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How to Invest in Stocks in the Post-Election World: 3 Dos, 3 Don’ts

Want to know how to invest in stocks with the presidential election finally behind us? Here are three things you should do, and three you shouldn’t.

How to Maneuver the Vicious Post-Election Rotation

It’s been a wild and wooly past few days in the market. Investors are re-positioning their portfolios trying to figure out how to invest in stocks in the post-election world, with crazy sector rotation that’s included huge amounts of stocks hitting both new highs and new lows. And that says nothing about the huge selloff in the bond market, which has roiled most yield sectors.

One truism in the market is that with volatility comes emotion, and that goes double when you consider we just came through a surprising election result. Today, then, with a little over a week to see the market’s reaction and ponder the future, I present three dos and don’ts for how to invest in stocks going forward. The goal is to help you keep your head while everyone else is losing theirs—something that will help you make (and keep) more money.

Let’s get started.

Do stay focused on the market’s trends.

Many investors are understandably getting caught up in the huge movements in individual stocks and sectors, but it’s vital to keep in mind the market’s intermediate- and longer-term picture. Without a real uptrend, it’s unlikely that your great-looking stock of today is going to make a ton of progress in the months ahead.

Right now, the trends are positive but bear watching. The intermediate-term trend turned positive by my measures this week, but it’s a mixed bag—small cap stocks look great while the Nasdaq is stuck in the mud. And let’s not forget that the S&P 500 and Nasdaq haven’t made it to new highs yet. Partly because of that, I’ve recently put some money to work but am not pounding the table on the buy side.

Longer term, the picture is brighter—the major trend has been up since April, and I’m very encouraged by some of the patterns I’m seeing. In fact, if all the indexes can join the small caps in new-high territory, it’s looking like the market will break out in a big way from a huge two-year base! (Check out the S&P 600 Small Cap two-year chart shown below.)

11-17-16-SML

My major point here is that you should start your day by looking at the charts of a few major indexes and not get caught up in the wild movements we’re seeing on a day-to-day basis.

Don’t let leftover emotions about the election affect your investing.

More than a few investors that I’ve heard from are either upset at the outcome of the election (and thus hesitant to join the market’s upmove) or overjoyed at the results (and are thus throwing money at stocks left and right).

I’m all for political talk at the dinner table or with some close friends and family, but it’s best to leave those opinions aside when determining how to invest in stocks —“Markets are never wrong; opinions are,” said Jesse Livermore. Thus, no matter which side of the political spectrum you’re on, if you want what’s best for your portfolio, you’ll simply stick with the market’s actual evidence.

Do stay open to the idea of buying companies you haven’t heard of before.

If I could pick the best environment for my growth-oriented methodology, it would be when big-cap growth stocks are racing up the charts. Those “liquid leaders” are easy to buy and are often easier to hold onto during their advances.

But that’s not the environment we have today. In fact, many of the well-known leaders like Alibaba (BABA), Facebook (FB) and Amazon (AMZN) broke down on earnings two to four weeks ago. That doesn’t mean they’re going to get cut in half, but it’s likely that—at the very least—they’ll have to build new launching pads going forward.

So you want to search for new leading stocks, often ones you might not have heard of before. As more and more investors become familiar with their stories, the stocks will be bid higher (assuming the market heads up). But you have to shake off the desire for familiarity in this market.

Don’t ditch your disciplines just to play catch-up.

During the past week, I’ve talked to a few dozen investors—including many professionals—who have basically thrown their disciplines out the window just so they don’t get left behind. Instead of looking for companies with solid sales and earnings growth, they’re just buying strong charts. And instead of looking for solid entries, they’re throwing money at whatever stock has soared the most.

Hey, I hope this buy-at-all-costs strategy pays off—if it does, it means we’re in a big bull market! But over the long run, it’s best to stick to your system. Sure, bending the rules here or there is fine (in my case, some of the infrastructure and transportation stocks I’m looking at don’t quite have the sales growth I yearn for), but the other factors (good long-term growth story, top management, big earnings estimates, etc.) are still in place.

Do be willing to buy fewer shares, and use looser stops, when buying extended stocks.

One sticky note on my desk says, “Early in a new rally, just buy a stock even if it’s marginally extended. Don’t get caught up in worst-case scenario thinking. Take a chance.”

I wrote this a few years ago when I failed to buy a couple of very strong stocks because they weren’t at great entry points. That’s often the right thing to do, but early in an advance, the strong stocks tend not to pull back much.

Of course, you don’t want to throw caution to the wind, either. But if you’re nervous about plowing into a stock that’s just had a big run during the past two weeks, consider buying a little less (say, 70% of what you normally would, dollar-wise) and using a looser loss limit (instead of 8% to 12%, consider 10% to 15%). That way you can get a stake in a potential new leader but you won’t get knocked out on a normal pullback.

Don’t forget about ETFs as a way to get some money to work.

I’m a stock picker first, last and always; latching onto a real leader in a new uptrend is the way to make big money. But as I mentioned above, it’s also possible the market is lifting off from a huge two-year consolidation—and when it comes to the Nasdaq, a massive 16-year consolidation!

In such a case, there’s nothing wrong with putting some money to work in some ETFs. I prefer major market funds that are generally leveraged two times—I’ve owned ProShares Ultra S&P 500 Fund (SSO) in Cabot Growth Investor for a few months, and I think it looks fine. You could also consider the ProShares Ultra Russell 2000 Fund (UWM) for exposure to the super-strong small caps.

Again, I’m not a huge ETF investor, but if you’re unsure how to invest in stocks right now, putting a little money into ETFs can get you a foot in the door of a new uptrend without taking on as much risk.

Two Growth Areas Coming to Life

But what about individual stocks? From a growth investor’s point of view, it’s been challenging in recent days—most growth stocks have been hit hard (especially those big-cap names mentioned above), even as “old world” stocks in the infrastructure, construction and transportation sectors have come to life.

However, I do see two growth sectors that have come to life of late. Not surprisingly, both have spent months bottoming out after big declines earlier this year, so most weak hands are already out.

The first is biotech stocks, which fell 40% from July 2015 into February 2016, and have been gyrating in a wide sideways range since. One stock that’s back on my Watch List is Celgene (CELG), a great long-term growth company that reacted well to earnings in October. Analysts see the company growing earnings 20% annually through 2020 as new products come on line, and the stock is toying with 2016 highs here.

The other sector that’s pushed higher lately is cybersecurity stocks. My favorite name in the group is a new leader that appeared in my Cabot Top Ten Trader on Monday as it hit new highs last week! I love the firm’s niche, which has produced accelerating sales and earnings growth, and free cash flow is expected to go bonkers in the quarters ahead.

If you want the name of that new leader, as well as the other new leaders that emerge should the market continue higher, I urge you to subscribe to Cabot Top Ten Trader today. You’ll get a weekly list of the strongest stocks in the market with specific buy ranges and loss limits for every trade. And you’ll have a direct line to me via email with any questions along the way. With the market looking strong, now’s a great time to get on board.

A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.