Trade idea of the day: Wells Fargo

US stock market have experienced a heavy sell off over the past few weeks. The Dow and the S&P officially entered correction territory, a fall of over 10% from a recent high, as investors became spooked by the prospect of faster interest rate rises. As US treasury bond yields pushed higher, investors sold out of stocks not just in the US, but globally.

What: 

US stock market have experienced a heavy sell off over the past few weeks. The Dow and the S&P officially entered correction territory, a fall of over 10% from a recent high, as investors became spooked by the prospect of faster interest rate rises. 

As US treasury bond yields pushed higher, investors sold out of stocks not just in the US, but globally. The worst of the sell off appears to be over and US stocks rebounded strongly on Monday, in the strongest one-day rally in the Dow Jones for two years. Following the rebound the S&P 500 is now only down some 7.6% as opposed to the correction zones 10.2% a few days earlier. 

In the past 42 years there have been 11 corrections of losses of 10% or greater in the stock markets which have occurred outside a wider recession. Of these there was only one, in 1987, which eventually turned into a bear market, ie a loss of 20% or more. 

So, probability dictates that a correction rarely leads to a bear market in solid economic conditions. Given the strong global economic growth a recession appears unlikely right now, so going on past performance we could deduce that this market will recover. 

That is not to say that we have hit the bottom yet, research by Goldman Sachs pointed out that of the 11 non-recession corrections, the typical pattern is a fall of around 15% over 70 days, followed by a complete recovery in prices to pre-correction fall over the course of almost 3 months. 

 It was the fear of higher interest rates that spooked the market, yet there are certain sectors which could benefit from higher inflation and higher interest rates. Financials tend to perform well in high inters rate environments. Within the financials, there are certain stocks which have fallen harder than the broader market in the recent sell off. One such firm is Wells Fargo.

How: 

Wells Fargo has dropped from over $65 to $56.50. $54 - $56 is a region which appears to offer strong support for the stock. Should you believe that this market is capable of a recovery, this could be a sensible entry point

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