnerable to a steep pullback. In order to find where the bargains are, you have to look at the laggards rather than the leaders.

Energy stocks certainly have the potential to play catch-up in 2024’s second half after a rough first half. Natural gas is far down from its 2022 peak, and oil’s pullback could offer an opportunity in exploration and production stocks.

The real estate sector is also lagging in 2024 so far. If you expect the 30-year mortgage annual interest rate to pull back from 7% at some point, you may want to look into real estate stocks, though there are risks involved.

Regional bank stocks are definitely in the gutter, but the gutter is where great opportunities can arise sometimes. Just bear in mind that if there’s a financial crisis coming, regional bank stock will almost certainly get slammed.

Courtesy: Google Finance

Some bargains can be found in small-cap stocks, which have lagged large-cap technology stocks throughout 2024’s first half. The image above shows the iShares Russell 2000 ETF, which tracks a large basket of small-cap stocks.

This isn’t to suggest that all small-cap businesses are worth investing in right now. It’s important to be selective with small-cap stocks, which can make outsized price moves in both directions.

Small-cap gold, silver, copper, and uranium producers are among my favorites. They’re worth looking into if you expect the supply-and-demand imbalance to force the prices of these essential commodities to run higher.

The mega-cap stocks that are in favor right now are susceptible to deep drawdowns as consumer sentiment isn’t optimistic and valuations are uncomfortably high. Diversification is the key to succeeding in the long run, so consider some high-quality laggards and look to small-caps for big opportunities.