When I first got interested in stocks many years ago, I didn’t come from a heavy fundamentalist school of thinking (P/E ratios, PEG ratios, balance sheets analysis, etc.). In fact, I came from the Cabot school of thinking – my Dad subscribed to the Cabot Market Letter in the mid 90s, and that formed the basis for my thinking.
And that meant (and still means) being a student of the market, i.e., knowing what actually works in the stock market, as opposed to what some professor or academic believes should work.
When it comes to market timing, that means understanding the power of trends, blast-off signals, sentiment and a variety of other indicators that have real, honest-to-goodness predictive ability.
Which brings us to today. With last week’s powerful market upmove – one of the best of the year, thanks partly to Mr. Bernanke’s half-point rate cut on Tuesday – we believe we’ve kicked off the next stage of this bull market … a stage that figures to be very powerful. Why so powerful? Because many unique indicators we follow are giving us a bright green light. Here are some:
1.) Tuesday’s rate cut was the second consecutive lowering of the discount rate by the Fed, triggering the old Two Tumbles and a Jump rule. (Invented by Norm Fosback in the 1970s, I believe, and touched upon in his book Stock Market Logic.) Twelve months following two straight rate cuts, the Dow and S&P 500 are up more than 25%, on average.
2.) Tuesday’s explosive move higher saw up volume on the NYSE (all the volume traded in stocks that finished up) beat down volume by nearly 30:1 … the most lopsided ratio since August 1982! These thrusts are rare, and, while the short-term often brings weakness, the market has always been substantially higher three months later.
3.) Tuesday was also the 4th day that up volume on the NYSE beat down volume by at least 9:1 since the market’s August low. Granted, two of those days were on super-light volume, but now we have two (August 17 and last Tuesday) that came on good volume. A couple of 9:1 days close together portends good times looking out many months.
4.) Our NYMA Oversold Indicator, which measures the distance between the NYSE Composite and its ten-week moving average, flashed a buy signal a couple of weeks ago. These signals are rare but often come near major inflection points – recent signals include last summer, March 2003, early November 2002 and early October 2001.
5.) Similar to our NYMA Indicator, our Two-Second Indicator (it tracks the number of stocks hitting new lows on the NYSE) recorded a gargantuan 1,132 stocks reaching new lows on August 16 – about 1/3 of the entire exchange!!! That was one of the largest readings ever, telling you tremendous selling pressures existed … and now that those pressures are exhausted, the buyers are in control.
We could go on, but you get the picture. Short-term, we wouldn’t be shocked to see some weakness – the last week of September is historically poor, and earnings season is going to rev up right afterwards. But if you’re focused on the intermediate-term (like us), the market’s message is clear – the odds are very strongly in favor of higher prices down the road, so look to pick up shares on any weakness.
So what do you buy? Well, if you’re more conservative, you simply buy up some index funds and enjoy the ride. Or, if you’re a bit more aggressive, you can snap up some of those ProShares I’ve written about before, which are leveraged index funds – more risk, but more reward should things appreciate. (Actually buying some leveraged index funds on weakness is a great way to get your foot in the door of this bull move, as you search for stocks to buy.)
For our part, however, we like individual stocks and sectors. And the good news is, this market is shaping up to be a “something for everyone” market – already, a ton of different sectors are participating.
Gold stocks, believe it or not, have blasted out of very long basing structures as gold prices have done the same. No, it’s not changing the world, but with lower rates and a weaker U.S. dollar, we think the move has legs. Agnico Eagle (AEM) is one Tim has mentioned, and Randgold (GOLD) is a smaller, more volatile play on the sector.
Wireless stocks are in favor. Research in Motion (RIMM) is a monster, Apple (AAPL) is setting up in a (sloppy) base and Nokia (NOK) is aiming to be the next Apple, as it diversifies into wireless services, not just handsets.
Internet stocks are gaining traction. Google (GOOG) is setting up a base on top of a prior base, Amazon (AMZN) is crawling above resistance, while eBay (EBAY) has rocketed to its highest level in 17 months.
Solar stocks are coming back. LDK Solar (LDK), JA Solar (JASO), and Yingli Green Energy (YGE) hit new highs last week, while SunPower (SPWR) and First Solar (FSLR) are coming on strong.
Chip stocks are attracting money. Nvidia (NVDA) and Sigma Designs (SIGM) are two leaders in the group.
Traditional technology stocks are looking good. Oracle (ORCL) just ripped out of a base on the back of terrific earnings, while Cisco (CSCO) and Juniper (JNPR) ride the wave of strong networking demand.
And oil service firms are moving straight up as investors foresee accelerated exploration spending by the majors with oil north of $80. National Oilwell (NOV), Cameron (CAM), Oceaneering (OII) and FMC Tech (FTI) are a few doing well. Just note that the group is due for some type of pause.
This strong breadth this early in an advance (we’re just 5 weeks off the bottom) is a good sign that the traditional year-end rally could, for all intents and purposes, already be underway.
However, there is one sector that’s far and away the strongest in the market today – and for good reason! The most interesting part? It’s not really a “sector” at all.
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The “sector” I’m referring to is Chinese stocks, at least those traded here in the U.S. Tim has written many times about China, so I won’t rehash all of the positives – suffice to say that its economy is growing more than 10% per year, and every month brings more and more investing opportunities.
Now, supposedly, China stocks have received a boost from a new rule that will allow local Chinese to buy shares on the Hong Kong exchange, as opposed to being restricted to Shanghai stocks. And many stocks did pop higher on that news in late August.
But to me, that’s transitory. The big, institutional money is pouring in to a few dozen of these stocks because they’re anticipating massive growth in the quarters to come … possibly due to the economic ramp-up sure to be seen ahead of the 2008 Olympics. So, while a little extra buying power won’t hurt, I see an acceleration in sales and earnings growth for most firms over there.
So how do you play this? Well, again, if you’re conservative, buying the iShares that tracks a couple dozen top China stocks (symbol FXI) should work out well. But I’m always looking for individual stocks that can outperform the indexes, and in China, there are plenty of candidates. But instead of highlighting one, let me give you a couple of my favorites.
One is Baidu (BIDU), more commonly known in our office as the Google of China. The Internet in China today is probably at the same stage as it was in the U.S. ten years ago – i.e., just lifting off, and paid-search is becoming the main way of advertising online. Baidu dominates the market – its more dominant in China than Google is in the U.S. – and is growing at triple-digit rates. The only problem: the stock has exploded higher in recent days and is due for a rest. I’m looking to get in on any normal pullback (10% or so) I can find.
Another is China Mobile (CHL), which, through a series of acquisitions and growth, is now the leading wireless provider in China, and the biggest in the world, with more than 300 million subscribers. Growth has been steady for years, and with the mobile phone industry set for some exciting changes (smartphones, 3G capability, etc.), I think CHL is destined for greatness.
Of course, I must admit, I am far from the China expert in the office. That honor belongs to Paul Goodwin, editor of Cabot China & Emerging Markets Report. But rest assured that Paul has backed me on these two China names (among others), thinking that the sector as a whole will help lead this new bull move.
For Cabot Wealth Advisory