MW He called the S&P 500 bottom. Now this stock trader can't rule out a 'flash crash.'

By Michael Sincere

Theo Trade's Jeff Bierman: 'You have to be very careful how you approach this market.'

'If you get a 5% to 6% return from the S&P 500 over the next three to four years, you've done very well.'

Warren Buffett, the voice of reason in the stock market, recently announced that he would retire as chief executive of Berkshire Hathaway $(BRK.A)$ $(BRK.B)$ at the end of this year. "He was like the Rock of Gibraltar," said Jeff Bierman, chief market technician at Theo Trade and an adjunct professor of finance at Loyola University Chicago. "It marks the end of an era of old school fundamentals that used to drive the markets. At the same time, it opens up a Pandora's box for much more volatility."

What's in the box, according to Bierman, is a "mercurial president; on any given day, there can be a tweet, a social media post or a television appearance where one word from him drives order flow. Each morning, I wake up and wonder what he's going to do to torch my portfolio or lift it up."

Bierman said he worries about the unpredictability of President Donald Trump. "To me, that is the perfect storm of a market that will remain volatile for at least the rest of the year. Trump is like the sun and everything revolves around him. Because of that, both professional and retail investors alike are constantly on pins and needles."

In this recent interview, which has been edited for length and clarity, Bierman discussed his views about the U.S. stock market, including stocks he is buying and what he's avoiding.

MarketWatch: In our interview in January, you warned about a volatile stock market. Have you ever seen a stock market as volatile as this?

Bierman: I've seen volatile markets, but I haven't seen a market quite like this where one single individual has the power to drive order flow.

Read: Trump is a 'wild card' for the stock market, this trader says. He's buckling up.

MarketWatch: What should traders and investors do when the stock market is so unpredictable?

Bierman: Trade small. Don't be fully invested at all times in one single product. Cut your position size, too. If you've been holding concentrated positions of 10%, you want to cut those in half. Also, consider international markets, or moving your money into precious metals such as gold (GC00) and silver (SI00). You could consider moving your money into commodities that have been beaten down - such as oil, which will eventually find its bottom and should provide good dividends.

MarketWatch: In January, you said if investors take out 5,600 on the S&P 500 SPX, the benchmark index would go to 5,200. What do you say now?

Bierman: We did take out 5,600 and went down to 4,800. Now, we have circled back to 5,800. Let me put it in perspective: The all-time high on the S&P 500 is 6,147 on February 19. Then we went down to 4,800, which is a decline of approximately 21%. We have retraced a little more than 61.8% of that, which is a normal Fibonacci retracement sequence.

'If we don't push past 5,900, the S&P 500 could fall to 5,200.'

MarketWatch: Although you don't make predictions, what are the possible scenarios?

Bierman: Nobody knows what will happen next. But overall, U.S. stocks are likely to underperform for the next few years. Investors need to recalibrate their expectations. If you get a 5% to 6% yearly return from the S&P 500 over the next three to four years, you've done very well.

In the short term, the market is overextended. To push back to all-time highs, you're going to need tailwinds. We will need the U.S. Federal Reserve to cut rates, which it might do in the early part of summer. We also need inflation to come down. We also need to get more clarity on the financial impact of tariffs, and tailwinds from technology and financials. The good news is we have tailwinds from financials, but they are now near fully priced.

MarketWatch: What if the S&P 500 doesn't make it past 5,900? What could happen?

Bierman: If we don't push past 5,900, the S&P 500 could fall to 5,200. To make it past 5,900, you need a lot of liquidity, which you don't have. You need a lot of tailwinds, which you don't have. And you will need the president to be less volatile and back off his aggressive tariff agenda. It would not surprise me to see the S&P 500 retest the intermediate low between 5,200 and 4,800. That is a real possibility.

'The financials should not be as impacted by the tariffs compared to other sectors.'

MarketWatch: Are there any particular stocks you believe are worth buying?

Bierman: I happen to like financial stocks: JPMorgan Chase & Co. $(JPM)$, Goldman Sachs Group Inc. $(GS)$, Visa Inc. (V), Mastercard Inc. $(MA)$ and PayPal Holdings Inc. PYPL. They are all good places to park your money. I like financials with steady cash flow, decent dividends and below-average multiples. The financials should not be as impacted by the tariffs compared with other sectors. I also like pharmaceutical stocks such as Bristol Myers Squibb Co. $(BMY)$. It delivered much better-than-expected earnings and the valuation is compelling. I also like Merck & Co. Inc. $(MRK)$, which had great earnings, and Baxter International Inc. $(BAX)$. The dividend is not as compelling but has decent upside. There's compelling value in Target Corp. (TGT), BJ's Wholesale Club Holdings Inc. $(BJ)$ and TJX Cos. (TJX.)

MarketWatch: Which stocks are you avoiding now?

Bierman: I think Walmart Inc. $(WMT)$ is in a bubble and Costco Wholesale Corp. $(COST)$ is ridiculously expensive. I also think much of the AI trade has been played out. I think you need exposure to AI, but not to be overweight. Many high-profile companies are cutting back on their spending budgets and resorting to layoffs as a result of the uncertainty around the economy, and that could trickle into AI.

Read: What is AI really giving back to tech investors? Here's the hard truth.

MarketWatch: In our last interview, you said you were buying semiconductors. Are you still?

Bierman: No, I'm holding off on most semiconductors at this point, but I do see compelling value in On Semiconductor Corp. $(ON)$, Western Digital Corp. $(WDC)$, Seagate Technology Holdings $(STX)$, and Dell Technologies Inc. $(DELL)$.

MarketWatch: Are there other investments you are recommending?

Bierman: You need some exposure to fixed income, whether it's an annuity or a short-term bond. I don't like long-term bonds due to their elevated exposure to interest-rate risk and lack of liquidity premium. I'd suggest short-term bonds or bond mutual funds. For stock-market investors, I would tilt more towards large-cap stocks away from small-cap stocks, because small-caps tend to lead to the downside in an economic slowdown. I've been moving more towards dividend-intensive stocks for protection.

'Liquidity in this market is about as thin as it has been in many years.'

MarketWatch: What about the stock market are investors underestimating?

Bierman: Liquidity in this market is about as thin as it has been in many years. Not to mention, the Fed is holding off cutting interest rates for the moment, meaning the quantitative easing (QE) program that normally juices stocks is not there.

Remember, liquidity drives all markets. If liquidity is siphoned out of the market, you don't have a stable market environment. Without more participation from sectors such as energy, consumer staples and healthcare, the market will struggle to move that much higher. You have to be very careful how you approach this market.

Professional market participants took a hard hit in the first quarter, primarily in technology, financials and cyclicals. Many reallocated their money out of the stock market into alternative asset classes. For example, a lot of money has gone into gold (GC00), silver (SI00), and bitcoin (BTCUSD). A lot of money in the U.S. has also moved overseas. So there is a relative scarcity of liquidity. Because of the lack of liquidity, I would not rule out a 2009-style flash crash.

Michael Sincere is the author of Understanding Stocks, Understanding Options, and Help Your Child Build Wealth.

Read: Strong earnings keep stock-market bulls in charge. What could bring the rally to a halt?

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-Michael Sincere

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