As Stock Market Losses Mount, Focus on These Positive Trends

 

It’s scary out there right now.

The stock market losses continue to pile up, with the Dow down another 250-plus points yesterday and the S&P 500 dipping to a new two-year low. It’s enough to make you want to pick up your ball and go home, and get out of the market altogether until the tide finally turns.

While not advocating getting out of the market completely, many of our experts here at Cabot Investing Advice are indeed advising their subscribers to go heavily to cash. Growth expert Mike Cintolo, for example, is currently advising subscribers to his Cabot Growth Investing advisory to keep 80% of their portfolio in cash. Our value expert, Roy Ward, is recommending all defensive positions to his Cabot Benjamin Graham Value Investor subscribers.

It’s also a good idea to keep tight loss limits on your open positions so that you don’t suffer the kinds of overnight losses that, say, LinkedIn (LNKD) investors experienced last Friday.

As a company, we’re preaching caution. But that doesn’t mean you should give up all hope. If you look past the admittedly troubling stock market losses that seem to occur on almost a daily basis these days, there are reasons for optimism that a turnaround isn’t far off.

A few positive trends have emerged, both economically and in the market itself, even as stocks continue to tumble.

U.S. unemployment is at a post-recession low. In January, the official rate dipped below 5% for the first time since February 2008. Just five years ago, twice as many Americans were without a full-time job. That’s progress, even though actual jobs growth has slowed in the past year and the real jobless numbers are higher than the 4.9% that was reported.

But Wall Street really only pays attention to the headlines, and 4.9% unemployment sounds a lot better than 9% or 10%.

The housing and auto industries are still chugging along. Neither is growing at the same pace it was a year ago. But neither sector is showing any signs of the kind of slowdown that might validate some of the double-dip recession rumblings we’re hearing from some of the Nervous Nellys on Wall Street.

New home sales reached 544,000 in December, nearly matching a five-year high. Meanwhile, car sales in the U.S., though down from 2014, topped 7.7 million units sold in 2015—the third-highest annual total since 2006. Those are good signs that the U.S. economy is holding strong, if not accelerating.   

Investor panic hasn’t reached concerning levels. At least not according to the VIX, a.k.a. the “investor fear gauge.” The latest reading of the options-based volatility index, as measured by the Chicago Board Options Exchange, is 29—high, but not indicative of an utter market collapse. It was higher in August and September, when the VIX topped 40 as stocks fell more than 10% for the first time in four years.

By contrast, in 2011, when the European debt crisis held global stock markets hostage, the VIX was above 30 for the better part of four months. During the 2008-2009 recession, it spiked as high as 60.

We’re nowhere near that now, which shows investors are concerned—but not panicking.

The Two-Second Indicator. Coined by Mike Cintolo, the Two-Second Indicator is a tool he uses in his Cabot Growth Investor advisory. It’s simple: the number of New York Stock Exchange stocks hitting 52-week lows on a given day is a way to take the market’s temperature. The smaller the number the better, of course. And as of this writing, that number is at 406.

Sounds high, right? Well, it is—but not compared to three weeks ago, when a whopping 1,395 stocks hit 52-week lows on January 20. So that suggests a lot of stocks may have bottomed and are starting to bounce higher. Though the broad stock market losses have continued to mount, more stocks are in better shape today than they were three weeks ago.

(By the way: to learn more about how Mike’s Two-Second Indicator works, or what stocks he’s recommending in the midst of the current market storm, you can subscribe to Cabot Growth Investor by clicking here.)

The Bottom Line 

The stock market is sick, and has been since last summer. Fortunately, it doesn’t appear to have infected the U.S. economy. And that means it’s not likely to stay down much longer.

Trends on Wall Street tend to last longer than anyone expects, so it might take another few weeks or months before the market stabilizes and the bulls return. But this isn’t the beginning of a multi-year bear market like we saw during the 2007-2009 recession or the dot-com bubble burst. As I wrote earlier this week, there’s no real macro, financial or geopolitical reason why stocks can’t bounce back. And soon.

When they do, it will happen fast—so fast you could miss out on some killer returns if you sell out of all your positions now. Don’t make that panic move.

Reduce your positions sizes, sell your biggest losers, and be defensive. But don’t sit on the sidelines. Staying engaged could result in a big payday down the road.  


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