Stock Market Video
How to Stay in Step with the Market
This Week's Fortune Cookie
In Case You Missed It
In this week's Stock Market Video, I point out the divergence between the Nasdaq's weak recent performance and the flatter charts of the S&P 500 and the Dow. It's still a stock picker's market and there are some excellent setups and breakouts to consider. But there are also some very good-looking setups that have turned negative after bad earnings reports. It's a good time for caution and cash, but not a time to crawl into a hole and pull it in after you. Click below to watch the video.
How to Stay in Step with the Market
Stock markets are about as good a substitute for soap operas as you can find in the business world. Always drama. Always a crisis or a triumph or a tragedy. And occasionally there will be a real plot twist, like the ones that show up in the final episodes of popular TV dramas.
Right now, the intriguing plot line is what's been happening to the growth stocks that dominated trading for so much of 2013 and the first three months of this year. If you take the Dow Jones Industrial Average as a proxy for dividend-paying blue chips and the S&P 500 Index as a stand-in for large cap stocks in general, then the Nasdaq Composite (often called the "tech-heavy Nasdaq") is the flag-bearer for growth stocks.
Here's a chart of what's been happening to the Nasdaq in the past three months. (February 9 to May 9)
Not a pretty picture. Not only is the general trend down since the peak in early March, the volatility has been quite high, which makes investors nervous.
By contrast, the stately old Dow has been relatively unruffled. Here's its three-month chart.
And the S&P 500, which represents a big percentage of the total market capitalization of the entire stock market, has been likewise holding its own in fine fashion.
I think it's interesting that when you compare the charts you see pretty much the same ups and downs as good or bad news arrives. But the bears, who have been winning the battle of the Nasdaq, have been fought to a standstill in the other two major indexes.
I have just one more chart to show. It's the chart of the PowerShares Golden Dragon China ETF, which I use as the basis of the Cabot Emerging Markets Timer. As you can see, it's been pretty much a slippery slope since March 7. Not a pretty picture.
But I have two very important points to make, one about the China chart and one about the three U.S. indexes.
The China chart shows that investors have turned away from Chinese stocks for now. And many of those Chinese stocks were in the tech sector of the Chinese economy. So the aversion to China was compounded by the same aversion to tech stocks that we see in the Nasdaq.
But the damage to the Cabot China & Emerging Markets Report's portfolio has been kept under control by a steady move away from stocks and into cash as the correction continues. Right now, after selling two more stocks yesterday, The Cabot China & Emerging Markets Report portfolio is just 35% invested. That means that we have a 65% cash position that is saving our capital for the day when investors' appetite for emerging market stocks comes back to life.
The second point is that right now, investors don't really know which way to turn. The AAII Investor Sentiment Survey that measures the percentage of individual investors who are bullish, bearish and neutral on the prospects for the stock market in the next six months has historically averaged 39% bullish. Right now, the bullish percentage is a little over 28%.
The bearish percentage is usually about 30.5%. Now it's a little lower, just under 29%.
But the stunner is that the percentage of individual investors who are neutral on the market, which usually matches the bearish number exactly, is now at 43%! That's a huge bump in the number of investors who don't have any idea where the market is going.
Historically, when markets are heading sideways and growth stocks are having a tough time, Cabot doesn't get a lot of takers for our investment advisories. People don't want to buy into a blah market. And a high "neutral" sentiment reading is the touchstone for that kind of hesitancy.
When markets are humming along in high gear and stocks are on the rise, our phones never stop ringing. And subscriptions reach their highest level just about when markets are ready to go into a correction. That's how the stock market works and it's how our subscriptions work.
The case I'd like to make is that a truly sensible investor should regard a market situation like the one we have now as the ideal time to start following the market with real interest. Maybe the bears will worry the market for another month or two. Maybe the bulls will storm back into town next week. We don't know.
But subscribers to Cabot's growth advisories that use market timing to regulate their level of aggressiveness and defensiveness (remember that Cabot China & Emerging Markets Report is now 65% in cash) will be among the first to know when markets turn up again.
There's an old market proverb that says, "If you think it's a bottom, it's too early; if you know it's a bottom, you're too late."
But Cabot's market timing indicators give buy signals within a week or two of the resumption of uptrends. And the subscribers who follow them are among the first investors to get back on the side of the bulls.
That's why I think that now is actually the perfect time for the wise investors to jump on board one of Cabot's growth advisories. No need to be depressed or stew about the state of the markets. Just watch from the safety of cash and wait for Cabot's historically accurate indicators to tell you when to put your money back to work. And you'll be ahead of the crowds.
Here's this week's Fortune Cookie. Remember, you can always view all previous Fortune Cookies and Contrary Opinion buttons by clicking here.
Tim's Comment: Similarly, it's worth remembering that a bull market climbs a wall of worry. Which means that as this market correction evolves, and investor sentiment becomes more and more negative, we get increasingly closer to the bottom, and the start of the next bull move!
Paul's Comment: The only ways to get real enjoyment out of a bear market are short positions, put options and bearish ETFs. For those of us who follow the growth stock discipline, the best we can hope for is that our cash position is heavy enough to insulate us from the chill. But old Henry is right, every bull market that has ever been was born with the wind of a bear market on its face. And the lift the market gets after the bears are finally booted out is reward enough for following your sell rules for a while.
In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
In this issue, Cabot Stock of the Month's Chief Analyst Tim Lutts introduces a new series on stocks that his Cabot colleagues see as great long-term investments. The results in 2013 were impressive; including Tim's own picks First Solar ( FSLR ) and Tesla ( TSLA ) . Tim will raise the curtain on the first of his 10 picks in Monday's Cabot Wealth Advisory.
Mike Cintolo, the alpha dog of Cabot's growth pack and Chief Analyst of Cabot Market Letter and Cabot Top Ten Trader, continues his series on chart reading by looking at how charts can help you sell your stocks better. Mike also looks at a few stocks with upcoming earnings that you should keep an eye on.
Nancy Zambell, editor of Investment Digest and Dividend Digest, writes in this issue about the advantages of investing in stocks that offer high dividends with the potential for price appreciation. Stocks discussed: Realty Income Corp. ( O ) and Alexandria Real Estate Equities ( ARE ).
Have a great weekend,
Chief Analyst, Cabot China & Emerging Markets Report
Editor of Cabot Wealth Advisory