Think the Bull Market is Overextended? Recent Action in Leading Growth Stocks Suggests Otherwise.
For my Cabot Wealth Daily column this week I wanted to do some stock market analysis with some unique (and encouraging) signs I’m seeing among many individual growth stocks.
First, with the market, here’s a fact we at Cabot frequently harp on: While news items can obviously move individual stocks (earnings, etc.), the reality is that, if you’ve studied history, the market is generally going to do what it’s going to do—if it’s a bull market, the market will tend to ignore bad news, and if it’s a bear or corrective market, worrisome news (or even unsourced reports!) will cause the major indexes to fall apart.
In other words, instead of over-interpreting every news item and trying to predict what it means for the future, it’s far better to just follow the market’s action. Said another way: It’s not the news that counts, it’s the market’s reaction to the news that counts.
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All of that is a preamble to the Middle East-related news of the past week, which has resulted in dozens of clickbait-y articles talking about what a potential war overseas would do to oil prices, economic growth and the like. Then this weekend there were reports (and tweets) about a few dozen targets each side is keeping its scopes on. And I’m not even going to get into all the political babble.
What has the market done in response to all the turmoil? Not much! Yes, there were a couple of bad opens, and some stocks have taken hits. But my stock market analysis is that the major indexes remain firmly in intermediate-term uptrends, as do most stocks.
Now, to be clear, I’m actually leaning toward the view that it’s best to go slow in the near-term—but I don’t say that because of anything to do with Iran or any other news item. It’s simply because the market has had an extended run (14 weeks with hardly any pullback) and numerous secondary measures (especially sentiment, where greed has picked up) hinting that the risk of a more meaningful and longer-lasting shakeout is possible.
But the point here is that you should do yourself a favor and put down the newspaper and stop digging in deeply to the news. It’s always good to have an idea of what’s going on in the world, but any actual decisions you make (buy or sell) should be based on the core of your methodology—in my case, that means market and stock action for what we own, and for potential buys, looking for the best combination of story, numbers and chart.
Stock Market Analysis: Individual Stocks Breaking Out
Far more interesting to me is what I’m seeing when I do my various stock screens on a weekly (usually twice a week) basis.
The first is related to something I’ve written about before—while many see the market as grossly extended, the fact is that most major indexes only got going from huge consolidations back in October. The S&P 500 had 20 months of no net progress (late-January 2018 through early-October 2019) before hitting new highs. Such a long base usually leads to a sustained upmove.
And, given that fact, it shouldn’t be surprising that I’m seeing a TON of longer-term breakouts among individual stocks. There are too many to list, but check out three stocks that made it into my Cabot Top Ten Trader momentum-stock advisory this week alone: Alibaba (BABA), the Chinese e-commerce behemoth that made no real progress from November 2017 to December 2019, has now moved out to new price highs; Global Blood Therapeutics (GBT), which built a big launching pad from February 2018 through October 2019 before blasting to new highs; and Lumentum (LITE), which spent two and a half years bobbing up and down before decisively pushing to new highs in recent weeks.
I could probably list 10 more off the top of my head (DOCU, VRTX, CRM, a million chip stocks, etc.), but you get the idea. The upshot of this is when you have huge launching pads followed by big breakouts and (importantly) a couple of months of upside follow-through, it places the odds heavily in favor of higher prices in the months ahead. I consider these long-term breakouts among so many names to be great confirming pieces of evidence that a new leg to the overall bull market has gotten underway.
2 Growth Stocks Primed for a Breakout
The second thing I’ve seen in my research has to do with the here and now. And, interestingly, it is surprising given the action of the major indexes.
Especially among growth stocks, I’m seeing a lot of tight and/or well controlled four-, five- and six-week zones that have been etched by current and potential leading stocks. Coming after some big advances during the past three months, these tight areas are usually a constructive sign—and, if the stocks break out, could provide fresh buying opportunities.
For instance, look at Splunk (SPLK), the leading Big Data software player. It, too, etched a huge base-on-base formation (no net progress from mid-2018 to November of last year) before breaking out after earnings. And now the stock has basically sat around in a small range (142 to 155 or so) for the past five weeks. It certainly looks like the next big move is up.
A second example is Insulet (PODD), which offers one of the best insulin pumps on the market. The stock pulled back grudgingly on very light volume for five weeks and has begun to bounce. A big-volume push higher or breakout to new highs would be bullish.
Long story short, the action of most individual stocks continues to impress. I’m always open to changes in evidence, but until proven otherwise, the bulls are in control.