Market Even Better Than Expected!
By
Michael Cintolo, Vice President of Investments and Editor of
Cabot Market Letter and
Cabot Top Ten Report From Cabot Market Letter 3/10/10
One month ago, on February 10, with the market smack in a normal correction (and Washington, D.C., paralyzed by a blizzard), we wrote here, “… as the correction progresses, investor sentiment will cool and fear will once again grow, creating a fine environment for the next leg of the bull market. If all goes typically, the next leg up will be characterized by narrowing leadership, as investors increasingly gravitate toward the market’s leaders. (Baidu, up strongly on earnings this week, will almost certainly be one of them.) It might also be characterized by an increasingly steep slope, as enthusiasm for the performance of these leaders becomes infectious.”
Now, we repeatedly tell you that we’re not in the business of predicting, that all we want is to get you on the right side of the market trend. Nevertheless, we can’t help reviewing these predictions … in reverse order.
Is the market’s slope steeper today? Yes!
Is Baidu a leader? Yes, it’s zoomed from 480 to over 550 in the past month.
And is market leadership narrower? No … and that’s a very good thing. You see, narrowing leadership typically foreshadows the end of bull market by a few months or more. Leadership narrowed normally before the market’s 2007 top (it peaked in June, four months ahead of the October high), and leadership narrowed hugely before the 2000 top. But today, the bull market is still strong and participation, as illustrated by the daily advance-decline line, is still very broad, much better than we expected. All major indexes are advancing strongly, and our Cabot Tides flashed a buy signal on March 2. In short, there’s plenty more upside ahead.
The fact that there’s still plenty of negative business news is a plus, too, in that it serves to keep public sentiment down. So our message today is simple. It’s time to return to buying mode. Put your cash to work buying technology stocks, natural resource stocks, Chinese stocks, Internet service stocks and other leaders. Also consider replacing your weakest performers with strong stocks; upgrading is good policy.
Finally, a tip on portfolio management as this bull market progresses. A portfolio is not a dog sled team, with all dogs running at the same speed. Some of your stocks are capable of doing much more work than others, and if they repeatedly demonstrate this capability, you should reward them by giving them more work to do. Average up in them by buying more at appropriate times. In the long run, great portfolio performance comes from a handful of strong stocks.
Use your cash to buy strong stocks. Also, consider replacing stocks that aren’t doing what you hired them to do with better performers.
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