After a year long consolidation, the market has broken out to new highs. As I’ve mentioned before, we have to take seriously the possibility that the post Brexit shakeout ushered in a new bull market (or a resumption of the bull market that started in 2009 depending on how you look at it). A bumpy ride higher, north of 2,400 in the S&P 5000, seems quite reasonable.
So how do we ride this potential bull? Sure we can buy an ETF that tracks the S&P 500 like SPY, but that would only yield average results. To generate alpha we need to actively put together and manage a basket of above average stocks that will outperform passive index funds.
One of the most common questions I get is, “What stocks should I buy?” Well, no matter how much I believe in a company I would NEVER put a blanket buy recommendation on ANY stock. I only want to buy a stock when it looks like it’s ready for an IMMEDIATE move higher and there is a stop loss level close by to limit risk. I call the system I use help me identify these optimal entry points 821x.
When I want to add a new position to my portfolio, I scan HUNDREDS of charts looking for 821x buy signals and only enter the very best looking setups. Some of the watchlists I scan through are from paid services and others I have built myself. However, I am going to share with you two of my favorite watchlists that are completely FREE. Both of these lists are focused on companies that are expected to experience above average earnings growth, which is a great place to put our money in a bull market environment.
IBD 50 – you have to subscribe to Investors Business Daily to gain access to the most up-to-date IBD 50, however, you can get a decent idea of what’s on the list for free by checking the holdings of the FFTY ETF.
Riding these stocks is actually a lot like riding a real bull. You are likely to take plenty of bumps and bruises along the way when a trade doesn’t play out the way you hoped it would. You’ll also likely experience the frustration of getting “bucked off” a big winner before it makes it’s run like we did in OMN and we almost did in NTG. If it was easy, then everyone would be doing it. However, if you do your homework and follow your trading system, you’ll come out of this bull run with a lot more money than you had beforehand.
The S&P 500 closed at a new all-time high yesterday. Upon hearing that, the average investor’s first instinct is to think that the market is topping out. Stocks are too expensive. Valuations are dangerously stretched. The higher they fly, the harder they fall. We are overdue for a crash etc., etc..
However, we here at DIY Investor know better. Perma-bear fearmongering is as unhelpful as unchecked bullish exuberance is dangerous. Emotions and feelings aside, here are the facts: after making it’s FIRST new intraday high in over a year on July 11th, the S&P 500 made 8 additional new highs and there is no reason to think that there aren’t several more on the way. Only ONE of these new highs will be a long-term top. MOST of them are just stepping stones to higher and higher prices. That’s why, counterintuitively, new highs are bullish.
If this rally continues, fears of a failed breakout will give way to a fear of missing out. IF this happens, the market can enter a mania phase where the uptrend gains EVEN MORE momentum. IF the last remnants of fear give way to unbridled greed, the market can explode into full-on bubble territory, which would mean we would see MUCH higher prices than we are seeing now. When this hypothetical bubble inevitably bursts, it will end badly for those that are unprepared. However, those of us with a plan will do very well and be able to lock in the lion’s share of our increased wealth.
Before you accuse me of smoking something, let me just say that I fully understand that this is a far-fetched potential scenario. Nevertheless, I do believe it is one worth keeping in the back of our minds as we break out of a year consolidation to new highs.
P. S., I only provide the actual buy and sell instructions for our 821x model trade here on the blog and through email to subscribers. Be sure to follow me on Twitter @marketchameleon for updates in between. On Tuesday, we received an 821x sell signal on NTG, our model trade. However, I recommended via Twitter that we not close the position unless it closed below $18.10. The stock pivoted and proceeded to put in an 821x buy signal on Thursday so far averting an unnecessary shakeout!
— David White (@marketchameleon) August 3, 2016