All the finance courses in the world won’t prepare you for the reality of the stock market.
The problem is they assume investors are rational.
But in the market and all walks of life, emotions take over, and rationality goes out the window.
People rarely act by the book. Valuation models hardly matter when investors have a herd mentality.
This has and will continue to lead to market extremes.
For instance: The dot-com boom and bust, the COVID panic in 2020 and even the meme stock rally in 2021 were all market extremes.
In each case, logic went to the wayside, emotion took over and prices overshot.
These situations create great opportunities to buy and sell.
It’s this idea that inspired sayings like “buy when there’s blood in the streets.” Or “sell when the shoeshine boy talks stocks.”
In other words, you should take action when sentiment and prices get too high or too low.
That brings me to an important point…
We’ve seen a market extreme develop over the last year. And now there’s a huge profit opportunity.
Tech Valuations Have Taken a Nosedive
There are several indicators that I follow that support this view. But one of my favorites is the relationship between tech and consumer staples stocks.
Paying attention to the changes in both can signal investors’ sentiment.
Investors typically bid up tech when overall sentiment is high and bid up staples when sentiment is low.
Right now, activity in both indicates sentiment is extremely poor.
Consumer staples stocks are now the most expensive they’ve been in the last 30 years. Meanwhile, tech valuations have taken a nosedive.
This has put the forward price-to-earnings (P/E) ratio of consumer staples at the same level as tech.
This may not seem like a big deal. But when I dig more, I see more support the market is being extremely irrational.
For example, investors are now giving consumer staples brands higher valuations than tech heavyweight Alphabet.
This comes despite Alphabet’s huge advantage in the earnings growth department.
With sectors like consumer staples now extremely expensive, investors will need to put their money somewhere else to get a superior return.
Typically, investments go into areas of the market that were previously underperforming. This is because after periods of underperformance, they offer investors the highest return potential.
Right now, the highest return potential lies in innovative tech stocks and cryptocurrencies.
These have struggled as of late, down 32% and 45% from their respective peaks.
They’re now in “blood in the streets” territory and are primed for a rebound.
We’ve witnessed this occur in oil and gas stocks since their sell-off in 2020. They’re now sitting over 300% above their 2020 lows, when investors punished them due to fear and uncertainty.
I expect innovative stocks and cryptos will see a similar rebound. But considering the huge growth behind the scenes, this one could be even stronger.
My colleague Ian King knows how to spot these opportunities more than anyone. He has helped his subscribers land gains like 1,934%, 3,981% and 18,325% in a year or less.
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