Here’s the situation: You have completed your research on your preliminary list of stocks. You have narrowed it down to those that each have a big idea, and the potential for fast sales and earnings growth. Technically, you selected those with a strong RP line and price chart. So, with some cash to invest, you took the plunge and bought a couple of great growth stocks. After all, that’s how the stock market works, right? You buy, you sell, you pocket the profits.
Not so fast. After buying a stock, the next step in the ownership lifecycle is to hold that stock. It sounds easy to sit and watch your stocks that are going up, but you may find holding stocks harder than you think. And although it sounds passive, there are some things to focus on, like gunning for profits and practicing patience. This lesson will help you learn about holding stocks for as long as their major growth phase lasts.
The One Thing You Need to Follow
In our opinion, the most interesting thing about the stock market is all the factors that influence it. If you read the newspaper each day, or follow one of the investment news websites, you’ll find articles about inflation, interest rates, the U.S. dollar, the Fed, money supply growth, international economies, housing activity, federal budget deficits or surpluses, unemployment data, and much more. Many of the articles you’ll find will focus on how these things influence the stock market.
In addition, there is plenty of investment news that relates to specific industries or companies. They usually focus on how trends in the economy or a specific sector can help or hinder these companies and their stocks. Some of those stocks might be ones that you own. After reading a few news articles, investors can easily become unduly influenced about a stock or an industry, to the point of buying or selling because of it. This is not the right way to go about investing.
We know for a fact that, instead of guessing (and that’s really what it amounts to) about what effect these numerous fundamental factors will have on your stock, the best thing to do is simply to watch your stock. This will help you determine if your stock is being accumulated or distributed, which is the only thing you need to know! Why? Because the only way to tell how all of the fundamental factors will influence your stock is by simply watching the stock itself.
Here at Cabot, we always remind each other to “stay focused on the market.” While that may sound obvious, it can be difficult to do considering the two or three newspapers and dozens of online articles we read every day. Most of these articles don’t simply relay news. They also give opinions. (And the ones that do relay news may not always be objective!) So we make sure to keep our focus on our stocks and not let the various opinions get in our way. After all, if the stock is heading higher, who cares what one or two people think of our stock, its industry, or even the market as a whole?
Welcoming Bad News
As a matter of fact, we welcome bad news about our stocks. Of course, we’re not talking about actual bad news, such as a drop off business or a missed earnings projection. We mean negative opinions (which are often confused with news) about our stock. When a few analysts or commentators dislike a stock we own, that’s fine with us. We’ve learned from experience that great growth stocks don’t top until most investors believe they are a good investment—much like the market as a whole. It’s simply the theory of contrary opinion: the fewer bulls there are, the less the potential buying power to push the stock higher.
Therefore, we don’t mind one bit if some analysts or commentators say that our stock isn’t a good buy or that it should be sold. These types of opinions breed skepticism, which is what growth stocks thrive on.
So don’t focus much on the media one way or the other. The only thing that should affect your judgment of a stock should be the stock itself.
What to Watch for in Your Stock
Now you know that you just need to watch your stock. But what are you looking for? Simple. Look to see if it continues to show the same type of positive technical patterns that attracted you to it in the first place.
First, watch the stock’s RP line. If the RP line is hitting a new peak every week or two, just hang on tightly and enjoy the ride. This type of RP line is telling you that your stock is under intense accumulation (assuming that the broad market is healthy), which should put to rest any thoughts you might have of taking action. Even if there were the occasional four- to five-week correction, we wouldn’t worry at all.
Next, watch the price action of the stock. Is the price itself hitting new highs along with the RP line? If so, then go outside and enjoy the weather. Again, like the RP line, it’s reasonable to see the price pull back for a few weeks. But the shorter and shallower the corrections, the better the situation. Keeping an eye on the price of your stock helps you determine its actual supply and demand situation. Remember that the RP line can actually move higher even as the stock loses ground, if the broader market is falling faster than your stock’s price.
Another part of the supply and demand situation for your stock is its volume patterns. You want to see volume rise when the stock price rises, and volume ease when the price eases. This indicates that your stock is under accumulation and can continue to move much higher.
That’s it! You really don’t need to analyze much else. In fact, just as others’ opinions can affect your judgment, so can a slew of technical indicators, such as a stochastic, MACD histograms, candlestick chart patterns, etc. You can always find a reason to be bullish or bearish on a stock or the market, and often times searching for them can cloud your thoughts. Our advice is to stick with the stock’s RP line, price chart and volume pattern.
Aiming for Big Winners
Our next lesson will cover the goals you should have when holding a great growth stock. Now that you understand that you should shut out all the ‘noise’ out there, you’re ready to formulate your investment goals. And that’s the first step toward attaining the big market winners that make all the difference to your portfolio over time.
Mike Cintolo recommends great growth stocks in Cabot Growth Investor