Investor examining the chart of a rising stock
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Last Monday (February 20th) IA new, exciting bull market is emerging.” Such a shift occurs when a significant sell-off ends previously popular market advances. So what are the steps to take advantage of it?
- First, discard past viewpoints, considerations, expectations, and actions. The media is still fixated on these issues, but that’s just mental laziness. This past construct has been undone and will not be seen again. It will be some time before the media and most investors realize that a new movement is underway.
- Second, accept that the next bull market will be unique, and that means completely different. That doesn’t mean the next move will be a simple 180-degree reversal — say, value stocks instead of growth stocks.
- Third, realize that media reports will not be of any help in identifying what is coming. Also, don’t expect those “so-and-so buy now XYZ” articles to help. They only appear afterwards.
- Fourth, you should know that most professional stock fund managers don’t try to predict a shift in stock markets. Instead, they will continue to focus on finding attractive stocks within their investment approach (referred to as an “investment style”). They know their style will fluctuate in popularity over different market periods, but with good stock selection, they can outperform the market over the long term.
The next step – Trying to identify the new trend
There are many tactics for managing stock portfolios, from using passively managed index funds to choosing actively managed funds to choosing an investment advisor and doing your own stock picking.
What makes the challenge of catching the new stock market wave so difficult is that the drivers are unclear. This, in turn, makes the characteristics of the future, better-performing stocks unknown.
It’s important to understand that it’s not just individual investors who are groping in the dark. So do the professionals. The latter are therefore sticking to their investment style.
What happens in the stock market is that certain companies are preferred based on their merits. The more companies are added to the favorites list, the more similarities become visible and the trend drivers crystallize. By then, the shares of these companies have of course risen considerably.
A way to move forward
Because stock trading is “transparent” (ie, publicly viewable throughout the trading day), the early signs (referred to as “technical indicators”) of a preferred stock are its outperformance on increased trading volume. This connection is certainly well known and often used in bull markets – “relative strength” and “momentum” investing are the common terms.
However, investors start to lose interest in technical indicators when stocks fall significantly. At the point when a market sell-off is bottoming out, like now, interest is low. In fact, investors have lost interest in speculation, and many are exiting the stock market — the “cleansing” I discussed earlier (Nov. 21 — “Stock and Bond Investors: Markets Heading for Market Corrections – Raise Cash“).
Therefore, when these first, professionally picked stocks begin to show positive signs, few investors see them. Also, it will be some time before investor-speculators come back into force.
However, there is a problem: There are always “wrong” stock movements – i.e. increased trading volume that does not stem from professional investor accumulation. Three examples are a good earnings report survey, a widespread industry blip, and a day trader buy. The wrong moves usually have one revealing characteristic: Bad trailing numbers – That is, a drop in volume with little or no price increases.
Then there’s this helpful step…
Limit your search to all-time highs
Stocks trading at their all-time highs have two very important characteristics:
- Investors are willing to buy at high pricesmeaning they see reasons the company and its stock will do well going forward
- All shareholders have a profitconfirming that their reasons for purchasing were correct
I realize that looking at stock charts and technical indicators at all-time highs can seem simplistic. However, this has worked for me since I started investing in 1964. It’s not my only strategy, but it has given me important information, especially at market bottoms like this.
Conclusion: Now seems to be the right time to act
The current market environment lends itself particularly well to this approach. Based on the starting stocks selected, the new bull market will likely focus on individual stocks of smaller companies that are not household names and are unlikely to be included in the S&P 500.
In other words, increased interest in companies that are more focused, less stressed, more flexible, and have higher growth rate potential. Also, smaller means that increased investor interest can move the company’s shares noticeably.
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