Three Market Lessons in Three Charts

Stock Market Video

Three Market Lessons in Three Charts

This Week’s Fortune Cookie

In Case You Missed It

In this week’s Stock Market Video, I pointed out that short-term pullbacks, while unnerving, aren’t all that concerning. Watch your correcting stocks carefully and use stops to manage your holdings, not emotional reactions. I also point out several growth stocks that have been completely ignoring this week’s minor correction, always a good sign. Click below to watch the video.

Three Market Lessons in Three Charts

Take a look at the chart below, which shows the S&P 500 (GSPC) from its bottom in March 2009 to the present. (If I had wanted to show the events that have many Baby Boomers hanging onto their jobs longer than planned, I would have cranked the chart back to about 1999, which would have shown the two bursting bubbles. But I’m striving for a more optimistic tone here.)

For many investors, this might also be a chart of their strengthening hope for their retirement accounts. I’m no friend of index investing, but this period has given a transfusion to many indexed portfolios, and I’m glad for that.

The lesson this chart teaches is that the long-term trend and the short-term trend are two very different things. If you look at the S&P’s sideways action (periods without a new high) during May through August 2010 or February 2011 through the end of that year, you are looking at periods of doubt and soul-searching from investors and market analysts alike. And you can take it from me that each correction, as harmless as it looks now, was cited by many as The Start of The Big One.

Cabot’s market timing indicators didn’t ignore these moves. During this five-and-a-half-year period, both Cabot Market Letter and Cabot China & Emerging Markets Report had periods when we moved out of growth stocks and into cash. In fact, the medium-term timing indicator used by Cabot Market Letter averages three or four warning signals per year. We’ve even done some of our own speculations about the possibility of a major (20%) pullback into a bear market. But the Letter’s long-term timing indicator hasn’t flashed a sell signal for the past 20 months.

I think there’s a lesson here, which is that paying attention to the market pays. But overreaction and panic will cost you. Let the market guide you, but don’t let your fears about what might happen keep you from following the main trend.

Next is a chart of Michael Kors (KORS), from its IPO back in late 2011 to the present. KORS was a runner right out of the blocks, pricing its IPO at 20 and streaking to 50 in less than three months. The Michael Kors story of quality fashion goods and relentless expansion into stores-within-stores, online sales and brick-and-mortar flagship stores in strategic locations was a sensation. It took the stock through the end of 2012 to consolidate that jump to 50, but the company’s run of triple-digit earnings growth fueled a run to 100 by early 2014.

Then the wheels came off, albeit in a fairly peaceful way. Despite EPS growth of 56% and 49% in the first two quarters of 2014, KORS slipped lower and kept on slipping.

The lesson? Know when it’s over. KORS is now down close to 25% from its February high of 101. The company is still profitable and expanding, but if you had bought anywhere near the top and held on for the entire correction, you would have a big hole to dig your way out of.

My third chart is for Chinese automotive website operator BitAuto (BITA). I’ve pushed the left end of the chart back to late 2012 when the stock was trading barely 100,000 shares a week. Yes, it was going up, but it didn’t cross above 10 (a minimum threshold for many institutional investors) until April 2013 and didn’t start to trade at really significant volume until August of last year.

The lesson here is that trends can go on for much longer than you think. When I recommended BITA for Cabot China & Emerging Markets Report last June, the stock was trading at 45. I received many messages from subscribers questioning whether a stock that had already doubled twice since its days around 10 could possibly have anything left in its tank. I was encouraged by the stock’s cup-with-handle correction from March through May and by its recovery to a new all-time high closing price. You can see the result.

The combination of a stock with a strong story, excellent numbers and a positive chart is a powerful one.

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here. 

Tim’s Comment: Most of us want progress, but many of us are afraid to change. Happily, there are creative thinkers coming up with revolutionary ideas for companies every day-and investing in them is both exciting and profitable!

Paul’s Comment: When many people think of Frank Zappa, deviation from the norm is foremost in their thinking. Zappa was a relentless innovator who refused to compromise or cater to public taste. By the end of his life, he was universally hailed as a composer of serious music and a major force in world music culture. But he was never “normal.”

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.

Cabot Wealth Advisory 9/1/14-Guns, Drugs, Crime and Incarceration in the U.S.

Tim Lutts, Cabot’s president and Chief Analyst of Cabot Stock of the Month, writes in his Labor Day edition about the problem of soaring prison populations and gun fatalities. He also speculates on the sources and solutions of these problems.

Cabot Wealth Advisory 9/2/14-Could Interest Rates Stay Low Forever?

Chief Analyst Chloe Lutts Jensen of Cabot Dividend Investor writes in this issue about how good economic news can be seen as bad news by investors because of its possible effect on the Fed’s interest-rate policy.

Cabot Wealth Advisory 9/4/14-Rev Up Your Motors with these Three Stocks

Nancy Zambell, editor of Investment Digest and Dividend Digest, uses this issue to look at automotive stocks and to recommend three leaders. Stocks discussed: Douglas Dynamics (PLOW), Chinese Automotive Systems (CAAS) and Motorcar Parts of America MPAA.

Have a great weekend,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory


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