Usually, when the market is doing well, stocks aren’t affected much by the news of the day. That’s not to say individual stocks don’t get pushed around, but for the stock market as a whole, worrisome headline news usually goes the way of water off a duck’s back.
But 2019 has been unusual in that sense—it’s been a good year thus far, but repeated news/rumors/reports about the Fed, U.S.-China trade and various economic reports have led to plenty of ups and downs. The latest news-driven event came two weeks ago, when the “new” tariffs on Chinese imports led to a stampede out of stocks, cracking the intermediate-term trend of some leaders.
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And that means we’re following our usual correction game plan: It’s time to play some defense by cutting back on most new buying, pruning your worst performer or two and keeping losers and laggards on tight leashes—all while still hanging onto your strong actors. In my Cabot Growth Investor advisory, we’ve sold all or pieces of four stocks, leaving us with 33% in cash as of the latest issue.
Longer term, most of the evidence remains bullish (including the pervasive and building pessimism out there—more on that below), so until proven otherwise, we’re sticking with the viewpoint that this is a correction within an ongoing bull market. In the near term, we see two possible scenarios.
The first is that the August selloff is basically one big shakeout on obvious news; the obvious rarely works for long in the stock market, and when combined with plenty of resilience among growth stocks (including many recent earnings winners, a bunch of which are on our watch list), we’re open to the possibility of a quick bottoming process and upside resolution.
The second is that this will turn into more of a “regular” market correction—two to four months of ups and downs amidst a barrage of worries and bad news, which will break some more stocks but also allow new leadership to build launching pads.
We’re still leaning toward scenario two given the fact that many stocks could use a rest. But the good news is that we don’t have to guess—simply taking things on a day-to-day basis will keep us in gear.
Stampede Out of the Stock Market
We don’t usually write too much about investor sentiment since it’s a secondary indicator and our decisions are (mostly) based on our market timing indicators and the action of leading growth stocks. But this year has been so unusual in that (a) the market has done well but (b) investors have been so hesitant to embrace it. And that’s once again being seen in the reaction to the August selling.
For instance, the equity put-call ratio actually hit its highest level of the year on August 2, and the 15-day moving average is close to doing the same. In terms of money flows, last week saw the largest weekly outflow ($25 billion!) since last December and was in fact the largest non-December reading in well over a decade. (December money flows can be affected by year-end tax planning and repositioning.)
And then there was the AAII sentiment survey of individual investors, which showed the second fewest number of bulls and third largest percentage of bears since mid 2016!
Of course, none of this means the stock market can’t go down for a while if it wants to, so you shouldn’t be buying stocks just because of a few pessimistic sentiment measures. But it is a good sign that a ton of money remains on the sideline—buying power that will eventually find its way back to stocks and allow the bull market to resume.
*This post was excerpted from the latest issue of Cabot Growth Investor. To subscribe, click here.
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