2015 Stock Trading in Review
10 Year-End Investing Tips
4 Growth Stocks to Put on Your Watch List
Late December is usually quiet for me, and this year is no different. Our 10 Low-Priced Stocks Report for 2016 has been published, I've published my last Cabot Growth Investor and Cabot Top Ten Trader issues of 2015 and my in-laws have just driven off after a five-day Christmas visit (heading down to Florida for two months!).
The relative quietness makes it a good time to get away from the day-to-day grind of the market, look at past trades, see what I did right or wrong, and come up with a few "do's" and "don'ts" for the months to come.
Thus, today I want to relay a few points, not just about the current market and 2015 as a whole, but about lessons learned this year that will likely apply to 2016.
1. The name of the game with growth investing is to never lose big, and conversely, to occasionally win big. (Hence, cut losses short and let winners run.) The big example during the past year, of course, is the dip in energy stocks; while the drop has been extreme, the fact is this kind of huge move isn't that unusual in the market, and is exactly the kind of move you have to guard against. So even if eight out of 10 times it might seem better to not cut the loss, in the long run, it's better to get out and make sure you don't get caught in a disaster. That's why I also preach trend following when it comes to market timing. Has trend following been frustrating this year, and for that matter, the past couple of years? Big time! But in the long run, trend followers are guaranteed to never miss a major upmove, and also guaranteed never to stay in a huge, prolonged decline. Sure, sometimes you get whipsawed, and sometimes, like in 2015, the market is simply chugging along in a sideways trend. But it's the best way to catch-or avoid-a big trend.
2. Speaking of a big trend, I think the odds heavily favor 2016 being a far "trendier" year, up or down. I don't mean to imply that we'll go up or down all year long, but that we'll actually see a couple of persistent trends that last three, four or even five months. (2014 and 2015 have been the opposite, with moves lasting just four or five weeks before stalling out.) Keep in mind that it's extremely rare for the market to be range bound, yet we've seen about two years of little progress for much of the broad market-the S&P 600 SmallCap Index, for instance, has been stuck in a 20%-ish range since October 2013 and, coming into this week, had made no net progress since February 2014. I think a third year of choppy action is unlikely.
3. Mostly, I believe the odds favor any major trend next year being up. I say that not just to be optimistic but because of a study I published in Cabot Growth Investor a couple of weeks ago: Going back to 1928, Following flat market years (defined by a total S&P 500 return of between -5% and +5% for the year), the market averaged a whopping 23% gain the following year, with 90% of the years showing gains. Those returns were a bit more muted when looking at more recent history (up +14% following flat years since 1965), but even so, there's evidence the endless chop will disappear in 2016.
4. None of this is to say I'm complacent, though. There remains lots of topping evidence in the market, with the major indexes unable to break through resistance while the broad market deteriorates and divergences abound ... typical action of major market tops. Thus, I certainly can't rule out the possibility that a bear market is on the horizon. That's why we continue to stay relatively close to shore; in Growth Investor, we're 45% in cash and have a couple more stocks on tight leashes, and have cut back on new buying until the bulls show some real power.
5. However, I continue to believe the odds strongly favor any bear phase being "garden variety," something like 20% to 25% on the downside, lasting for a few months. I'm not downplaying that-such a move would still cause lots of damage-but a replay of 2000-2003 or 2007-2009 is not in the cards. Anything is possible, of course, but an 18- to 36-month bear market is highly unlikely. In fact, I think the fact that the major indexes have held up well despite numerous pieces of bad news (interest rate hikes, Chinese economic slowdown, oil collapse, exchange rate nuttiness, terrorism, etc.) is hinting the same thing.
6. Switching to portfolio management, the good thing about a challenging year is that it helps you fine-tune some areas of your investing. I think the big lesson of 2015 concerns stock selection; there have been opportunities in certain stocks this year, but you had to focus on the best of the best. Ideally, everyone should "trade the best and leave the rest" all of the time and in every environment, but human nature doesn't allow that. So if you do anything during your downtime, my advice is to develop a stock buying checklist-a group of "must have's" before you buy a stock.
6a. Some of my own criteria that would be on that checklist include: Stock is trading above its 200-day moving average; my Cabot Tides (intermediate-term trend market timing indicator) is positive; stock trades at a big volume; revenues up at least 15% in the latest quarter; earnings estimates up at least 15% for the upcoming year; and the stock has shown at least some bullish volume clues during the past few weeks. Those are reasonable minimums before I would consider getting in.
7. Another lesson learned (or re-learned) from 2015: Remember not to get "caught in the middle." What I mean by that is that, with such choppy action, you have to either be shorter-term oriented (possibly swing trading in and out of positions every three or four weeks) or longer-term oriented (willing to ride out multi-week corrections and consolidations). Those who fall in between often find themselves get shaken out after a stock retreats for a few weeks ... often just before it ramps higher again. Frankly, this was one of my biggest mistakes in 2014, but we corrected it this year (for the most part), allowing us to hold onto some decent winners, even in a challenging year.
8. My general thoughts on the energy sector after their bottom in August of this year was that big drops take time to heal-and given the 14-month decline in energy stocks (June 2014 to August 2015), some months would be needed for the sector to build a bottom. Interestingly, while some areas of the sector (like MLPs and upstream explorers) have hit lower lows, many oil service and integrated oil stocks (XOM, CVX, etc.) have held their August lows so far. My thought: A push by XLE back above its 200-day line (currently at 71 and falling) in the weeks ahead would be a sign the energy bear market could be subsiding.
9. I'm not one for predictions, but my pick for a widely disliked sector that could do well in 2016 is Chinese stocks. After so much talk about China's slowing economy and its own stock market crash earlier this year, few investors are interested in the group. But the action of many of the leaders (NTES, BABA, CTRP, BIDU) has been decent considering the overall market, and the fund for the group (symbol PGJ) is resilient, hitting multi-month highs just last week. Given that the group hasn't done much on balance for a few years, it wouldn't surprise me if a few Chinese stocks perform very well.
10. My final thought is something I've talked about on many Cabot Weekly Review videos in recent weeks-whether you own them or not, I think you can use the liquid growth leaders as clues to the market's health. Right now, I see many that are coiled tightly ... usually a good sign if (if if if) the market can get going.
Thus, monitoring some of these liquid growth leading stocks and key support and resistance levels could not only provide some good buying ideas, but also offer you a glimpse into the market's overall health.
Here are four ideas for you.
Amazon (AMZN), which might be the top growth leader, would be buyable above 685, while a drop below 635 would be a yellow flag.
Facebook (FB), which has etched a tight flat base, will break out above 110 or so, while a move below 100 would be questionable.
Alibaba (BABA), which has set up its first real base since coming public, would look great above 86-87, but a drop below 77 or so would be worrisome.
Nvidia (NVDA), the top chip stock right now, has quieted down for a few weeks, finding support near its 25-day line. A move above 34 would be bullish, while a drop below 30 would be a yellow flag.
There are others, but that's enough for now-if every stock surges to new highs, it would be a bullish sign for the market, and vice versa. Keep an eye on them!
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Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader
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