"I buy things that are undervalued," writes Real Money contributor Jim Collins, "and I try to short things that are overvalued."
It's good advice for investors in a market that is rapidly heating up and cooling down by turns. In recent days (in fact, in recent months) the only thing stable about the market has been its instability. Markets surge before they tumble, then come right back to life. The only constant is inconsistency and the VIX has remained strong throughout.
Stocks slumped Monday, with the Dow posting its worst day so far this year, as investors moved into safe-haven assets and mulled the possible impact of the COVID variant.
As an investor you certainly want to buy assets when they swing too low. Shorting an overvalued asset is a great idea, too. But how can you tell when to make your move? Many investors don’t even try. In a recent Real Money column, before Monday's selloff, Collins says:
"The broad array of red figures on my screen this morning -- every global market that I track is in the red today, and only the VIX volatility index is in the green -- is an indication that the markets' blistering pace in the first half -- the S&P 500 rose 15.2% in the first half -- was just a mirage."
"Does that mean that you should dump all your stocks and go to cash? No, of course not. But the drastic nature of such a move belies the truth surrounding its logic. The reason not to dump your stocks is not because they are under- or even fairly-valued, it is because cash and its fixed income friends -- the 10-year U.S. Treasury note is the benchmark there -- are essentially worthless… But if your alternative is to pour money into equities at cycle-high valuations, maybe it makes sense to take some money off the table, and hence the incredible rally in U.S. Treasury bonds in the past six weeks."
You don’t need to bail on the market. Instead, he suggests, “find an incredibly overvalued name in an incredibly overvalued sector, and take profits as the soufflé starts to deflate. Tesla (TSLA) - Get Tesla Inc Report is still my favorite trade there.” Look for companies that just can’t stay out of the news. If they’re headed by a prima donna, even better.
And while you’re looking for assets that have gotten overvalued, keep an eye on cryptocurrency. This “asset” has become the stock market’s favorite casino. Investors buy in when they’re feeling confident. The upshot is that Bitcoin has become a useful high-water mark for speculation.
"Bitcoin," Collins says, "and other cryptos simply cannot be valued."