Volatile Market = More Questions
Clearing up Some Misperceptions
A Glamour Stock to Watch
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Given that we’re publishing this on July 2, I’m assuming many of you are already on vacation, worried more about exactly what kind of marinade to use on that chicken and steak than every wiggle of the market. And the rest of you will be in full BBQ/beach/golf mode in short order. Me included!
Thus, I’m going to keep this short and sweet—whether you’re reading this right before Independence Day or over the weekend, I figure it’s better to keep things bite-sized.
In today’s Wealth Advisory, I want to highlight a few helpful tips that I’ve gotten from answering recent subscriber emails.
It’s not so much a Q&A session as much as a heads-up; I’ve found that, as the market has gotten more volatile, I’ve gotten a bunch more questions many of which involve misperceptions. So I figured I’d clear those up.
1. Correlation Doesn’t Always Equal Causation: Many emails I’ve received will say something like “why did you recommend XYZ after it already rose 50% this year; it’s fallen since and I’ve lost money!” or “Did you know there was a lot of insider selling in ABC? It’s fallen steadily in recent weeks, not long after your recommendation.” These sorts of things always crop up in a down market, and what it really boils down to is people falsely linking a factor (in these cases, a big prior run-up or insider selling) with the stock’s recent weakness.
However, usually such links aren’t accurate. At the end of the day, many stocks with big prior run-ups did well in January, February, March and April. And don’t even get me started on insider selling; most of the best stocks in history have had lots of insider selling all the way up. Really, the reason these stocks have sagged of late is far easier to explain--the overall stock market has been in a correction!
Don’t get me wrong; I’m totally fine with taking blame and hearing critical feedback. That’s the business I’ve chosen! And I always go back over my trades and look to eliminate weaknesses. But I’ve found that many investors identify “false causes” for bad trades and, therefore, will avoid a stock with lots of insider selling during the next uptrend ... only to watch that stock become a big leader.
Long story short, most losses of late have simply been because of a bad market environment. That might be reason to study up on market timing to help avoid buying near a top, but it’s not a reason to focus on factors that, at the end of the day, don’t have a major correlation to stock performance.
2. Avoid assumptions: For some reason, heightened volatility in the market tends to bring out predictions and assumptions from everyone. As a general rule, be careful not to use words like can’t or won’t when to comes to what the market or a stock will do. Within a couple of days, I heard from one subscriber saying the market can’t go down much further because the Fed will still be buying bonds for many quarters, and another subscriber saying that the market can’t go up because the Fed will soon taper its purchases! I also hear regularly about the calendar: “Sell in May and go away” or “The summer is always bad”.
The fact is, the market can and will do whatever it wants. Now, that doesn’t mean the odds don’t favor it taking one path or another; that’s what my market timing indicators (mixed in with a little experience) can help with. But if you start making hard-and-fast assumptions about what is or isn’t possible, you won’t mentally be open to the unexpected ... and in the market, the unexpected occurs frequently. Bottom line: Keep an open mind, both to potential upside and downside.
3. Continue to Aim High: As sort of a corollary to #2, I see most investors completely dampen their expectations of the future when the market is in a correction. Whereas most investors were dreaming of landing the next Tesla a few weeks ago, today most are happy to book a four-point gain on any stock.
I’m not saying now is the time to swing for the fences (although I am encouraged by the action of the market and leading stocks of late—see below for more on that). But the fact is that big moves usually begin after market corrections; the time to think about finding a stock that’s going to double during the next few months is now!
The best part of this treasure hunt is that these potential big winners are often relatively easy to spot; they’re the ones that hold up best during the market’s doldrums and shoot ahead once the pressures come off the market! Of course, every resilient stock doesn’t morph into a big winner, but all you need is one to make a big difference.
4. Make a Decision and Stick with It: Last but not least, I get a lot of very good questions from subscribers about individual stocks; it’s clear these people have studied up, knowing their cost basis, position size, the stock’s levels of support (such as the 50-day moving average) and more. Yet they still want my opinion of what they should do with their holding.
I’ll always offer up my opinion, but except in cases where a stock is very resilient (hovering near its highs despite a big dip in the market—an obvious hold) or weak (plunging on monster volume to multi-month lows—an obvious sell), I usually just let them know that what they should do comes down to how they want to handle that stock, and their portfolio as a whole.
In other words, it comes down to making a decision and sticking with it. If you value smaller drawdowns and safety during rough times, by all means trim the position or sell the whole thing.
But if you have already built up a good-sized cash position, it’s fine to give the stock an extra few points and see how it goes.
Again, if there are obvious buy or sell signals for a stock or the market as a whole, you should respect those. But for the day-in-day-out decisions on every stock, it’s best to have a game plan of how you want to operate in general, and then stick to that.
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As for the market, we definitely saw some panic selling last Monday, June 24; the market opened down and collapsed for the first few hours of the day before finding support. One of my favorite measures of panic—the number of new lows on the NYSE—surged to more than 500 that day.
Now, this wasn’t any sort of all-time freak out, but combined with the month-long market correction at that point and the Fed/tapering-induced selloff, it was logical many weak hands had been shaken out. And, sure enough, the market has kited higher since, with many growth stocks acting even better.
So is that it? Is the correction over? It could be, as my market timing indicators have improved significantly, and I’m impressed with the action of many individual stocks. That said, I’d be surprised if the smooth uptrend from earlier this year returned; it’s likely volatility will remain somewhat high, especially with earnings season right around the corner.
All in all, if you turned defensive in late-May, it’s OK to begin putting some money back to work. Just let the market and individual stocks be your guide—if you buy three stocks and none of them make any progress, don’t keep throwing money at the market. Conversely, if you begin to print money right away, go ahead and become heavily invested.
So where should you look to buy? I do think the defensive, income-oriented plays that worked so well earlier in the year won’t be leaders; I’m not saying Hormel Foods or the Consumer Staples SPDR won’t do pretty well, but with the trend in interest rates having turned up, money seems to be flowing into more and more growth-oriented stocks.
One of my favorite ideas remains SodaStream (SODA), a glamour stock that is aiming to be the Green Mountain of soda makers. I was high on this story a couple of years ago, but the stock wasn’t ready and got clobbered on a so-so earnings report. Now, though, the company is bigger and big investors are coming around to the view that this business has lots of potential. Here’s what I wrote about SodaStream two weeks ago in Cabot Top Ten Trader:
“Rapid sales and earnings growth? Check. Big earnings estimates? Check. Mass market product? Check. Recurring revenue? Check. SodaStream has many of the boxes checked that big winning stocks of the past have had. The firm’s home carbonation system has been popular in Europe for many years (SodaStream is based in Israel), but it just hit U.S. shores a couple of years ago, and it took time for many in the investment community to think of it as more than a fad. But today, big investors are coming around to the view that SodaStream is here to stay, which means it could sell tens of millions of its soda makers in the U.S., as well as ongoing CO2 refills and soda flavors (read: recurring revenue) in the years ahead. (It should be noted that one attraction of the soda kits are their environment and health impacts—no cans helps the environment, and its soda contains far less sugar than Coke or Pepsi.) In the first quarter, revenues in Europe were up a solid 17%, but they boomed 89% in the U.S. where they made up nearly half of total revenues. Soda maker, gas refill and syrup unit growth were 78%, 101% and 119%, respectively, in the U.S., and the potential remains enormous going forward; all told, the company sold about 3.5 million soda makers last year, and that figure could boom if uptake in the U.S. remains on track. Moreover, Whirlpool just inked a deal to sell SodaStream-powered units for the KitchenAid brand; they should hit shelves in the fourth quarter, in time for the holiday season. Management has a goal of $1 billion of revenue by 2016, and all the pieces are in place for SodaStream to get there and beyond.”
The stock surged in May and early June after a great quarterly report and rumors that Pepsi wanted to buy the company for 90 per share. (Pepsi’s management vehemently denied the rumors.) And just as encouraging as the stock’s upmove was its calm retreat to its 25-day line during the worst of the market’s downturn.
Now, yesterday, as the market pushed higher, SODA did sag on volume, but the first day of a month (and the quarter) can often be a bit funky. Overall, SODA’s chart looks great; I think it could be nibbled at here, or just look for a big-volume push above 74 or so as a sign the stock is ready to move.
Have a great Fourth of July!
All the best,
Michael Cintolo
Editor of Cabot Market Letter
and Cabot Top Ten Trader
