How to Read Stock Charts
Want more expert advice from Mike that utilizes his expert chart reading skills?
Try Cabot Top Ten Weekly! Here’s what Mike recently had to say about it and the market …
There’s no question about it: So far, 2010 has been a tough, grinding year for the stock market. The major indexes are down 5% to 10% for the year, with most off 15% or more from their spring peaks. Many stocks and sectors have skidded sharply since topping out in April. And the news … well, the news simply stinks. Housing sales are plunging, manufacturing output is fading, double-dip recession talk is everywhere, and, looking further out, many investors seem resigned to a sub-par long-term future for both the economy and the stock market, content to put their money in bonds yielding 2% for the next five or 10 years.
In other words, pessimism—not just about the present, but about the intermediate- and longer-term future of the economy—is literally off the charts! Yet while 90% of investors are focused on all of the negative news and betting on a slow-growth or no-growth future, the other 10% (who correctly raised cash back in May when the market first began selling off … and before the news was so awful) are intelligently looking ahead toward the next big bull move. And I’ve got a message for you: That bull move, based on history, is likely to begin in a matter of weeks … if not sooner! In fact, we’re seeing signs of it now.
Now, those of you who know me and my investing style know that I’m not the kind of guy who usually predicts where the market is heading. (I like to think that I’m in the interpretation business, not the prediction business, when it comes to the stock market.) But I’m also a student of the market and have studied its past. And one of the best tricks I’ve learned in hundreds of hours of studying is the success and consistency of the four-year cycle (also called the Presidential Cycle).
I wrote about this recently (the article was picked up by MarketWatch and other news outlets), and the main thrust of it was that, from the low in the year of the midterm election, to the high of the following year, the stodgy Dow Industrials averages a gain of 50%. You read that correctly—a 50% gain, on average, for the Dow.
“Yes, Mike, that sounds great, but that probably occurred in the past because conditions were much better than they are today,” a skeptic might say. But that would be absolutely wrong! In 1998, for instance, the market was faring far worse because of the implosion of Long-Term Capital Management and the Russian Ruble crisis (the Nasdaq fell 31% in 10 weeks). In 2002, the market was nose-diving in the third year of the Internet implosion. Back in 1990, that “four-year bottom” was created as oil prices surged, the economy fell into recession and the first Gulf War was set to begin. Heck, I could even go back to the 1974 low, when the combination of Watergate, inflation, recession and a two-year bear market make this year seem like a run through the tulips! In other words, this cycle has held true to form in many environments that were far worse than this year.
Why does such a rally take place? I think it’s because, in most midterm years, the electorate tends to create a more divided government, something that historically, the market enjoys (partly because it eliminates lots of policy uncertainty). Anyone reading the polls for this November ‘s election can see that, at the very least, Congress is going to become a lot more balanced. Also, the President and Congress usually both try to goose the economy following the midterms to bolster their chances in the next election.
Thus, to me, the message is clear. While it seems hard to believe, the market will likely not only form a major bottom relatively soon, but follow that up with a strong, sustained uptrend that lasts for much of 2011. So the question is, how are you going to invest in that trend when it begins? The best way to make money during bull moves is to buy the strongest fundamentally exciting stocks at the right time. And the #1 way to uncover those stocks is Cabot Top Ten Weekly.
Each week, then, I give you the 10 strongest stocks in the market, but I don’t just drop a list in your lap. I also tell you why the stocks are strong, what their prospects are and, importantly, provide a suggested buying range (I usually like to buy these strong stocks on normal, 5%-type retreats). Moreover, I also highlight one stock each week as my “Editor’s Choice,” to point you to the name I am most enthusiastic about going forward.
How has the system worked? Well, since the start of 2007, nearly four years worth of data, the average Top Ten stock has outperformed the market by about 15% on an annualized basis. (Incidentally, in 2007—the last “pre-election” year following the four-year cycle—Top Ten stocks averaged a huge 30% annualized gain, versus the S&P 500’s gain of 3.5%.) But to me, the real story isn’t the average numbers; it’s the fact that, during every year, Top Ten has managed to hit on not some, not many, but all of the big winners.
In 2005, for instance, Top Ten Report recommended Hansen Natural (HANS) seven different times, on its way to a 570% gain; Frontier Oil (FTO) seven times, on its way to a 400% rise; and Titanium Metals (TIE) three times, as it motored up 520%.
The year 2006 brought monster stocks like Crocs (CROX), recommended three times as it rose from 16 to 75 within 12 months; MasterCard (MA) five times during its 170% run in less than a year; and NutriSystem (NTRI) seven times, during its amazing 480% run-up in eleven months.
As I mentioned earlier, 2007 was a particularly great year, with recommendations like First Solar (FSLR), up 520% in 10 months; JA Solar (JASO), up 200% in seven months; DryShips (DRYS), up 510% over 10 months; and Research in Motion (RIMM), up 149% in seven months, just to name a few.
Even during the down times of 2008, Cabot Top Ten Weekly recommended winners like Cleveland-Cliffs (CLF), which doubled in four months after being featured in February; Continental Resources (CLR), which rose 160% from its recommendation March 31 to its peak in July; and Walter Industries (WLT), a booming coal stock that moved from 42 in January to 112 in early July.
And yes, even in the challenging environment of 2010, Top Ten has highlighted Sotheby’s (BID), UAL Corp. (UAUA), Acme Packet (APKT), SanDisk (SNDK), Chipotle Mexican Grill (CMG), Netflix (NFLX), Veeco Instruments (VECO), Baidu (BIDU), Dendreon (DNDN), Dollar Thrify (DTG), Perrigo (PRGO), AnnTaylor Stores (ANN) and Salix Pharmaceuticals (SLXP), all of which rose at least 30% in three months time, with a few (like UAL Corp., believe it or not) up north of 75% during that time.
And that last point is something I want to highlight—while it’s hard to ever get excited about investing in airline stocks, my proprietary screens found UAL Corp. and it found its way into Cabot Top Ten Weekly. The screens are unbiased; I’m just trying to find where the big money is flowing, whether it’s in growth stocks, commodities, turnarounds, cyclicals … you name it, I’ll find it.
Last but not least is market timing … a topic near and dear to my heart. On page 1 of every Cabot Top Ten Weekly, my Market Monitor will give you a quick view of the health of the market. Because the heart of my market timing system is trend following, I’m never stuck in a prolonged downturn, and I’ll also never miss out on a major bull run. I sat out most of 2008, in fact, and this year, I’ve had the Market Monitor in the neutral position since early May, advising subscribers to keep positions small and hold some cash on the sideline.
But as I said above, four long months of correction, combined with the four-year cycle and overwhelming pessimism among investors tells me a terrific buying opportunity is coming up quick. And if you want to take advantage of it, I invite you to join Cabot Top Ten Weekly so that you’ll be on board the very biggest winners in the market.
Editor of Cabot Top Ten Weekly
P.S. Don’t miss out on the huge gains Mike sees ahead during this Presidential Cycle. Join him today to reap the rewards of the market’s next upmove!