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The Gold Star and the Falling Knife

Stock Market Video
All You Need to Know about Market Bottom
This Week’s Fortune Cookie
In Case You Missed It


In this week’s Stock Market Video, I reinforce Cabot’s take on how growth investors need to handle down markets: Cut your losses short. Hold on to your most resilient performers (but consider taking some profits out). And wait for the market to get back on its feet before you try to put your cash back to work. I point out a couple of sectors that are working, too. But the big message is to get your cash to the sidelines and wait for the green light. Click below to watch the video.


The Gold Star and the Falling Knife

When Patrick Henry, eloquent firebrand of the American Revolution, wrote in The American Crisis that “These are the times that try men’s souls,” he was addressing a group of revolutionaries who needed encouragement. And by all accounts, it worked.

A correction in the stock market isn’t exactly an armed conflict, but it can certainly try men’s (and women’s) souls. An equity portfolio that’s declining in value is irksome, and worries about how low markets might go can have investors lying in bed at night staring at the ceiling.

Everybody, from long-term, buy-and-hold investors to the jumpiest day traders is looking/waiting/praying for the market to get over its most-recent correction (now between 15% and 22%, depending on which index you follow) and get going again.

But markets don’t just switch from bear mode to bull mode overnight ... not very often anyhow. It usually takes a combination of new lows, bounces, retests, consolidations and false starts to build a bottom. This is what market gurus call the bottoming process, and it takes some time. And nobody knows exactly where it is or how much time it will take.

Market commentators aren’t much help, since there are always super-optimists and super-pessimists who will confidently tell you that 1) the bottom is already in and we’re ready to start the next bull phase, or 2) the market is going to sink like a stone and there’s no bottom in sight.

My favorite maxim about trying to predict a market bottom is this: “If you think it’s a bottom, you’re too early; if you know it’s a bottom, you’re too late.”

Translated, that means: Don’t look for market bottoms in your windshield; they only show up in your rear view mirror.

Until the market actually goes through whatever it will take to build the 2016 bottom, the only choice for equity investors of the growth persuasion is to keep your portfolio as clear of damage as you can. Kick your weakest stocks out before they give you big losses and keep new buying to a minimum.

The other thing you can do, of course, is sign up for my Lunch with the Analyst webinar next Wednesday (February 17) at 1:00pm Eastern Time.

In my hour-long program, I’ll talk about the state of the market and what stocks are working and which aren’t. But the major theme will be how to prepare for a market bottom, how to spot one when it occurs, and what moves to make in your portfolio when it occurs. And, as always, I’ll be answering questions about stocks from participants.

I promise you that it will be interesting (if you’re interested in that sort of thing) and potentially profitable. Market bottoms occur after a process of beating the optimism out of investors. But that means that when market bottoms are finally complete, there are bargains galore (for value investors) and a new crop of strong market leaders (for us growth types). The quicker you get back into the market, the better for your portfolio’s results.

The title of this piece is “The Gold Star and the Falling Knife.” So I guess I’d better pay that off.

The Gold Star is a reference to the energetic rebound in the price of gold that’s been lifting mining stocks for the past couple of weeks. This is mostly a defensive move by investors who are looking for something that will hold value in a chaotic market environment. And after a nearly four-year collapse in gold prices, even those who aren’t fans of precious metals (like me) are getting a little gold gleam in their eyes.

This chart of the SPDR Gold Trust ETF (GLD) shows both the prolonged decline of gold prices and the energetic action of the last few weeks as the fever hit the sector. If you’re considering putting a little gold in your portfolio, just be judicious. Volatility cuts both ways, and hot uptrends can reverse. Just look at all the failed rallies in gold prices since that 2011 peak.

The Falling Knife part of the title will be familiar to any connoisseur of market maxims. When stock prices (either market-wide or on an individual issue) are in free fall and someone says that it looks like bargain-hunting time, some grizzled veteran will wheeze that you should never try to catch a falling knife. The implication is that you’re just as likely to grab the blade as the handle.

As a grizzled veteran, I agree wholeheartedly.

And, as I noted about gold, the maxim is probably right. Fighting the trend of any issue, whether it’s the S&P 500 or a stock whose quarterly report just disappointed investors, is a dangerous business.

So put a piece of tape over the “BUY” button for a while, keep the “SELL” button limbered up for your losers and don’t forget to attend my webinar on February 17. Lunch with the Analyst is a meal you don’t want to miss. Click here to register.


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

Tim’s comment: The only argument available with a bear market is to promptly retreat to cash-or, as investment professionals like to say, cash equivalents.

Paul’s comment: This is the easiest advice to give, but probably the hardest to follow for most investors. People hate to sell, especially if their stocks have losses, because it feels like admitting defeat. But a couple of good market corrections will usually adjust their attitude. And besides, once you’re defensive, you can then spend your energy preparing for the return of the bulls, when the big money will be made.


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 2/8/16 - Apple (AAPL) and Zika

Tim Lutts, Chief Analyst of Cabot Stock of the Month, talks about contrarianism, risk assessment and how to sell your stocks smarter. Stocks discussed: Bank of New York Mellon (BK), Abercrombie & Fitch and Westlake Chemical (WLK).

Cabot Wealth Advisory 2/9/16 - Five Steps of a Market Bottom: Where Are We?

Chief Analyst Mike Cintolo (Cabot Growth Investor) checks to see how markets are doing using his five characteristics of how markets build a bottom. Mike also talks about how to use market timing to get out of bear markets and back in when bull take over. Stock discussed: Five Below (FIVE).

Cabot Wealth Advisory 2/11/16 - The Growth Stock Diet

I write in this issue about how a balanced approach to stock picking can keep your portfolio in good shape. But I warn against worrying too much about catching the market bottom (when it occurs). It’s a long process. Stock discussed: Seaspan (SSW).


Paul Goodwin
Chief Analyst of Cabot Global Stocks Explorer
and Editor of Cabot Wealth Advisory

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.