The post-election stock market rally has definitely captured the attention of many growth investors. Led by big gains in financials, commodities and energy stocks, the major indexes soared out of their pre-election trading ranges, hitting new record highs. Some wits even called the rally the Trump Bump.
You’d have to say the Trump Bump has been a pretty impressive performance, coming as it did after the indexes had been stuck trading sideways for three months or more. The Nasdaq Composite, which is more packed with growth stocks than its rivals, after hesitating at 5,500 during December, has been off to the races since 2017 began. In the process, it has left the Dow skidding sideways for more than a month under resistance at 20,000 and the S&P 500, although it inched out to a new high on January 6, has been similarly bogged down.
If you’re watching the financial websites, you have probably noticed that there are a ton of advisors out there telling you how to “play” the Trump Bump, offering advice based on their analysis of how Trump’s policies and legislative priorities are likely to affect certain industries or particular companies.
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And I’m here to tell you to ignore that advice with the same discipline that you use when offered a chance to help some exiled Nigerian royalty gain access to their banked millions (and get a million dollars for your troubles!).
There are three reasons you shouldn’t be buying anything based on anything to do with Donald Trump.
First, you shouldn’t buy because the whales are way ahead of you.
One reason that buying based on propositional analysis doesn’t work is that big investors—mutual fund companies, private equity investors and hedge funds—were working on their analyses way before the election. And their trading floors began trading those analyses as soon as the results firmed up.
So if you’re looking to invest based on anything to do with the incoming Trump administration, that circus has already left town. In fact, it’s probable that the rally from November 9 to the middle of December was partly based on just that kind of buying.
Second, you shouldn’t be buying based on predictions about Trump because buying on the basis of any predictions is a fatally flawed strategy.
As Yogi Berra said, “It’s tough to make predictions, especially about the future.”
For example, until two weeks ago, it seemed possible that the upcoming Super Bowl might be an all-Texas affair, with the Dallas Cowboys meeting the Houston Texans for the NFL title. The New England Patriots knocked the Texans out of the playoffs last Saturday, which eliminated that possibility.
But the Cowboys were still in the mix until Sunday’s game with Green Bay, when a last-minute field goal put the Packers into the NFC title game.
Why am I talking about the Super Bowl? It’s because as soon as the Cowboys were booted out of the playoffs, the price for Super Bowl tickets (the game will be played in the Texans’ NRG Stadium) dropped by 25%, according to an analyst for SeatGeek. The price of the cheapest ticket to the Super Bowl dropped $1,000 from last Friday.
And that’s a pretty good illustration of the difficulty of making predictions. Of the eight teams in the playoffs last week, 25% were from Texas, which made an expensive ticket seem like a good idea. But reality often fails to conform to predictions.
Big investors pretty much have to make predictions, because the sheer size of their positions make it difficult to jump into and out of particular stocks. Their economists and analysts need to stay months ahead of trends to let their traders buy and sell slowly enough to avoid spiking prices one way or the other.
But as an individual investor, you have one luxury the whales lack: You can sell a stock with a few keystrokes or exit your entire growth stock portfolio in a few minutes. And if you give up that advantage by tying your portfolio to predictions about what might happen next month or in six months, you will wait a long time to see if you’re right or wrong. And that’s a long time in an actively traded growth portfolio.
Third, well maybe you can play the Trump Bump after all, but only in one way.
The stocks that are thriving as investors anticipate what effects Trump’s policies might have are showing one of the three things every growth stock needs to succeed. They have positive momentum.
Cabot’s growth investing strategy uses charts to identify stocks that are finding favor with investors. If a chart shows positive price movement and good trading volume, our analysts will dig deeper to see what’s going on.
We dig into a stock to see whether there are positive revenue and earnings trends and whether the company has the products, markets, management and intellectual capital to sustain a rally.
Before we recommend a stock to our subscribers, we look for a combination of a good Story, positive Numbers and a supportive Chart. You need all three to put the odds in your favor with any investment.
So, if the post-election rally has produced a positive chart, it’s one-third of the way to being a good candidate for investment.
But you need all three.
So don’t be a chump. Don’t play the Trump Bump. But as a savvy growth investor, you can let it show you interesting candidates. And if you get the story and the numbers to line up in your favor, you’re on your way.
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