Mike’s Thoughts On the Market
Watch Lists, Shorting, Market Timing and More
Two Parting Thoughts
Given all that’s gone on in the market during the past couple of weeks, we thought it best to just get to the heart of what is on investors’ minds. In the following interview, I asked Cabot’s V.P. of Investments, Mike Cintolo, for his thoughts on the market, what scenarios he sees potentially playing out and, of course, his general recommendations for what to do now.
Mike made some of these points when he recorded his Cabot Weekly Review video last week, and many of my questions are based on emails we received during the market’s selloff.
If you have any questions or comments on the interview, let us know by responding to this email.
Paul: OK Mike, I don’t want to go over all the gory details of the past two weeks, but we’ve obviously seen a straight-down move in the indexes and lots of stocks falling apart. What do you make of the move? And where do you think we go from here?
Mike: As you know Paul, I’m always on the lookout for unusual strength or weakness, so I’m “impressed” by the recent plunge because we fell nearly 11% on the Nasdaq in a span of 10 trading days without more than a two- or three-hour bounce along the way. To me, that’s unusual weakness, which will probably lead to more pain in the weeks ahead before any sustained advance gets going.
As for the future, you know I shy away from predictions; it’s best to just interpret what’s going on. But there are two scenarios that I’m looking at.
The first is that this decline is a kickoff to the downside—markets will sometimes top for five to seven months before declining in earnest (because it takes that long to distribute stock and frustrate the early short sellers), and most major indexes topped out from May to July—five to seven months before the recent plunge. So this could be the kickoff to a bear phase.
The second possibility is that this is the final washout in the market decline/correction that started in August. Reasons for this: So much selling has already been done among most stocks (small- and mid-cap indexes are down nearly 20% from their highs, and nearly 1,300 stocks hit new lows on Wednesday) and sentiment is getting very bearish (based on surveys, put-call ratios and the like). You don’t usually see bear phases get underway with over 1,000 stocks hitting new lows after just a few down days, which is the case here.
If we see a very strong snapback later this month (during earnings season) with some new leadership, I’d be temped to say that scenario two is playing out. For now, though, I’m just taking it day-to-day, week-to-week, and trying to stay in gear with the evidence, which is clearly negative right here.
Paul: What have you been telling subscribers who are still heavily invested in stocks and haven’t raised cash?
Mike: In that situation, I usually advise people to split the difference—do some selling, preferably among your biggest losers and/or biggest positions. However, you don’t have to go from, say, 10% cash to 60% cash overnight; it’s OK to get to 25%, then see how the market goes, and then try to raise some more (preferably on bounces).
What I don’t advise is to just hold and hope. If you’re clearly out of sync with the market, it’s best to at least take a step or two in the right direction and then go from there. And, by the way, that’s not just best for your portfolio, but for your psyche, too.
Paul: Back to the market, you think this could be a kickoff to a bear phase, as you call it. Harking back to 2008 (and the 2000 top before that), that’s a scary thought. Should investors run for the hills for a few months?
Mike: I’m not a mutual fund guy, so I have no expertise on what to do with your kids’ college fund and stuff like that. However, one thing I have a fair amount of conviction in (and something I’ve written in my advisories) is this: If we have entered a bear phase, it’s likely to be more garden variety (20% to 30% from the highs over a few months), rather than a two- or three-year event.
I say this for two reasons. First, history has never shown us three whopping bear markets in a row—not in the 1970s, not in the 1930s, never. And second (which goes along with the first), after 15 years of little net progress in the market, many investors have already been kicked out of the stock market, and the market was not very overheated coming into this decline.
Long story short, anything is possible, but the odds are strongly against another 40% or 45% kind of bear market … and that’s assuming we’re in a bear market to begin with.
Paul: We’ve read about how last week was a historically bad start to the year, and how that kind of performance in early January portends a bad year. Thoughts?
Mike: Forget that stuff. If investing based on the first few days of the year worked, we’d all be rich. Those articles are psychologically attractive because they take something complicated and make it easy. I’m all for making things simple—I just follow trends, after all—but at best, seasonal indicators result in a small edge either way.Paul: Just thought I’d ask! Moving on to individual stocks, what are you seeing now? Obviously, most stocks are weak but are there spots of resilience? And how should people go about building their watch lists during this downturn?
Mike: First, as an aside, I would just say that down markets are great times to do some self-scouting. Take a look at your trades of the past few months, find any major mistakes and write them down on a sticky note so you don’t repeat them.
As for watch lists, it’s hard to find many stocks swimming against the tide right now, apart from REITs or defensive, high-quality blue chips. So now’s the time to be forgiving when building a watch list, at least when you evaluate a stock’s action—future leaders can still look awful in this environment.
But you don’t want to be lenient when it comes to the fundamentals. As you dig into a company’s fundamentals, demand an excellent story and fantastic growth numbers—then, even if the chart is so-so, you can add the stock to your watch list.
And be on the lookout for two situations: Recently public stocks (within the past couple of years) that could provide new leadership when the bulls return, and stocks (and sectors) that have gone through the wringer but have shown signs of re-emerging. The main thought here is that new uptrends often have new leadership, so if you’re only focused on the leaders of 2014 and 2015, you’re probably going to miss some dynamic new performers.
Paul: Willing to share any names of those new performers?
Mike: Like I said, it’s still early—good stocks can go bad in a hurry in a down market. But a few stocks that are early in their overall advances or have yet to get going include Nvidia (NVDA), Nevro (NVRO), Square (SQ) and Universal Display (OLED). I don’t want to give too much away as I provide my best ideas to paid subscribers, but those are four newer names I’m following closely.
Paul: What it would take for you to begin a new buying spree?
Mike: That’s easy—buy signals from my market timing indicators. The first to flip is almost always our Cabot Tides. That will occur when the major indexes we track rise to a five-week high in price. (It’s a bit more complicated than that, but that’s the gist of it.) Right now, that’s a ways off, so it’s a pretty sure bet I’ll be playing defense for a bit.
Now, if I was hugely in cash, something like 80% or 90%, I could nibble on something before the Tides turned positive—but I would need a signal from our market timing indicators before I’d take on any serious buying.
Paul: On the flip side, what about shorting? Do you advise doing any shorting if the market does morph into a bear phase?
Mike: As I wrote in last week’s issue of Cabot Growth Investor, I’m not huge on shorting because (a) there’s no big money to be made (your maximum profit is capped at 100%, and realistically, even a 30% to 40% winner is rare), and (b) most declines tend to happen within a few days, so your timing has to be super precise.
That said, I’m not opposed to a little shorting, but only after a market rally of a week or two. And if you short, I advise sticking with index funds or sector ETFs (the iShares Biotech Fund, symbol IBB, looks to be in trouble)—you won’t make a ton of money that way, but you could make up for some losses.
Paul: I think I know your answer to this, but since everyone asks: What’s your take on China and the economy and all that?
Mike: Next question! No, seriously, I am not an economist (thank goodness), but the market and the economy are two separate things. So I’m just focused on the market itself, which tells its own story best. Said another way, the market is already discounting all of the news and rumors about China, the global economy, interest rates and the like, so I’d rather watch the market than guess what’s going to happen with respect to those factors.
Paul: Any parting thoughts?
Mike: I have two. First, I encourage everyone to stay flexible and avoid any preconceived notions. When volatility ramps up, so do the number of predictions from all sorts of pundits. Now’s the time you have to get in gear with the market, and then just take it day-to-day and week-to-week. Nothing would surprise me in the weeks ahead, whether it’s a multi-month down phase, or a major, major rebound following the many months of intense selling in the broad market. Or maybe something in between!
Second, stay engaged. I know many people lose interest when the market is going down. But now is actually the time you want to keep your eyes and ears open, as this is when the next leaders are setting up their next play. I know that sounds like a cliché, but it really is true—while everyone else is fearful and focusing on the daily gyrations, you can get your watch list together and pounce when the real upturn comes. I’m looking forward to that!
Paul: Thank you, Mike.
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Chief Analyst of Cabot Emerging Markets Investor
and Editor of Cabot Wealth Advisory
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