Stock Market Video
The Panic Button: When to Hit It … and Why
Think for Yourself
In Case You Missed It
In this week’s Stock Market Video, Mike talks about how sellers have finally made a stand after a huge run. That means that short-term gyrations are likely, but the long-term uptrend remains intact. Mike also talks about what to do now, including advice about how to handle your big winners at this point. Stocks mentioned include: Tesla Motors (TSLA), Regeneron Pharmaceuticals (REGN), Boeing (BA), Celgene (CELG), Netflix (NFLX), BE Aerospace (BEAV) and Cabot Oil & Gas (COG). Click below to watch the video!
The Panic Button: When to Hit It … and Why
Growth investors run in the fast lane of the investment highway, and things can get hairy when you’re pushing for big returns.
That’s pretty much the nature of the game, because risk and reward are like a pair of skis or the sleeves on a shirt. They just go together. (Which is why Treasury bond returns are so low right now; if you want absolutely no risk, you’re going to get close to no return.)
But growth investors are not really risk addicts. They don’t all require big thrills to help them survive the tedium of an ordinary day. They get nervous when markets have been going up for a while and downright scared when markets correct.
We have just had a couple of really crappy days in the market (Wednesday and Thursday) and if the questions we were receiving at Cabot are anything to go by, the pucker factor for growth investors was fairly high, with many people wanting to know if this was the start of the big correction some analysts have been predicting and anxious to know if they should hit the sell button and hunker down in cash for a while.
In other words, they wanted to know if it was time to hit the Panic Button.
The simple answer is no.
But the longer answer is that you can’t let a little pullback—even one that comes on increased volume—squeeze you out of the market. There may be a time when it makes sense to hit the Big Red Button, but this isn’t it … not yet, at least.
A look at the market’s advance (as represented by the large-cap S&P 500 Index) in recent months will show why.
The current rally got started in November, with the S&P below 1,350. After a run of around 100 points, the Index corrected in late-December from around 1,450 to 1,400. And the pullback had some big volume on December 21.
Time to hit the Button?
As it turned out, it wasn’t. The Index not only got going again, it rallied sharply enough to return to its original trend line. Plus, the dip below the 25- and 50-day moving averages was shallow enough that Cabot’s market-timing indicators weren’t even pushed to a sell signal. In other words, it was a textbook shakeout, a down move that causes investors with no conviction (or too-sensitive nerves) to pound the “SELL!” button, creating opportunities for opportunistic buyers.
So, off went the S&P again, zipping to about 1,530 in the third week of February. And BOOM! there was another correction, that time to around 1,490. And the Index’s lower (50-day) moving average didn’t even get its hair mussed. Four days down and the market was ready to get going again. And not even market alarmists considered hitting the button that time.
But things were a little different when the S&P got back in gear.
While it topped 1,550, the Index couldn’t seem to get any momentum going, and kept returning to that level, even reverting to it after an apparent breakout in the second week of August that pushed to within sniffing distance of 1,600.
That six weeks of basically sideways trading was good news for technical market analysts, because it constituted a consolidation, a period of sideways movement when neither bulls nor bears could get the upper hand. A flat chart like that allows for quiet accumulation by methodical buyers, but it’s not necessarily calm. Note the volume spike on March 15, early in the consolidation; there was very little price movement, but the high volume indicates a pitched battle between buyers and sellers. And, as you can see, the correction from the attempted breakout to 1,600 during the week of April 8 is squashed, but the Index drops just to its 50-day moving average (another shakeout) and gets moving again.
The Index finally manages to resume its rally and breaks out above 1,600 on May 3. Everyone is happy (except for those who were shaken out by one of the three corrections since November) and the Index is advancing at a higher rate than ever.
So, to summarize: markets seldom advance without corrections. If they do, experienced market watchers get really nervous, because markets that don’t take a rest occasionally are setting themselves up for a genuinely big correction.
Right now, the editors at Cabot don’t have any idea whether the correction that started on Wednesday is just another hiccup or is the start of a major market correction. (And, just between you and me, neither do any of the market gurus who are grabbing headlines by predicting either a 30% meltdown or the S&P at 1,700. Someone will turn out to be right, but that’s just the luck of the draw.)
I’m a little nervous about the S&P because it has increased its rate of attack and pulled farther away from its moving averages than is ideal. Sometimes extremes on the upside can lead to extremes on the downside.
But we are dedicated to not trying to predict the future.
The way to remain calm during either rallies or corrections is to let the market tell you what’s going on right now. And act accordingly.
Buy when the market is going up. Sell when your stocks go down. Know what your loss limits are and follow them. Let the market tell you what the weather is today and let tomorrow take care of itself.
The bottom line is that you never have to hit the Panic Button if you’re prepared for whatever happens. Your sell disciplines are your best friend during corrections, and whatever happens when the markets open up after the Memorial Day weekend, you should be ready.
I hope you have a great weekend break. And if it feels like you might be a calmer, better growth investor if you had a trustworthy advisor to help you find great stocks and manage the ups and down of the market, you can always find a Cabot newsletter to keep you away from that Panic Button.
Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
Think for Yourself
Tim’s Comment: This is my favorite button. In a world where news and information is increasingly plentiful, wisdom gained from time spent in real thinking grows relatively scarce, and thus more valuable than ever.
Paul’s Comment: Thinking is underrated, under-practiced and under-understood. Advertisers want us to just react. Politicians push our emotional buttons. I’m not sure that many people even know how to think any more. But when you actually manage to do some calm cogitation, the results can be astounding … and rewarding.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Robin Carpenter, editor of Cabot ETF Investing System, writes in this issue about how thinking in terms or probabilities (as an insurance actuary does) can help you achieve better investing results. Improving your odds using market timing is a big part of this approach.
Editor Mike Cintolo of Cabot Market Letter discusses his revelation that investing in large, well-traded stocks (the “liquid leaders” that trade $50 million per day) actually gets better investment results. Stocks discussed: FMC Technologies (FTI) and Seadrill (SDRL).
In this issue, Tim Lutts, editor of Cabot Stock of the Month, writes about the upcoming Cabot Investors Conference that will start on August 14. Tim details the programs and personal interactions with Cabot editors that will make you a better investor. It should be a lot of fun.
Have a great weekend,
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report
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