Be Dumber

 
Every holiday season, I like to come up with one or two simple ideas that can help me with my trading the following year. Usually these ideas are based on post-analysis on my trades of the prior year or a broader theme I think will help my investing going forward. “Think Big” and “Lean Against the Wind” are a couple of past ideas.

This year, I went even briefer and simpler: “Be Dumber.” How can that help us make money? What I really mean by “being dumb” is to keep it simple, follow the methodology and not overthink things. It’s so easy—especially in such a whippy market environment with extreme price moves nearly every day—to over analyze the goings-on in the oil pit, the job market, the industrial sector, China’s currency, Japan’s negative interest rates, support and resistance on the major indexes, the junk bond market and all the latest chatter from earnings season. That’s what “smart” investors do, right?

Not really. When it comes to market timing, it’s best to be, well, dumb. Today, that means recognizing that the market’s intermediate- and longer-term trends remain clearly down, and the vast majority of stocks remain in poor shape (more than 80% of all stocks are still below their 200-day lines).  Thus, remaining patiently on the sideline remains your best bet.

Don’t get us wrong, there’s nothing wrong with reading the daily news to keep up on what’s driving investor perception. And we do track many measures outside of our key market timing indicators that can give us a heads-up about the market’s shorter-term moves (that’s how we spotted an oversold bounce coming two weeks ago) and, occasionally, the very long-term picture too.

But our main focus is interpreting what’s happening right now. On that front, the indexes are still holding their panicky January 20 lows when we saw nearly 1,400 stocks hit new lows (the largest reading since 2008), though the recent bounce hasn’t been impressive and is now running into trouble. We see three scenarios going forward: (1) A straight-up move to new highs as the bulls take control; (2) A bottom-building effort during the next many weeks with some positive divergences developing; or (3) a plunge to lower lows as the bears do further damage.

If we had to place odds on those, we’d say (1) probably gets 20%—possible but unlikely given the recent damage. (2) might get 35%, while (3) gets 45%—both could easily happen, though with the trends down and so many stocks having decisively broken down just a few weeks ago, more time and work on the downside is probably needed before the sellers finish up their work.

Those are just guesstimates, of course; many investors will spent countless hours trying to figure out exactly what’s to come. But that’s unnecessary—if you just stay in sync with what’s going on, you’ll stay mostly safe while the sellers are in control, and will pounce when the tide turns.


This is an excerpt from Cabot Growth Investor, where we’ve been picking the best growth stocks since 1970. Cabot’s flagship advisory combines expert stock selection and award-winning market timing. It’s the most complete and most helpful, growth-oriented investing advisory available anywhere.

Michael Cintolo is Cabot's Vice President of Investments and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. To read customer reviews of Cabot Top Ten Trader, click here. To read reviews of Cabot Growth Investor, click here.


Michael Cintolo can be found on Google Plus.

Stock Picks

Tesla Motors

If Tesla ever begins to cut back on development and innovation costs, earnings will soar.

Alibaba

China seems to be raising up its very own version of Amazon in Alibaba (BABA.

Facebook

Roy Ward uses the PEG ratio to determine if the stock is undervalued or overvalued.

Cabot Wealth Advisory

Three Vital Tips for the Chinese Stock Market

By Paul Goodwin on September 30, 2016

As U.S. stock markets continue to drag, the Chinese stock market is an ideal alternative for growth investors. Here's how to find the best Chinese stocks.Read More >

What Fed Speeches Mean for the Stock Market Today

By Chloe Lutts Jensen on September 29, 2016

Four Fed presidents gave speeches yesterday, and every word was digested by the stock market in an attempt to better predict the Fed’s next move. With odds of a December rate hike now about even, how should stock investors prepare?Read More >

The Emerging Market Stock You Ought to Own

By Paul Goodwin on September 27, 2016

The company I’m talking about (the one that you probably don’t own) is the largest Chinese instant messaging company. It is a giant in its own right, with a market cap of $262 billion and annual sales of over $19 billion. The company grew revenue by 28% in 2015 and routinely boasts after-tax profit margins over 30%.Read More >