The major U.S. stock market indexes experienced a shakeout chart pattern last week. Visually, a shakeout pattern looks like a rapid spike downward, followed within one to three days by a rapid spike upward. This pattern typically precedes a run-up in a share price or in a market index.
Sometimes, what appears to be a shakeout turns into a double-bottom, which has the visual appearance of the letter “W,” another constructive chart pattern.
You can enter any of these symbols on your favorite stock chart website to see how the shakeout pattern looks: SPX, DJIA, COMP, CCL, DHI or RCL.
The markets remain far more volatile this year than in recent years. I’m not referring to the extremely slow year-to-date performance of the S&P 500 and the Dow, which are up 1.39% and 1.29% through December 4. I’m referring to the constant extreme influences of falling commodity and precious metals prices, strength in consumer spending, weakness in manufacturing, skittishness over timing of the Fed’s rate hike, worries over debt rating downgrades, a booming housing market, the strong dollar’s negative impact on corporate profits, and weak Asian and Third World economies.
Those combined situations have led to extreme short-term volatility among U.S. stocks. Whether the companies are thriving or suffering financially, it has made no difference. Your favorite stock could be next. It’s a tough year for investors.
The good news is that politics, economics and moods that affect investment markets are constantly changing. Today’s investment climate will pass, as will El Nino. I encourage you to hold you’re your undervalued growth stocks and ride out any storms.
If you’re inclined to pare back your stock holdings, to either move to cash or to purchase different stocks, start with the companies whose earnings per share (EPS) are not projected to grow in 2016. If profits aren’t rising, then there’s no motivation for institutional investors to buy the stocks, and institutional investors move the markets.
In your career and family, you aim for rising income and lower debt, correct? If you own a company, you aim for rising profits and moderate debt, right? Try to buy stocks of companies with similar features.
Generally speaking, the same approach to your personal finances that optimizes your income and cash flow, also works in identifying good companies to invest in.
I know that investors like to focus on products, because products might be more understandable than balance sheets; but balance sheets are the tail that wags the dog in the stock market. That’s why I go straight to projected EPS and blow right past a company’s products.
Stay focused on value and profits; the combination of the two help to lower the risk in stock investing.
