Please ensure Javascript is enabled for purposes of website accessibility

Excerpt from Smart Investing in Turbulent Times Weekly Update

There are two major reasons that we saw a 3.6%+ drop in U.S. stock markets last week.

  1. The price of West Texas Intermediate crude oil (WTI) fell 10% in recent days, which triggered a drop in energy stocks.
  2. U.S. stock markets experienced a huge rebound in October. They’re now having a pullback, which is a perfectly normal reaction after a run-up.

I have come to an important conclusion. It’s becoming statistically clear to me that U.S. stock markets are recently far more volatile than normal, while not being overvalued nor overextended.

Right now, commodity prices, unusual interest rate situations and quick market corrections and rebounds are the tail that’s wagging the dog. In that light, I am changing my general position on stop-loss orders.

The practice of using stop-loss orders to protect profits works quite well during normal levels of market volatility, but it harms investors in the current market. Therefore, I encourage you not to use stop-loss orders on your undervalued growth stocks; instead, ride out the storms.

I would like to emphasize, however, that this suggestion only applies to:

  • Undervalued stocks, in which the price/earnings ratios (P/Es) are lower than the earnings per share (EPS) growth rates; and
  • Growth stocks, in which three-year EPS projections reflect double-digit annual percentage gains.

My suggestion does not apply to day-trading, low-priced stocks or companies with slow EPS growth, falling EPS or net losses.

Please hold onto your undervalued growth stocks during market turmoil, and consider adding to them during market dips. These are the best companies on Wall Street for investors seeking capital gains while minimizing risk.

Crista Huff is the lead analyst of Cabot Undervalued Stocks Advisor, where she combines a strict fundamental methodology with technical analysis, to identify growth and value stocks whose charts are turning bullish.