Lust for Alpha: The Market as a Soap Opera


Stock Market Video

Lust for Alpha: The Market as a Soap Opera

Fortune Cookie

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I know that the stock market is serious business, with constant danger, tension and people's money on the line. But after the recent dramatic correction and (maybe) recovery, I'm struck by how much the stock market acts like a soap opera. If I look at a two-year chart of the S&P 500 Index, probably the single best indicator of the health of the broad growth market, I see the kind of turbulent romance that daytime dramas thrive on.

Here's the chart.

During this two-year run of this soap (the program would be called Lust for Alpha), the romance between the S&P (whom I will call Sue) and an investor (who will be known as Wally) has enjoyed many happy days. But this affair is not all walks in the park and candle-lit dinners. Sue has a volatile side that can make it seem almost capricious, and Wally is always a little apprehensive about where they stand.

One minute Sue is all affection and generosity and the next minute everything goes sour. The chart shows all the spats and hissy fits that have marked this stormy relationship over the past two years.

Poor Wally thinks things are going along great, then WHAM! Sue is upset about something and Wally is sleeping on the couch. And even though everything is fine a week later, Wally is a nervous wreck.

But those minor dust-ups seem like nothing when Sue goes volcanic in September, throwing all of Wally's profits out the window and changing the locks on the apartment.

That's the way soap operas work, of course, manufacturing crisis after crisis. And it's not until one of those crises turns really bad that you realize how minor the previous ones were.

For the S&P 500 (we're done with the soap opera for now), the damage from the correction that ran from September 19 to October 15 was about 7.4%. That's enough of a pullback to really get investors' attention, prompting many of them (especially the ones who came late to the rally) to head for the exits.

The sharp recovery shown in the chart above is the really enigmatic part of the story. Nobody know whether the market will just start chugging higher again or whether we will get a retest of last week's lows or whether we just need a period of being tossed in the surf to reset things.

Fortunately for those who follow the Cabot growth disciplines, trying to predict the future isn't necessary. We just follow the market, using moving averages to tell us exactly what the trend of the market actually is.

If you'd like your relationship with the market to be less like a soap opera and more like a rational activity, you should consider trying one of Cabot's growth advisories like my Cabot China & Emerging Markets Report.

Next week, I'll write about what happened with emerging market stocks during the September/October washout. It will make the dramatics of Sue and Wally seem like, well, an episode in a soap opera.

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In this week's video, Mike Cintolo catches you up on his latest thoughts about the market's overall position, and what the energetic rally of the past few days likely means. (hint: Mike's not buying with abandon but the rally tells him last week's low is likely sustainable). His sees the big-volume rebounds in many growth stocks during the past week as a positive sign, and he presents a list of early potential leaders, as well many names poised for good results should the market enter a sustained uptrend. Click below to watch the video.


Here's this week's Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here. 

Tim's Comment: People who want to see with perfect clarity are ill-prepared for investing, where uncertainty is a given. In fact, uncertainty goes hand in hand with opportunity. It quite often happens that when all the questions about a stock are gone, so is the opportunity.

Paul's Comment: I've been telling people for years that good investing advice isn't about certainty; it's about improving the odds. Since there has never been such a thing as reward without risk, a successful investor has to be prepared for anything. The key isn't perfect clarity about the future, it's about knowing what you will do in any given situation.


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.

Cabot Wealth Advisory 10/20/14 - 5 Investing Mistakes Beginners Make in Bear Markets 

Cabot Stock of the Month's Chief Analyst Tim Lutts writes in this issue about the most popular ways to go wrong when markets are heading down ... and how to avoid them. Stock discussed: GoPro (GPRO).

Cabot Wealth Advisory 10/21/14 - How to Invest Best in a Wild Stock Market 

Roy Ward, the value investing guru behind Cabot Benjamin Graham Value Investor uses this issue to extol the virtues of dividend-paying stocks when markets get volatile. He's especially fond of companies that have a long history of raising dividends. Stock discussed: United Technologies (UTX).

Cabot Wealth Advisory 10/23/14 - Two Strong Growth Stocks 

In this issue, Mike Cintolo, Chief Analyst of Cabot Market Letter, writes about the folly of seeking gains in unsettled times and how to tell resilient stocks from ones that are really played out. Stocks discussed: GoPro (GPRO) and Palo Alto Networks (PANW).

Have a great weekend,

Paul Goodwin Chief Analyst,
Cabot China & Emerging Markets Report 
And Editor of Cabot Wealth Advisory

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Paul Goodwin can be found on Google Plus.

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