Cut losses short.
Let your winners run.
Don’t put all your eggs in one basket.
The trend is your friend.
If you’ve been investing for some time, you’ve probably committed these maxims (and more) to memory.
And they’re obviously important; they’re maxims for a reason.
But they’re not the be-all and end-all of trading, there are plenty more tricks of the trade that can’t be embroidered on a pillow.
And we’ve found that, in times of volatility, those other tricks of the trade can be even more helpful.
So, with growth stocks starting to see some air pockets and with a lot of winners already in our portfolio on the heels of a two-year bull market, let’s take a deeper look at some of those more nuanced lessons and a handful of stocks to watch because of them.
4 Trading Rules to Remember Now
#1: Don’t underestimate a big, liquid, well-sponsored growth stock that gaps up huge on earnings
Maybe it’s because I like to focus on emerging blue chips, but I used to find myself doubting big-cap growth names that would gap up on earnings (especially many weeks after other leaders have gotten going), thinking they were laggards. But while there are no sure things, over time I’ve come to never underestimate this situation, as it depicts monstrous buying by institutions that doesn’t usually go away overnight.
The clear example of this recently is Shopify (SHOP), which, after a solid recovery from its bear market lows for two years, etched a huge base this year (39 weeks long, 47% deep). The breakout on November 12 came on 9.5x average volume (a huge figure) and shares have held up well since. Near-term wobbles are possible (even likely) but odds favor big investors will be buying more here eventually.
#2: Many weeks up in a row usually means the next pullback is buyable
As I’ll talk about below, it does depend on where this happens, but a very good rule of thumb is if a liquid name goes from languishing to a string of six, eight or 10-plus weeks up in a row, the next meaningful dip (not just for a day or two, but maybe to the 50-day line) should be buyable.
The example du jour here is United Airlines (UAL), which, admittedly, isn’t a growth title, but it’s gone from nothingburger to superstar, rising an incredible 18 weeks in a row (!!) as it zoomed to multi-year highs. Near term, it’s obviously “overbought,” but barring something truly abnormal, the odds favor a dip of two or three weeks finding support.
#3: Daily or weekly volume clusters usually mean the next pullback is buyable
This is basically #2b—both many weeks up in a row and a string of big-volume buying days (at least four or five in a row) or weeks (two or three) often indicate a significant change in the supply/demand equation, so the first pullback has a good chance of finding support and leading to a fresh upleg. Note that this doesn’t mean every pullback for many months will do so—the further out you get, the greater the chance of pent-up selling appearing—but it works very well during the ensuing few weeks.
Toast (TOST), with three huge-volume buying weeks, looks like one of many good examples these days, and it should provide a real-time test of this—the stock took a hit in early December after management said it was expecting “only” 200 basis points of margin expansion next year (Wall Street was hoping for more). Shares got clonked, but didn’t break down, and should find support right quick if all’s well. Let’s see how it progresses.
#4: Major strength after nine to 12 months of up action often happens toward the end of a run
The prior tidbits had to do with identifying stocks that might look too high—and they might be in the near term—but should work their way higher due to unusual strength. This one is the opposite and really speaks to one of the main reasons many investors have trouble with the market: The same type of action in a stock can mean different things at different stages of the advance.
When a stock shows unusual strength after a long period of listlessness, it’s very often a good sign—a kickoff, if you will. But if you see that action after nine to 12 months of strong action, it’s usually toward the end of the advance. It may not be the very end, but you’re likely in the fourth quarter.
Take GoDaddy (GDDY), for instance. It blasted off in November 2023, a kickoff that led to a huge short-term move and a persistent advance for the next year. Now the stock has come to life again … but after a year of up action, such strength doesn’t have the same meaning. I don’t call tops and I’m not saying GDDY is headed south from here, but risk is likely elevated and letting some shares go here or on the way up makes sense to me.
Right now, in Cabot Growth Investor, we’re picking our spots and not taking this bull market for granted.
