Stock Market VideoHow to Handle a Young Buy Signal
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In this week's stock market video, I look at the new buy signal Cabot's growth advisories have received from the rebound in market indexes. It's still fragile, but it's definitely a buy signal, and you should respond by doing a little buying (one or two stocks) of the strongest names on your watch list. Let the market pull you back in, and if your choices wind up making money, you can wade in deeper. I also look at strong stocks in four categories that look like likely candidates.
How to Handle a Young Buy Signal
Everybody likes good news, right? Well, the good news for growth investors is that we have a new buy signal.
In technical terms, that means that the indexes used by Cabot’s growth advisories (Cabot Growth Investor, Cabot Emerging Markets Investor and Cabot Top Ten Trader) have climbed back above their moving averages. And when an index (like the S&P 500, shown below) gets back on top of its 25- and 50-day moving averages and the lower of those averages turns up, that signals that the intermediate-term trend of the market is now up.
As you can see, there’s the S&P, powering up from 1,880 to just under 2,000, and the 25-day moving average (the green one) at 1,952, with a clear upward curl in the last three days.
So. Buy signal.
But in practical terms, what does that mean?
Well, here are a couple of things that it doesn’t mean. It doesn’t mean that you should scrape together all the cash you’ve been holding on the sidelines and push it onto the table as if you were in the finals of a Texas Hold ‘Em tournament.
And it doesn’t mean that markets are out of the woods and it’s going to all blue skies and clear sailing from now on. Market timing indicators like Cabot’s are completely descriptive, and have no predictive powers. These market-trailing indicators just tell you when markets gain positive momentum. Period.
Here, as promised in the title, are a few tips on how to handle a new buy signal.
First, you should do a little buying. For a portfolio with 10 or 12 positions, that translates to buying one or two additional stocks. (If you’ve been following the advice of Cabot’s growth advisories and have been heavily in cash, the additional buys will bring you back to somewhere around 50% to 60% invested.) Look for stocks to buy that have strength in their stories, numbers and charts; you want the complete package.
Second, don’t jump. If your stocks make money for you, you can buy more, increasing your exposure gradually as long as everything remains copacetic. Let the market pull you in. Then, if the market goes wrong or your stock picks aren’t doing their job, you can back out again.
Third, remember that new buy signals are fragile. When an index has just pushed its way above its averages, it’s vulnerable to a reversal in market fortunes that can pull it lower in a few days. Staying in sync with that kind of new move requires a light touch.
So, welcome to your new buy signal in U.S. markets. Please remember that, like a new puppy or kitten, things can be a little unpredictable for a while, and follow these rules.
"Take a man and put one of his feet in a bucket of ice and the other foot in a bucket of boiling water; and, on average, he's comfortable"—Mark Twain
Tim’s comment: The whole idea is patently ridiculous. In the investment business, however, averages do matter, and smart investors pay more attention to their average returns and less attention to their outliers, both positive and negative.
Paul's Comment: Twain always had a particular bone to pick with statistics, and this kind of absurdity is right in his wheelhouse. (I hesitate to point out that a true average between freezing and boiling—122 degrees F—wouldn’t actually be that comfortable. But I know what he means.) Likewise, the average returns for an index in particular months, or years, can be very misleading. It’s best to keep you eye on what’s actually happening to your stocks.
---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.
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 10/5/15 – The Problem with Hunches
In this issue, I write a bit about my tiny woodworking projects and the hunches about pieces of firewood that inspire them. I also talk about the trouble with using hunches as guides for your stock investing. Stock discussed: Activision Blizzard (ATVI).
Cabot Wealth Advisory 10/6/15 – Have Solar Stocks Bottomed?
Tim Lutts, who helms Cabot Stock of the Month, looks at an interesting explanation of why markets tend toward extremes and the current state of solar stocks, many of which have been going through a very tough time, but may be ready to rebound.
Cabot Wealth Advisory 10/8/15 – Is Facebook the New Apple? (And Two IPOs to Watch)
Cabot Growth Investor’s Chief Analyst, Mike Cintolo, looks at why Facebook may be moving into the leadership position that Apple used to occupy. Stock discussed: Shopify (SHOP).
Chief Analyst Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory