I’m coming up on 27 years at Cabot (yikes!) and have studied decades of action before that, but the past couple of months of action—from the major indexes, yes, but especially from leading growth stocks—has been about as crazy as I can remember. In fact, the only time that was as wild as this was the Internet bubble back in the late 1990s, which still, in my view, was the craziest period in history … but it’s getting close.
Of course, up is good, and hopefully you’ve been riding some big winners in recent weeks—but these types of runaway markets can still cause a lot of stress. Do you chase stocks higher? Average up? Or should you hold off buying until we see a pullback? And on the sell side, do you ride through the inevitable correction in some stocks that’s sure to come—or try to sell and buy back lower? And by the way, what about the market, which has also skyrocketed—is it the end of a bubble?
Right now, I have a lot of thoughts, but a lot depends on your perspective: Whether you’re looking at the short term, meaning the next few weeks, or looking at the bigger picture, meaning the next few months.
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Big Picture, Stay Bullish
My main thought when it comes to the overall view is simple: Be Bullish.
I say this not because I’m giddy with some of the recent gains, but because of cold, hard facts related to the rare strength seen off the March lows, the overall setup and the current primary evidence.
Starting with the rare strength, there are tons of signposts that tell us this thrust higher over the past couple of months should lead to great things. I’ll give two examples, the first of which occurred during the initial phases of the advance: Through April 16, the market saw gains of 3% or more for three straight five-day periods—historically that’s only happened a few times since 1970, but what followed was very bullish, with the market sporting an average max gain of 15% within six months and 24% within a year even after that rush higher. So far, by the way, the S&P’s max gain has been about 6.5%, so the odds favor meaningfully higher returns in the next many months.
Then there’s the fact that April and May were up a combined 10%. Again, such an occurrence is very rare, happening just four times before (all, ironically, since 1997)—and all saw the market continue sharply higher through year-end, with an average gain of 18% from June through December.
“But Mike, we’ve come so far, so fast—doesn’t this feel like a bubble?” Well, I don’t think so, at least at this point, and part of that is because of the overall setup. If this rush higher in the S&P and Nasdaq came after the market was higher for a few months, I might be thinking differently—but it didn’t. From its peak in late October to its low in late March, the Nasdaq fell a net of more than 13% over five full months, and while that’s not the biggest re-set in the world, it makes this upmove look more like a kickoff than a blowoff.
Last but not least is the current, mostly primary evidence—simply put, whether it’s my Cabot Trend Lines (long-term market trend), Cabot Tides (intermediate-term trend), Growth Tides (intermediate-term trend of growth funds and indexes) or the Aggression Index (growth stocks vs. defensive stocks), basically all of my core, rubber-meets-the-road measures are bullish.
… But Be Mindful in the Near Term
However, as bullish as I am when looking out a few months, that doesn’t mean the near term doesn’t have some potential perils. Some of that is due to secondary indicators that hint that the underlying buying demand is waning.
For instance, look at the number of new lows on the NYSE, which we call our Two-Second Indicator (because, in the old days when we came up with the measure, it only took two seconds each day to check in the newspaper). Usually when the indexes are hitting new highs, the number of new lows will be south of 40 (and often south of 20 or even 10) each day—but it’s been the opposite of late, with the readings generally elevated (and, occasionally, in triple-digit territory), telling us the broad market is a bit iffy here.
Then there are near-term sentiment measures: While some (like Investors Intelligence, which has a long history) are showing only modest bullishness, others are showing a lot of complacency—the 15-day put-call ratio has dipped to new lows, meaning calls (betting a stock will go up) are becoming ever more popular.
Plus, of course, there’s the obvious: Not only have many stocks had huge moves, but recently, we’ve seen a lot go up huge amounts (10% or more in a day!) on industry rotation, or simply on rumors—nothing substantive. After nearly 10 weeks up, it’s obviously a sign that things are a bit giddy.
Thus, especially when it comes to super-hot stocks, I do think we could see some unpleasantness start soon—I’m not predicting anything specific, but given that we’re approaching three months into the rally (historically, that’s a natural time for things to exhale), it wouldn’t surprise me to see some hot individual stocks hit air pockets and consolidate their massive gains of the past couple of months, which could include sharp corrections.
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So how should you handle all of this? Everyone’s different, so I’ll leave the exact mechanics up to you—but my two biggest thoughts are (a) to be bullish and think big, as the market and some of these stocks could surprise on the upside, when looking months down the road; but (b) portfolio management is important, so if you have a huge winner or are super-concentrated in the hottest stocks (a good thing so far), consider lightening up a bit and/or focusing new buys on fresher potential setups. In other words, be bullish, but keep your feet on the ground here after 10 weeks up.
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