May has finally arrived, and is once again wreaking havoc on investors.
We’ve all heard the old adage “Sell in May and Go Away.” So far, the market hasn’t disappointed the folks who propagate it.
Right now, the S&P 500 Index is down about 2%, and its chart is pointing towards a further downturn before the month is done.
And you’ll recall that the index, which fell more than 10% to start the year, has only recently recovered from the decline.
Well, forget about seasonality. This pullback is exactly what the market needs after two months of scorching gains.
Here’s how you can trade the dip with momentum behind you.
The Laggards Now Lead
After leading the market for most of this seven-year bull market, growth stocks are taking it on the chin this year as earnings fail to justify lofty valuations.
Investors are rotating out of growth and into cheaper equities.
As a result, value stocks – which have underperformed the market over the same period – have risen from the dead.
The S&P 500 Value Index is up 2.5% on the year versus a decline of 1.5% for the large-cap growth index.
And there’s plenty of value in the market. That is, if you know where to look.
Rising Rates Will Lift These Boats
The financial sector holds some of the deepest value in the stock market today.
Years of record low interest rates around the world have choked bank profits and kept a tight lid on stock performance.
Over the last 10 years, large-cap financials have declined 31% while the broader market gained 59%.
But now, financial stocks sport a valuation that’s too low to ignore.
At 14.8 times earnings, the sector trades at a 22% discount to the S&P 500 – the largest of all 10 sectors.
And if the Federal Reserve follows through with an interest rate hike next month, these stocks won’t be this cheap for much longer.
As you may know, financial stocks perform well in a rising interest rate environment.
Net interest margins – the difference between the interest that an institution earns from loans and interest paid out to depositors – increase as rates go up. The higher the margin, the larger the profit.
With a possible hike on the horizon, this could be your best chance to seize upon the sector’s weakness… before the rest of the market catches on.
A Safe Way to Play
Amerisafe Inc. (NASDAQ:AMSF) is a leading American insurance holding company.
Licensed in 47 states and the District of Columbia, the company provides workers’ compensation insurance to hazardous industries, like construction and manufacturing.
Propelled by outstanding earnings growth, Amerisafe shares have gained 161% over the last five years.
That’s more than triple the gain of the S&P 500 over the same period.
Despite the impressive rise, shares still trade at just 13.1 times forward earnings – a slight premium to its peers but 31% below the benchmark index.
Amerisafe’s chart paints an even more attractive picture.
As you can see, shares just broke through an ascending triangle pattern to set a new all-time high.
One of the most bullish chart patterns out there, an ascending triangle pattern indicates that in the face of overhead resistance, demand for a stock is on the rise.
Going all the way back to January, the stock’s rising support line has gone unbroken for the last five months.
Furthermore, the stock hasn’t closed below its 200-day moving average in nearly a year – a key indicator of long-term support.
The increased demand this year gave shares the boost they needed to break through the resistance around $52.85.
And stocks making new highs, especially all-time highs, entices investors looking to buy into established momentum.
This greatly increases the likelihood that the bullish trend will continue.
Best of all, the recent pullback in stocks this month has helped carve out an even nicer entry point for new buyers.
Now’s the time to buy the dip, and trade the trend of one of the year’s hottest value stocks.
On the hunt.