3 Reasons to Trade the Stock, Not the News

News

When growth investors get fearful, markets get slammed. That’s just the way it is. And when investors are antsy about a trade war between China and the U.S.—which is like a fight between the number 1 and number 2 rated heavyweight boxers in the world—the effects can be striking.

Every day, millions of investors hit the internet in search of clues about what’s happening in the market, and what they’ve been finding recently isn’t especially hopeful. Here’s a daily chart of the S&P 500 that shows the dance between the index and its 200-day moving average, which is generally considered to be the electrified third rail of market analysis. (The 200-day moving average is the one in red.)

I get questions from Cabot Global Stocks Explorer subscribers all the time about what the market is doing, and it’s true that the Cabot growth disciplines consider the state of the market to be a key factor in our level of aggressiveness or defensiveness. (The fact that the S&P is trading below both its 25- and 50-day moving averages is a big deal in our market-timing techniques.)

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But there are three reasons not to let the momentum of the market make your investing decisions for you, especially not about how you manage the stocks you already own.

So here are three reasons to spend more time looking at the charts of the stocks in your portfolio (and your watch list) than at the state of the broad market.

First, remember that you’re not buying the market. Buying an index fund and holding it forever is a very popular technique, especially with mutual fund companies who enjoy charging you management fees quarter after quarter.

But a real growth investor is more concerned with the performance and possibilities of stocks that have the potential to seriously outperform the market. That means that growth investors are prepared to take on much more risk than index investors, and they have to pay attention to stock selection, portfolio management and the performance of their individual stocks. The direction and momentum of the broad market is of secondary importance when you’re evaluating the stocks you already own.

Second, when the news is worst, the opportunity is at its peak. One of the defining characteristics of a stock market top is that the news is uniformly good. Headlines trumpet recent gains, analysts vie with one another to turn out the most optimistic commentaries, and you will even hear someone utter the dreaded phrase, “It’s different this time.” When you hear that one, it’s time to tighten your loss limits and start to build up cash.

But the converse is also true, and the day with the most hideous headlines is the day the market hits bottom and starts to build its new base for another advance. This isn’t something that you can see at the time; market tops and bottoms are only evident in the rear-view mirror.

But true growth investors, those who have been biding their time and have a good chunk of cash on the sidelines during a market correction, actually enjoy a string of bad news and slumping indexes. Having taken in some sail while the storm was blowing, they are alert for signs of fair weather.

Third, a growth investor pays attention to the stocks that are outperforming the market. When markets are forming a chart like the nasty S&P debacle above, any stock that can hold up—or even advance—in spite of the bad conditions is likely to be even stronger when it has the market’s positive momentum to build on.

Here’s an example of such stock which was recently featured in Cabot Global Stocks ExplorerBeiGene (BGNE), a Chinese pharmaceutical company that has several high-potential cancer treatments in clinical trials. But what investors really like about BeiGene is the company’s monster deal with Celgene (CELG), the Swiss drug giant. Celgene has taken a 5.6% stake in BeiGene and granted it exclusive rights to commercialize three of Celgene’s already approved drugs in China. BeiGene realized $413 million from the deal in the last half of 2017 and the continuing revenue (including milestone payments) will help finance the company’s development activities for its promising candidate drugs.

A quick look at the chart for BGNE will show you what I mean about outperforming the market. BGNE, which is still a relatively young stock, has been in an uptrend since December 2016, but really blasted off in July 2017. And its recent behavior has been exemplary, ignoring both the January/February plunge and the correction that started on March 12.

It’s not always true that the strongest stock during the storm will be the fastest stock during the rally. But by keeping your eye on the chart of the individual stock and not the broad market, you can certainly raise your odds of finding a leader among a group of laggards.

To get further updates on BeiGene (BGNE) and to receive a full list of stocks I’m currently recommending in my Cabot Global Stocks Explorer portfolio, click here. We grabbed many winning stocks last year and outperformed the S&P 500 by 100%. Despite recent market volatility, I expect many of the stocks I am watching to do well this year. Don’t hesitate. Join Cabot Global Stocks Explorer today.

Timothy Lutts

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