Status on the Five Steps of a Stock Market Bottom
A month ago, I wrote about the five characteristics of market bottoms, and in this issue, I update our progress toward reaching the market bottom. Happily, we’ve seen some improvement since my update two weeks ago.
I’ll also delve into retail stocks, and explain why they could be our next market leaders. (Here's more about retail stocks).
Here's where we stand:
1. Extremely Negative Breadth and Sentiment Measures
We met this market bottom requirement back in late-January. Interestingly, we've seen even more sentiment extremes of late-the percent of bullish investment advisors fell to its lowest level since 2009 last week, while the same figure for individual investors plunged to a 25-year low! Bottom line, there's enough negativity around for a sustained market rally.
2. A Market Bottom-Building Process
Well, this one gets a "maybe." We did see a three-week bottoming process, with the indexes retesting their January 20 lows on February 11. That's nice ... but following a 15% to 20% plunge, the market usually needs more than just three weeks to rebuild the damage.
3. Positive Divergences as the Market Bottom is Built
This goes part and parcel with #2-we did see the number of stocks hitting new 52-week lows dry up to around 1,400 (NYSE and Nasdaq combined) on February 11, combined with 2,300 on January 20. That's good, but is it enough of a sign of a strengthening broad market to kick start a big advance? I'm doubtful, but will take it as it comes.
4. The Stock Market Trends Turn Up
Here's where things are getting interesting-my intermediate-term trend following indicator (dubbed the Cabot Tides) are extremely close to flashing a green light. If so, it will be the first time in more than two months that the indicator has been positive, and a real sign that the sellers are worn out. Now, on the other hand, my longer-term trend measure (Cabot Trend Lines) are still clearly negative, and most stocks are also in longer-term downtrends. But any Tides buy signal would be a good step in the right direction.
5. Growth Stocks Powerfully Breaking out of Trading Ranges
There's almost nothing happening on this front. There are few set-ups here, with most of the strength of late occurring in broken stocks. It's going to take at least a couple of weeks to see more legitimate set-ups and launching pads form, and probably longer.
All in all, after a couple of months in the storm cellar, I've started to slowly come off the sideline. But I emphasize slowly-with such a short bottoming process, so few set-ups among growth stocks and a longer-term downtrend, the market still has a lot to prove. So I'm probing but staying close to shore.
Watch Retail Stocks for New Market Leadership
As a growth investor, my main focus is always on my current indicators and individual leading (and potential leading) stocks. That's what drives my investing actions on a week-to-week basis.
But I also take some time every week or two to ponder any bigger shifts that are going on, and what their reverberations might be. And the biggest shift during the past couple of years, of course, has been the drop in oil. To me, it’s really broader than that—after a 10-year bull run in most commodities (interrupted by the 2008 wipeout), all kinds of commodities—from agricultural to metals to precious metals—have entered major bear markets.
Now, some of those bear markets are mature (gold topped out way back in 2011!), and even the commodities that "only" topped out 18 months ago have had huge 50%-plus drops. So a multi-month rally in any of these commodities is certainly possible.
But I am thinking that, big picture, the decade-long secular bull market (early 2000s to 2014) in commodities is over, which means the next 10 years will probably bring generally "low" commodity prices. Who will that benefit? I think it will be retail and consumer-oriented companies, as consumers have more money to spend, and as input costs for food or materials go down and stay down.
Thus, I'm on the hunt for some retail-related companies that can make huge runs during the next bull phase.
3 Retail Stocks to Watch
I know you're looking for stock ideas-and I have three of them for you, including one I mentioned in Cabot Wealth Advisory two weeks ago.
Five Below (FIVE) is one of my top watch list candidates right now. It's a dollar store for teens and pre-teens with about 440 locations today. Long term, that total should rise to 2,000 or more, with double-digit store growth annually for many years. And each store offers a quick return on the company's investment-money spent to open a new store is usually recouped in less than a year. The company believes sales and earnings can grow 20% annually for many years to come, and the stock believes it-it's been trending up since November! Earnings are likely out in mid-March.
Another name to watch is Texas Roadhouse (TXRH), which operates 485 full-service restaurants around the country. (I can speak from experience the food is darn tasty too.) The firm just reported fourth-quarter results that topped expectations (revenues up 12%, earnings up 23%), with management specifically citing lower food as a reason for its higher margins. The company is aiming to open 30 new restaurants this year (6%-plus store growth), and has posted 24 straight quarters of same-store sales growth. Shares of TXRH are a bit thin for my taste ($30 million volume per day), but I love the stock's push to new highs on Tuesday.
Third, I'm still watching an oldie but goodie that, admittedly, needs time to set up properly. Zoe's Kitchen (ZOES) is a new player in the fast-casual restaurant scene, serving fresh Mediterranean fare in 165 restaurants in 17 states. Similar to Five Below, ZOES has a huge runway of growth-the concept is large enough to be proven (it's seen consistent growth among different locations and states), yet management believes there's room for 1,600 Zoe's restaurants in the U.S. alone. And it's wasting no time in getting there, aiming to boost its store count by 15% to 20% annually for the next few years. The stock is still well below its old high (it's made no net progress since its IPO in April 2014), but let's see how the stock reacts to earnings tonight (February 25).
Cabot Top Ten Trader features momentum stocks that are ready to take off in the weeks to come. Despite the volatile market, we've been able to grab double-digit returns in stocks recommended since the beginning of February-23% in OLED, 20% in ELLI, 16% in KORS, 17% in VNTV, and many more! Cabot Top Ten Trader is your ticket to big profits in any market.
Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader