A Strong Stock to Build On

 

Two Charts Tell You What You Need to Know About the Market

Staying in Step

A Strong Stock to Build On

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I'll be the first to admit that you have a right to be confused about what's happening in the stock market. I'm confused too.

But my confusion isn't all that unusual. Since I understand on a fundamental level that the stock market is a machine that's always working to separate me from my money, I'm always on the lookout for traps and deception. In fact, the only time I'm ever really comfortable with what's happening in the market is in the midst of a huge correction. Show me a market that's heading into the depths like a rock in a reservoir and I'm perfectly at home.

Of course, I'm only at home because during a correction my own personal portfolio (and probably the portfolio of Cabot China & Emerging Markets Report, which I write) is likely 100% in cash, or near. I've written before about the warm glow of satisfaction I get when the market is abusing investors and I find myself riding out the downtrend with zero exposure.

All other situations, which is to say, any time I have money in the market, makes me a little nervous. I think this shows that I'm sane and understand the situation perfectly.

The big dilemma for investors right now is to know which way the market is going. (Your biggest dilemma may be to figure out what the market will do tomorrow. But since I know that there is no way on earth to accurately forecast that, I have crossed that worry off my list.)

Two charts will give you the idea. The first is a two-year chart of the S&P 500 Index, which shows that this broad-market index of large-cap stocks has been in an uptrend for a long time. It's a pretty chart, and looking at it will make you happy.

A chart like this teaches you that every time the S&P corrects for a while, it quickly pops back up to new highs and resumes its advance. And that's a great lesson.

Unfortunately, it's wrong.

As a useful antidote to the apparent optimism that suffuses this chart, I offer this short-term chart of the S&P, which shows how it's behaved for the last six months.

I will point out two things about this chart. First, it shows the S&P 500 pushing out to three major new highs, one on July 24, one on September 18 and one on December 5. (There are actually over 20 new daily highs in the chart, but I'm talking about major moves.)

But the second thing-which illustrates once again that the sting of most things, like the scorpion, is in the tail-is that the S&P 500 is exactly two points ahead of where it was on July 24. And statistically, that's a dead heat.

In this kind of market, as Mike Cintolo so succinctly puts it, not a lot of money is being made.

I've written many times about the importance of staying in step with the market. When the market is bobbing and weaving, as it is now, there isn't much in the way of a useful trend to latch on to.

Whether they will admit it or not, many market commentators have been waiting for a Santa Claus rally to kick the markets onto the "UP" escalator as the end of the year approaches. But Santa Claus may not deliver this year.

So, my advice right now is to take the intermediate-term trend of the market seriously and pull in your horns for a while. Kick the worst-performing stock (or two) out of your growth portfolio and tighten up the stops on any stocks that are showing weakness. Keep new buying to a minimum. Have some eggnog. Look at the tree. Relax. The market will come around eventually, and if you've followed the rules, you'll be ready for it.

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My stock pick today is based on one great rule, which I learned during my first few weeks at Cabot. "The most bullish thing a stock can do is go up." A stock that is advancing in spite of market weakness is a great find. After all, only the strongest swimmers can make progress against the current.

I wish I had a Chinese stock that answered that description, but the news there is too hot for most investors to handle. What you may not know is that in addition to my position as Chief Analyst for Cabot China & Emerging Markets Report, I also work on Cabot Top Ten Trader, Mike Cintolo's weekly review of the 10 strongest stocks of the previous week. Writing about Top Ten stocks keeps me in touch with what's working in U.S. growth markets as well as emerging markets around the world.

So I'm returning to one of my favorite stock screens, limiting my search to liquid stocks that trade above 10 and have shown price advances for the last five weeks in a row. I'm looking for a stock that's rallying in spite of the punchy market, and one that's relatively conservative.

And what pops up is Lowes Companies (LOW), one of the largest home-improvement, building supplies, do-it-yourself, do-it-for-me and appliances stores in North America. (Lowes hasn't been featured in Top Ten-yet-but it's the kind of strong package of story, numbers and chart that Mike looks for.)

Lowes has over 1,800 stores and grows revenues steadily (every year but 2010, when the Great Recession's effects were still being felt). Earnings are forecast to grow 23% this year and 22% next year. The stock also offers a useful 1.4% annual dividend.

The company is getting a big boost from two sources. First, there's the added earnings power created by low oil prices; what people don't spend at the gas pump can be spent on the house! Second, a generally improving economy and housing market is creating higher demand for home improvement projects.

LOW went through a year-long basing process from November 2013, when it finished a long rally at 51. The stock dipped below 45 in May 2014, but was always under control. The breakout came after LOW pushed to new highs in August, then traded sideways in a tight range in September and October.

Lowes is a good defensive stock for a market with plenty of question marks. It's stronger than the broad market and pays a dividend. If you're looking for a safer place to be in this market, LOW is a good choice.

For details on stocks with strong stories, numbers and charts, consider taking a risk-free trial subscription to Cabot Top Ten Trader.

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Sincerely,

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


Paul Goodwin can be found on Google Plus.

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