Why the 200-Day Moving Average Matters - Cabot Wealth Network

Why the 200-Day Moving Average Matters

200 Day Moving Average

The most important trend-following tool for growth stock investors is the simple 50-day moving average. You should own growth stocks that are in uptrends above it, and you should welcome opportunities to buy when those stocks correct down to that 50-day moving average. (It’s usually best if that average is rising.)

The 200-day moving average, by contrast, is of little use for long stretches of time—like most of 2017. In long bull markets, stocks can trade well above their 200-day moving average for more than a year.

But in major corrections—and even bear markets—the 200-day moving average can be the most valuable moving average of all. That’s because just when all the news seems darkest—just when investors begin to feel that all is lost, as they did last week at the height of the tariff threats between the U.S. and China—the 200-day moving average pipes up and says, “Hey, this looks like a terrible time to sell; perhaps you should think about buying!”

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They say a picture is worth a thousand words, so let’s take a look at these charts.

The 200-Day Moving Average, in Nine Charts

The Dow Industrials

Stocks in the Dow have been volatile of late, but the 200-day moving average has held, as it has with most other indexes.The S&P 500 (Large Cap)

The S&P Midcap (MDY)

The S&P 600 (Small Cap)

The NYSE Composite

The Nasdaq Composite

I find those bottom formations pretty persuasive, at least in the short term. And it’s not just domestic indexes; the 200-day moving average was also speaking for emerging markets stocks!

Powershares Golden Dragon China Portfolio (PGJ)

Halter USX China Index (HXC)

iShares MSCI Emerging Markets ETF (EEM)

Conclusion: Stocks hit a major low last week, exactly when the news was scariest, and they’re very likely to move higher for a while. So if you want to participate, it’s not too late to get on board. But don’t wait until the news is good; stocks will be higher then!

Two Stocks to Buy Now

So what should you buy?

A lot depends, of course, on what you already have in your portfolio, and what your risk tolerance is, so I’ll give you two ideas, one aggressive and one low-risk.

Axon Enterprise (AAXN)

Better known as Taser until it changed its name last April, Axon is attractive today because there’s been no selling pressure on the stock. Just look at that chart; this is a stock that wants to go higher!

Here’s the story as it appeared in Cabot Top Ten Trader a few weeks ago.

“Axon Enterprises used to be known as Taser International, which was a star back in the early 2000s as its next-generation stun guns gained in popularity. That business is still solid today; Taser weapons are used by more than 18,000 law enforcement agencies in more than 100 countries.


Taser Pulse – $399.99

“But the story is now about much more than Taser weapons—Axon is making hay with its body cameras, in-car video systems and its Evidence.com cloud software system that helps cops store, manage and share data and video, and manage records. These new products also mark a big business shift toward a recurring revenue model (sell the hardware, then get long-term subscriptions to its cloud platform), and investors think the business could be near a tipping point. In Q4, Taser weapons still accounted for two-thirds of revenue, but growth in that area (10%) was nothing compared to the rest of its business (up 27%), and Axon said its annual recurring service revenue was up 74% in the quarter, while future contracted revenue grew 8.5% from the prior quarter to $536 million. In 2018, the top brass sees mid-teens total revenue growth, but with expanding margins and corporate tax cuts, earnings are expected to lift 52%.”

AAXN is an aggressive stock, and the growth potential is high. Note: if you choose to buy, don’t make the mistake of entering the stock symbol AXON; that’s a terrible chart!

Stag Industrial (STAG)

On the conservative side, I suggest Stag Industrial (STAG), which has a fat yield of 6.0%.

Here’s the story as it appeared in Cabot Stock of the Week just last week.

“Stag Industrial is a real estate investment trust, or REIT, a type of company designed to pass most of its income on to investors through regular distributions. What makes REITs such a good source of income? First, they have a steady income stream themselves, usually generated by renting out properties that they own. Second, REITs are granted special tax status as long as they pass most of that rental income directly to investors. That does create some tax complications for you, the investor, but a lot of investors think the extra paperwork is justified by the giant yields REITs can generate.

“Stag’s steady income stream comes from its large portfolio of industrial real estate—mostly warehouses (over 80% of their 356-property portfolio). Warehouse space is in high demand these days as e-commerce companies compete to ship faster and faster, often by storing products closer to their customers. The Federal government is also a major tenant (they have a lot of files).

“Thanks to a steady stream of rent increases and acquisitions, Stag has grown funds from operations every year since it came public in 2011. Over the last five years, Stag has grown FFO by an average of 31% per year, including 39% growth last year.

“Investors in Stag should be aware of the potential for interest rate changes to impact REIT stocks. Because REITs borrow heavily and are high-yield investments (and thus used as fixed income alternatives), rising rates can cause selloffs in the REIT sector. Anxiety about Fed rate hikes and higher long-term interest rates caused a lot of volatility in REITs in recent years, culminating in a 20% selloff in the sector between November 2017 and February 2018.

“The good news right now is that sector selloff brought STAG to an attractive entry point. The stock corrected 20% as interest rates surged, finally finding support in early February. That’s a big drawdown (risk is always higher with high-yield stocks) but presents a good buying opportunity for us. It also defined a nice support level around 22.50 to watch should things go south.”

Stag is not going to change the world the way Axon might, but if you’re looking for a low-risk investment with a fat dividend yield, it’s definitely worth a look.

Timothy Lutts

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Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditions

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