If you’re investing in the stock market using a growth strategy, it’s the most natural thing in the world to want to know how the market is doing. It would be irresponsible not to know the latest stock market news.
But knowing what’s going on in the market can also be a trap, tempting you to pay attention to more and more news headlines, economic reports, political analysis and market forecasts. There are websites that offer all of those things and a hundred others, all inviting you to immerse yourself in research, analysis and prognostication.
And I’m here to tell you that you don’t have to do that.
Ignore Stock Market News, Focus on the Charts
My first reason for that contention is that knowing more about the economic, political and military state of the world will not make you correspondingly more successful in your investing. And as every MBA knows, when you reach the point of diminishing returns, you should stop expending additional resources.
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The big monkey wrench in the gears of market research is the law of complexity. When any occurrence (economic growth or corporate profits) reaches a critical mass of input, predictions get increasingly less precise. It’s not a Garbage In, Garbage Out (GIGO) process, it’s more like Chaos In, Chaos Out.
Even more important, there’s no point in casting a broad net for economic data when what you should really be interested in is the effect that data is having on the market. And you can see that effect clearly in a simple chart.
In this daily chart of the S&P 500 Index (the 25-day moving average is in blue, the 50-day is red and the 200-day moving average is black), you can see what investors were thinking after the February–March market correction interrupted the Index’s run that began in November 2017. There’s nervousness in the chart, but there’s also tremendous optimism that keeps prices advancing right up to the October collapse.
And there’s also a rebound on pretty good volume that began on October 30. But the Cabot growth investing disciplines tell us that the Index has to be above the lower of its 25- or 50-day moving averages (which it is) and that average has to be turning up (which it’s not) to give us a green light for buying. (The Cabot Growth Investor’s market timing indicator evaluates a basket of five indexes, but the principle is the same.)
The bottom line is that the action of the major indexes will give you, for free, the most important momentum signal you can have, which is a statistically accurate sense of what the market is doing right now. And if you know that, all the stock market news and speculation about what might happen in the future is just noise.
Now, if you think you could use a little help identifying major market trends - or simply want to receive our next buy signal or specific growth stock picks - I’d recommend subscribing to Cabot Growth Investor. Our signature advisory has helped subscribers double their money 28 times since its inception in 1970, and chief analyst Mike Cintolo regularly beats the market.
If all of that sounds interesting to you, click here.
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