V-Shaped Market Recovery

Stock Market Video

The Market Giveth…

“Man will never be free until the last king is strangled with the entrails of the last priest.”

In Case You Missed It

In this week’s Stock Market Video, I talk about the V-shaped recovery in the major market indexes that has pushed a couple of them out to new highs. Yes, it’s a bull market, but there are also plenty of warning signs telling you to be cautious in both new buying and managing your existing growth investments. I also look at the three leading industry groups in the market and give some examples of the leaders in each group. 


The Market Giveth …

What does it mean when all three major U.S. stock market indexes produce charts with corrections and recoveries that look like a big “V”?

Good question. I’m glad you asked.

If you look at this chart of the S&P 500 Index since the middle of January, you’ll see what I mean. (The Dow and the Nasdaq went through similar corrections, but their patterns were significantly different.)


There have been three corrections this year that pulled the S&P 500 Index significantly below its 25- and 50-day moving averages. The correction that began on January 23 lasted just eight trading days and took the Index down 6.1%. And the recovery, i.e. the time it took the S&P to book a new high, was 14 days.

The April story was similar, but with an important difference. The 4.3% correction lasted seven days and the Index needed 20 trading sessions to book a new high. The difference is that the correction occurred during a 10-week consolidation, so the longer recovery period was part of a larger pattern.

The correction that began on July 25 dropped the Index from 1991 to 1904, a 4.4% dip in just 10 sessions. And the recovery also took just 10 days.

The undeniable energy of the S&P’s ongoing bounce back from its July–August correction shows that there is still plenty of enthusiasm among stock investors.

But that doesn’t mean that the long-running rally in stocks is back on track and everything is rosy.

The number of stocks hitting new highs on the Nasdaq Exchange (a good measure of interest in growth stocks) is now less than half what it was when the Nasdaq Composite climbed above 4,400 for the first time in early July.) That’s an indication of narrowing leadership among growth stocks, which is one symptom of a rally that’s running out of steam.

As always, it’s good to remember that volatility is a knife that cuts both ways. A market that can recover to new highs with remarkable rapidity also has the capability of breaking lower with equal vigor.

The prescription is to take the positive momentum of the market seriously, putting money to work in strong growth stocks, but also to acknowledge the danger of a volatile situation. Watch the major indexes closely for moves below their 25- and 50-day moving averages, keep slightly tighter than usual stops on your holdings and be a little more willing to take partial profits in your winners.

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

fortune cookie

Tim’s Comment: According to Wikipedia, there are only 15 kings left in the world, so we’re making good progress there. Counting queens and other sovereign monarchs, however, there are 29. And priests are still plentiful. In fact, I’d guess that more people, globally, follow the head priest—the Pope—than did when Diderot lived.

Paul’s Comment: Anyone familiar with the turbulent history of Europe during the Renaissance and Reformation periods will probably cut Diderot some slack for his bluntness. The Continent was riven by dynastic and religious wars, with few apparent winners, but plenty of losers, especially the common people who fell victim to constant violence. Mostly, though, I just enjoy the blaze of Diderot’s anger and the sharpness of his wit. Change a couple of names and you could probably get plenty of present-day Americans to subscribe to Diderot’s prescription for freedom.

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 8/18/14—Ride the Wave

Tim Lutts, Chief Analyst of Cabot Stock of the Month, gives his thoughts on the just-concluded Cabot Investors Conference, summarizing the different approaches of the Cabot analysts and the fun we all had with the attendees. Stock discussed: White Wave Foods (WWAV).

Cabot Wealth Advisory 8/19/14—My Favorite Dividend Reinvestment Plans

Editor Nancy Zambell of Investment Digest and Dividend Digest writes in this issue about the advantages of dividend reinvestment plans (DRIPs), an inexpensive way to start (and grow) a portfolio. Stocks discussed: Intel (INTC), Microsoft (MSFT) and Xerox (XRX).

Cabot Wealth Advisory 8/21/14—Running With the China Bulls

I write in this issue about the bull market in Chinese stocks, and why anyone interested in growth investing needs to be invested there. Bull markets are a valuable resource, and it’s a shame to waste one. Stock discussed: TAL Education (XRS).



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