Trends Can go on Longer than You Expect
This Week’s Fortune Cookie
In Case You Missed It
Don’t Let Market's Up Move Go to Waste
In this week’s Stock Market Video, I probably just confirmed what you’ve already been feeling, which is that the stock markets are in a healthy uptrend. The “why” doesn’t matter much (although The Fed is in there somewhere), but the major indexes sitting atop their moving averages is absolutely crucial. The important thing now is to look for good stocks at reasonable entry points and gradually increase your exposure to this bull market. Click below to see which stocks I think are shaping up well.
Trends Can go on Longer than You Expect
When markets have had a resoundingly positive day (as happened on Thursday), you can find yourself experiencing some very contradictory emotions. And how you handle those emotions has a lot to do with your success as a growth investor.
The first emotion most people feel when markets put on a real show of strength is happiness. A day like Thursday, when advancing stocks outnumbered declining stocks by better than two-to-one on the NYSE, can give a real jolt of pleasure. Most, if not all of the stocks in your portfolio probably get a bump in price. And for a growth investor, that’s as welcome as a lower-than-expected reading from the bathroom scale is to a dieter.
But there’s a dark side to a big up day in the market.
Suppose you were following a stock like YY Inc. (YY), a Chinese online communication platform that doesn’t have an exact equivalent in the U.S. YY Inc. offers users a way to form online groups, perform karaoke (and evaluate and rank the performances of others), along with games and real-time voice, text and video.
The basic deal is that users create the content and YY Inc. figures out how to present, support and improve it. YY Inc. is young and growing fast, and I’m following it for Cabot China & Emerging Markets Report.
YY stock was trading at 28 when I first wrote about it in early June, and the stock traded under resistance at 29–30 for a total of seven weeks. But on Thursday, the stock blew past that resistance, roaring to 33 on greatly elevated volume.
Now, if you had bought YY at 28, this would have been a great thing. It’s always a sign of strength when a stock makes a decisive move above established resistance, and often indicates a change in investors’ attitude toward it.
But what if you hadn’t bought it?
If you were just sitting there with YY on your watch list—which is what I have been advising my subscribers to do—you just missed a one-day 10% bump up in a stock’s value. So how do you feel about that?
Well, I know from what I’ve heard from my subscribers that some of them feel like they’ve missed the boat! The stock is now at 33.3 and the 25-day moving average is back at 28.4 and they feel like the train just pulled out of the station without them. I’ll tell you what I tell them, which is that if YY is going to have a good run (and the signs are all positive), it’s still very early in the game. The stock only came public last November (at 10.5), and it’s been surging and consolidating ever since. And the average trading volume for the stock has been increasing steadily, indicating a gradual upswing in institutional interest.
What’s true of YY is true of the broad market as well. One good day doesn’t drain the potential out of a robust rally. One of our favorite adages at Cabot is that “trends can go on longer than you expect.” And even if you keep that truism on a Post-It note on your wall, the persistence of both upmoves and downmoves can blow away your expectations like a tsunami chugging up a beach.
So don’t despair. And don’t get too exuberant. A market in an uptrend is what growth investors wait for like kids waiting for Christmas. And you don’t want to let the opportunity go to waste. Yes, it’s always a good idea to buy strong stocks on a reasonable pullback. But don’t let a big upmove (like the ones we will see by the dozens during earnings season) freeze you out because you think you’ve missed the boat. Big moves often lead to bigger moves, and it’s certainly not too late now.
If you would like to receive help in identifying strong growth stocks that are on the way to bring subscribers excellent gains in the month ahead, consider subscribing to the Cabot Market Letter. For details, click here.
Tim’s Comment: Galbraith was not only an economist, he was also an excellent communicator, with a good sense of humor. With this quip, he compares economic forecasting unfavorably with astrology (which is currently discredited by roughly three-fourths of Americans). He is, of course, too modest. Economics has great value in explaining what has happened in the past, and most of us persist in believing it is of some help in anticipating the future.
Paul’s Comment: Believe it or not, we actually receive an astrological investment newsletter here at Cabot (part of our exchange program) and it’s very interesting. But I wouldn’t invest a thin dime on its advice. So that means it has exactly as much influence on my investing as long-term economic forecasting, which is zero. Cabot’s technique of following what markets are actually doing (and ignoring predictions) is based on facts, not forecasts. So neither form of prognostication has any respectability for me. But Galbraith, love him or hate him, could really turn a phrase.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Tim Lutts of Cabot Stock of the Month wades into the deep waters of companies that have the potential to transform their industries. Using the example of Amazon (AMZN), he tells you how to recognize the revolutionary stocks. Stock discussed: Tesla Motors (TSLA).
In this issue, Robin Carpenter, the Quant Wizard behind Cabot ETF Investing System, criticizes investors’ preference for long-term performance numbers in judging investment performance. Markets change radically, so a middle-range evaluation makes more sense.
In this issue, I turn a critical eye on quarterly earnings season, giving some of the whys and hows of getting through it unscathed. I offer a guide to using options to lower your risk (just reply to this email me to get it). Stock discussed: China Automotive Systems (CAAS).
Have a great weekend,
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report
Editor's note: Only five weeks left until the Cabot Investors Conference! All of Cabot's editors will be there with tips, tricks and stock recommendations that will fill you up with enough "takeaways" to change your investing life. Book your Conference registration and hotel reservation now!