Shelter from the Storm

Shelter from the Storm

Follow the System

A High-Potential Stock in China

Today’s advice is about finding shelter from the storm … so that you can gather your thoughts and think calmly about your next investing move.

Perhaps you’re already calmly plotting your next move.  If so, good.

More likely, however, is that you’ve been worrying about the effect that the troubles in Japan will have on various industries—from automotive to electronic to medical to nuclear—and trying to figure out which stocks will win or lose as a result.

And I think that’s a waste of time!

The fact is, you don’t need to figure out which industries will win or lose.  What you need to figure out is which industries other investors believe will win or lose.  Even more important, you need to determine when the selling pressures that have been driving most stocks lower for the past four weeks (many people forget this correction started two weeks before the tsunami) have been exhausted.  You need to gauge when the buyers once again take control, driving “good” stocks back up. And the best way to measure that is simple; watch the market.

The trouble is, most people have a very hard time doing that without factoring in the news—and opinions—of financial commentators. On the drive home from work, they hear, “Stocks fell today and oil prices threatened to top $100 as the situation in Libya blah blah blah.”  As they’re eating breakfast, the talking head on TV says, “Stocks are expected to open up today as the Federal Reserve’s policy remains unchanged and unemployment numbers blah blah blah.”  And when they go online at work, they see a story that says, “U.S. stocks weakened this morning as the dollar was pressured by blah blah blah.”

But the average investor never sits down and looks at a simple chart and asks, “What valuable information is hidden in this chart?” And that’s a shame, because the information in that chart is far more valuable than the scripted pronouncements of any media flunky. Plus, it can keep you calm.

Today, I’m calm.

And today, what I see when I look at Cabot’s master chart of the market is a powerful broad bull market that hit a temporary peak a month ago.  How do I know it’s temporary?  Simple. Because the advance was so broad and uniform right up until that top.

Since then, I see a market that’s grown increasingly fragmented.  

Sure, the major averages have lost substantial ground, and that’s normal. Numerous high-visibility stocks have cratered as well.

But many leading stocks continue to trace out very positive patterns, telling us that investors are still optimistic that those stocks will be higher months down the road.

And then there are our three major market-timing indicators.

The Cabot Two-Second Indicator, which monitors the number of stocks hitting new lows, continues to tell us that the market’s internal health is just fine.

The intermediate-term Cabot Tides are now negative, telling us caution is appropriate in the near term.

And the long-term Cabot Trend Lines are positive, telling us the market’s main trend remains up.

Now, if you’re a new reader, those three sentences above mean very little.  Five minutes after reading them, you’ll likely to be sidetracked by a headline about Japan, or Libya, or the NCAA basketball tournament … or worse yet, Lady Gaga.  But to me they’re the bedrock that enables a calm, confident approach to investing year after year, regardless of what fundamental changes are going on in the world.

In short, 40 years of experience with proven market timing tools has taught us that we have no better guides in uncertain times than tools like these, which dispassionately assess the actions of the market and advise us what those actions mean about the market’s future action.

Are they perfect?

No, no market indicators are perfect.

But the important point is that they are never wrong for long.  Thus if you follow them, as we do, you’ll never be wrong for long either.

Equally important, these indicators can give you peace of mind, so that instead of worrying about what the market is going to do next, and whether you should stand and fight with your remaining stocks, or sell and run for cover, you can act calmly, secure that the system you’re following will guide you through.

Today, subscribers to Mike Cintolo’s Cabot Market Letter—which follows this system religiously—are calmly preparing for the market’s next leg up, while sitting on profits of 42% in UnderArmour, 39% in Priceline and 278% in Baidu.

For details, click here.
 
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One way to prepare for the market’s next leg up is to build a Watch List, a list of stocks you’re thinking about buying.  I keep mine on a Post-It Note on my desk that I update regularly.  Mike Cintolo keeps one as well (on a larger piece of paper, complete with notes) and he keeps the subscribers to Cabot Market Letter informed by publishing capsule descriptions of stocks that might be added to his portfolio in the future.

One stock he featured recently that I think has great potential is Youku.com (YOKU), which runs the largest Internet video website in China.  At first glance, you might call the company the YouTube of China, but on closer inspection, you’d recognize it as the Hulu of China, because most of the site’s content is from professionals.  

Just as Netflix is now trying an end run around the networks by buying original programming to distribute by Internet streaming, Youku.com bypasses the fragmented broadcast industry in China by putting a wide variety of professional-quality content on the Internet.  Contributors include television stations, distributors and film and TV production companies.

Revenues come from advertising, and are growing very fast.  Revenues were $4.8 million in 2008, $23 million in 2009 and $58 million in 2010.  The company has not turned profitable yet, because so much money is spent growing the network’s infrastructure.  But profits will come eventually, and I believe the stock will be much higher then.

In fact, one other reason to like the stock is that it’s so little known; it only came public in December.  But it’s behaved very well since then, especially in recent weeks as the broad market has faltered. Still, I don’t recommend plunging in until the climate is right, and for advice on that, I recommend you heed the advice of Mike Cintolo.

For details, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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