Stock market swings got you reeling? Answering 6 questions will help

It's definitely been a tough market over the past few weeks. One day, stocks are rising on renewed hopes of a December rate cut by the Fed. The very next day, the anxiety of an approaching AI bubble weighs down on them. It's no surprise that the CBOE Volatility Index (VIX), commonly known as the "fear index," soared in November, reaching its highest levels since President Donald Trump's "Independence Day" in April. Of course, bad days are always a possibility in the markets. But they are especially frustrating when the data does not seem to support the price action. All in all, we're coming off a strong quarter with 83% of S&P 500 companies reporting so far beating Street earnings expectations and 76% beating revenue expectations. But this success was met with unrelenting sales, including some of the best performers. As frustrating as this action can be, it also tends to present opportunities. Investors just need to know where to look and how to strategically put money to work. To help with the search, we've prepared six questions to ask yourself on hard tape. How you answer will help you determine whether to give up on a stock, maintain your current exposure, or hold your nose and buy more. 1. Have there been any changes in your company or industry that could affect future earnings? We're all about fundamentals, which means we care much more about a company's financial health and earnings outlook than we do about its stock price. This is not always easy. Price action shows how much money you made or lost on a given day. However, it is critical for long-term investors to maintain hyper-focus on long-term earnings power. As legendary investor and economist Benjamin Graham once said, "In the short term, the stock market is a voting machine." Over the long term, stock prices tend to keep up with the company's performance. Of course, if you determine that your investment thesis is broken for some reason, you may not want to stop there at all. Bad news can be priced in and stocks can overreact; A negative update by itself does not mean you should sell the stock. But this means we need to objectively re-evaluate whether we still want to be involved. On the other hand, if your analysis of both the company's own valuations and industry-level changes, such as regulatory change, leads you to conclude that the long-term earnings story remains intact, you may see a buying opportunity if shares decline. There are a few more questions that need to be answered first. 2. Have there been any changes in macroeconomic terms that could affect the amount investors are willing to pay for the company's earnings? The first question is about earning power; But this is only one part of determining the value of a stock. This is the bottom up view. Now we need to look at a top-down perspective that will help inform us how much multiple investors might pay for the earnings outlook identified in the previous question. Consider adopting a worldview that encompasses everything from geopolitical events to monetary and fiscal policies to macroeconomic data points. From here you can understand what this worldview means for various sectors of the economy and companies in those sectors. The idea is to use this top-down analysis to determine if anything has changed in the economy's outlook, which could affect sentiment and therefore multiple (or discount rate) investors reference valuation models for the foreseeable future. Are inflation forecasts rising, prompting the Federal Reserve to raise interest rates or pause interest rate cuts? If so, you would expect the coefficients applied to earnings estimates to narrow or the discount rate applied to future earnings to increase. Layering this analysis will help determine a price target for the stock; This is, at the end of the day, earnings per share (EPS) multiplied by what multiple investors are willing to pay for those earnings. Where the stock trades relative to the new price target will determine the course of action. But there is one more step we need to take to further refine our price target. 3. What is the multiple, both in terms of the stock's historical valuation and the market? Once you have a sense of whether the group should expand, contract, or remain stable, given your top-down perspective, consider what that means historically and how it compares to the market as a whole. This means you need a frame of reference - typically the multiple at which the stock has traded historically, both in relation to itself and its peers and the market as a whole. Don't forget to account for changes in growth rate (we use the PEG multiple for this) or investor sentiment; This could, all else being equal, cause investors to pay out or value earnings less than before. By answering the second question, we determined the initial price target; With this third question we aim to refine this goal and base our thinking on the stock's historical valuation dynamics. The idea here is to get a sense of how the story has changed over history to determine whether investors will pay the same, the same, or less than they once did, given the story as it stands today. Simply determining how much a multiplier should expand or contract is not enough; We must also take into account the magnitude of the expansion or contraction. Take Wells Fargo. We argued that the group would expand as regulatory milestones were achieved. Great but how much? We can look at where it was before the regulatory issues to determine that, but that was a long time ago. We argue that it makes more sense to look at what a well-run bank is trading and take that as our indicator of where the group might be heading. For example, we can look at JPMorgan and use its multiple as an upper bound, given that it is considered the best in the industry. From there, we can adjust this based on the multiples we see at other firms like Bank of America or Citigroup, and using these three valuations, we can try to determine where reformed Wells Fargo deserves to trade. 4. What does the graph tell you? Given the fair value estimate created in steps one through three, once you have a price level to step in and buy more shares (which is a price target, not a fair value estimate), it's worth taking a look at the chart to identify possible support levels. There are many tools for technical analysis, but given our focus on bottom-up analysis, we prefer to keep it simple or leave it to the real market technicians, as Jim Cramer often does in "Crazy Money." Some things to look for include intersections of the 50-day and 200-day simple moving averages, long-term trend lines, or horizontal support lines. Also pay attention to the volume. Higher volume means the moves you analyze carry more weight because they were made with more participation. One can also look at tools like the relative strength indicator, which is a momentum indicator that helps indicate whether a stock has reached oversold or overbought levels. If you see support coming in at a significant level that has attracted interest from buyers in the past, you may want to buy more shares. However, if the chart shows that long-term support is not maintained (for example, if the stock breaks down further after breaking below the 200-day moving average), wait as the stock could be a "falling knife" at this point. In these cases, we need to be patient for a better price level, as we have determined in the previous steps that we still want to be involved for fundamental reasons. Wait for the sell-off to slow down and for the stock to gain some ground before stabilizing and perhaps even stepping in. 5. How big is your current position? Once you have a purchasing level in mind, you need to decide how much money you will commit to the job. Consider percentage weighting against the entire portfolio, including cash. The full position for the club is in the range of 5%-6%. This means that we will not add to a name that has a weighting of 5% and will try to fix names that start growing above 6%. What the exact position size is for you and how large your current position currently is will determine how aggressive you need to be. If the position is new and its current weight is small, you can act a little more aggressively knowing that you have room to add more weakness. If the position is of a relatively decent size, say 50% or more of full weight, consider waiting for larger drawdowns; so each purchase can have a greater impact on reducing your overall cost base. 6. Are there any catalysts in the near term? The last thing to consider before placing a trade is events on the horizon. Once we take into account all the information we have, we want to consider what updates are coming and how much they might impact the investment thesis. Consider possible catalysts that might encourage you to be more aggressive, such as upcoming economic data or the resolution of legal disputes. Not all events are treated equally. For example, we tend to be cautious ahead of quarterly earnings — even if you predict the headline numbers correctly, predicting investor reaction to the release is another beast entirely. Just look at Nvidia, which had a boom one quarter and quickly faced a sell-off. (See here for a complete list of stocks in Jim Cramer's Charitable Trust.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. 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