An Interview with Joe Cotton

Today I’m pleased to bring you a new installment in our Dick Davis Digests Contributor Interview Series. This time I’m talking with Joseph Cotton, editor of Cotton’s Technically Speaking. Read on for his stock-picking tips, surprising favorite contrarian play and warnings about the broad market.

Chloe Lutts: Hi Joe, thanks for talking to us today. To begin, when did you start publishing Cotton’s Technically Speaking? How has the newsletter changed since then?

Joe Cotton: I started Cotton’s Technically Speaking in 1986. My original market letter was published monthly, and sent by regular mail only. And we had no website. But it had the same format and charts. The new letter is published weekly and sent to our subscribers by e-mail only.

CL: I know you do a lot of technical analysis: what are the primary factors you look at? Does your technical analysis fit into an overall investing philosophy?

JC: When doing technical analysis, the primary emphasis is on the stock chart of the company you’re analyzing. Is volume increasing on the upside or the downside? Is the stock in a bullish or bearish formation, and is the formation a short-term or long-term formation? Are the Insiders buying or selling, and are the amounts significant? What is the short interest ratio, how many shares are outstanding and what is the float?

We believe the chart is the most important factor in investing in a company. We believe that anyone that buys a stock without looking at the chart is playing Russian roulette. It is very important to see where the stock is trading now, in relation to where it traded in the past. You don’t want to be the person buying at the top—or near the top—of a long run-up.

CL: Do you look at any non-technical factors when considering individual stocks?

JC: In individual stocks, we look for increasing earnings, a good product, whether or not brokerage houses are recommending buying the stock and their earnings estimates. Some stocks are story stocks and may have a compelling story regarding a new technology, patent or blockbuster drug. For those stocks, we then try to evaluate the underlying potential of the story… but in many cases the stock chart tells all, and we might recommend or buy the stock just because of the strength of the chart and the trading action.

CL: What’s one of your favorite stocks to buy today?

JC: Facebook (FB) is our favorite stock to buy today, and is now trading around 22 as of this writing. We reaffirmed our BUY rating on the stock at 20 in our Market Alert for October 17, writing, “We believe that Facebook has bottomed and that it is a great short-term and long-term investment at the current asking price: We are reaffirming our buy rating on the stock.”

CL: What’s one important piece of advice you think more investors need to hear or follow?

JC: We think the following three pieces of advice are very important:

1) Get off of margin. It clouds your judgment, and can result in your losing all of your money in a severe downturn.

2) When the market is vulnerable, and moving down, just step aside and go to the sidelines, and wait to see what transpires before getting back in. Stock commissions are so low that you can do just that.

3) Get in the habit of taking profits… before they disappear. In this market many stocks have doubled, tripled and quadrupled since March 2009 and are trading at the high end of their range. We would be selling those stocks.

CL: What do you see as the biggest challenge in the market right now?

JC: We think the biggest challenges to the market are the deficit, the fiscal cliff, the lack of accountability by our elected officials (Republican and Democrat) to what the voters want, and lower corporate earnings estimates because, generally, stocks go up with rising corporate earnings expectations, and they decline with lower earnings expectations.

CL: Let us get to know you better—what else do you like to do besides investing?

JC: I like to play golf, play Scrabble, swim and travel.

CL: Anything else you’d like to add?

JC: It is very possible that the bull market has ended. We would be SELLING. We have been alerting our subscribers along those lines. In our letter dated October 22, we wrote, “As we indicated, this could be the end of the Bull Market. We no longer are expecting the DOW to surpass the all time high of 14,000 this year. We believe that corporate earnings are slowing, and that the momentum will now be downward because of that, because rising stock prices are caused by rising earnings expectations, which is not necessarily the case now.

“… If we had $1,000,000 in stocks, we would sell at least $800,000 of them and pay off our mortgage and debts and wait for lower prices. We would not buy bonds, especially anything with a maturity of one year or more. We would be especially selling those stocks trading at the high end of their range, or at all-time highs, and with higher P/E Ratios.”

CL: Well I think that’s a pretty clear warning! Thanks for talking to us, Joe.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Dick Davis Dividend Digest

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