It’s obviously been mayhem in the market, and the news continues to come at investors from all angles, with tariff threats and pauses, retaliations and negotiation updates breaking a few times each day, and now earnings season is beginning, with many executives giving their early read on the hecticness. Stepping back, I have some thoughts—one very big picture, and a couple that home in on the current environment.
[text_ad]
4 Thoughts for This Bout of Market Mayhem
1. It’s Good to Have a System
As an investor, you can only control what you can control—it’s obviously good to understand what’s going on with the market (or, of course, with a company you’re invested in), but what counts longer term isn’t your knowledge of tariff negotiations, economic reports or Fed policy, but having a system that puts the odds in your favor, with a market timing component to keep you out of meltdowns (and keep you in bull trends), as well as some stock selection and risk criteria. That is the real way to beat the market over time.
In the current situation, the fact is that many leading stocks were clearly euphoric late last year, gapping up 40% or 50% on earnings reports and, by December, were miles above long-term moving averages (AppLovin (APP), our biggest winner last year and a huge leader, was 246% above its 200-day line in early December!) while one huge market bear did a public mea culpa about missing the bull market.
Then we had two months of selling on strength, where the market repeatedly failed at resistance (20,000 on Nasdaq, 6,100 to 6,150 on the S&P 500), followed by the late-February break, when the market’s intermediate-term trend turned down and leaders imploded. In mid-March, our long-term trend model turned negative.
All of this happened well before last week’s tariff reveal that sent the market down 10%-plus.
The point is you didn’t need to predict the path of tariff negotiations, you just needed to follow the primary evidence—the trends of the major indexes and the action of leading stocks. Just sticking with those factors is a big reason why Cabot Growth Investor’s Model Portfolio is up 51% since the start of last year, while the S&P 500 is up 14% or so and the Nasdaq even less.
2. It’s Not the News That Counts—It’s the Reaction to the News
In recent days, the market’s plunge has brought some true extremes when it comes to selling intensity and sentiment. On the latter front, this week’s Investors Intelligence survey—which has been around a few decades and has proven its worth throughout environments—just posted its lowest number of bullish advisors since 2008.
In terms of the selling storm, our favorite measure of the broad market is the number of new lows—and Friday and Monday each saw north of 1,000 stocks hit new lows, a very extreme figure. (The Nasdaq also saw north of 1,000 stocks hitting new lows both of those days.)
There are tons of other metrics I could write about, but all of them are among the most extreme seen in decades, which generally occur near bottoms. Of course, oversold can always get more oversold, which leads me to point #2.
It’s very likely the fundamental news is going to get worse—tariff negotiations might help, but the actual economy is very likely to take a hit; we’re already seeing some executives (like Walmart and Delta) pulling guidance due to the tariff uncertainty. My point is to ignore all of the news items—good or bad—and instead focus on the market’s reaction to the news.
One big example came in October 2022, when there was a worse-than-expected inflation report (inflation was the main worry during that bear), causing the market to gap to new bear market lows—but the S&P 500 actually finished up 2.6% on the day.
I’ll be on the lookout for the market to hold up or rally outright on upcoming “bad” news as a sign big investors are looking over the horizon to brighter days.
3. 1998 Precedent Analysis
Precedent analysis is anything but precise, but I do think it can help by providing possible scenarios as to what may come. One period of time I’m looking at now is 1998, which featured a quick, super-deep bear market that paved the way for the final uptrend of the Internet bubble.
Back then, the Nasdaq topped in July and, over the next 31 trading days, plunged 27% from its highs. That was a short-term low, and the Nasdaq rallied for about four weeks but was rejected by the 200-day line and melted down to a lower low, 33% off the prior high—before skyrocketing for most of the next 18 months. The fear, by the way, was the meltdown of the Russian Ruble at first, followed by the collapse of Long Term Capital Management, a huge well-regarded fund with massive leveraged bets.
So far, that’s tracing this year’s decline fairly closely—from the late-February top, the Nasdaq has slipped as much as 26% in 33 trading days before this Wednesday’s pop. History doesn’t repeat exactly, but given the extremes mentioned in point #2, I’m looking to see if a short-term rally is now underway … with a retest of some sort coming down the road. Such a bottom-building pattern is often seen at major lows.
Again, this is just one possibility, but so far, the precedent has been lining up pretty tightly, both market-wise and sentiment-wise.
4. Many Stocks Are Trying to Resist
Good-looking stocks can go bad in a hurry in a bad market, so I’m not catching any falling knives at this point. But with the maelstrom going on in the market, it’s becoming easier to see which stocks are holding up well. I’m looking for names that are above their 200-day line (85% of stocks were below that key trend line as of earlier this week) and are at least in the vicinity of their early-March low (as the indexes crashed miles below their own lows).
There are a few in the medical field that look promising. Penumbra (PEN) is one we’ve written about in Growth Investor and Top Ten Trader, with new, best-in-class medical devices to remove blood clots in a variety of instances. Shares are holding above the 200-day line and near the March low above the round number 250 area.
Then there’s a name like Marex (MRX), which is actually something of a Bull Market stock, though it’s leveraged to trading activity in the commodity markets. Growth here has been excellent, and after a March dip, shares are holding up very well, with Q1 pre-announced as another one of big growth.
To be the first to know when the market sends a green light to start buying more aggressively, subscribe to Cabot Growth Investor today.
[author_ad]
