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So, what now, Mike?

That’s the question I posed to the most recent addition to StreetAuthority’s stable of stock market strategists, Michael J. Carr, following a week that saw the steepest single-day drop in the stock market since November 2011.

During the past month I’ve been telling you about Mike’s Maximum Profit trading system — a trading system that’s among the greatest investment strategies we’ve ever discovered.

Every two weeks, Mike starts with about 150 individual stocks, partnerships and trusts that constitute the 10 portfolios in the premium StreetAuthority advisories — the same holdings that have already been recommended by Carla Pasternak, Elliott Gue, Amy Calistri and the rest of the StreetAuthority experts.#-ad_banner-#

From there, Mike runs every pick through a test of relative strength — a measure that compares a stock’s performance of the past six months with the performance of the thousands of stocks that make up the entire market. Only those holdings that are rising faster than 70% of the market are considered.

From the stocks that pass this part of the test, Mike looks at the strength of the companies’ cash flow — the amount of money coming into the business, a barometer Mike regards as the very lifeblood of a company. Here, again, Mike considers only those holdings whose cash flow per share is rising faster than 70% of all available stocks.

Mike reveals the single stock with the highest ranking — the holding that shows the greatest potential for capital appreciation in the current climate — in each issue of Maximum Profit.

Sometimes a particular stock might retain its No. 1 ranking in Maximum Profit, but often there will be a new leader, based on changing market conditions. At any given time, Mike’s system will only rank a maximum of 10 stocks as “buys.”

A back-test of Mike’s system showed an annual return of 21.5% during the past decade — three times the gain in the S&P 500. The back-test included the good times in the market over the past 10 years, as well as the volatile times.

Needless to say, the times don’t get much more turbulent than what we saw this past week. The CBOE Volatility Index spiked 23% Thursday to 20.49, the first time this year it closed above 20.

I wanted to see how Mike’s inaugural pick in Maximum Profit two weeks ago was weathering the storm.

So far, so good.

You’ll recall from a recent StreetAuthority Daily article that Mike’s No. 1 rated stock from all of the StreetAuthority holdings as of June 7 was FLY Leasing (NYSE: FLY), an airline leasing company based in Ireland. As I noted at the time, FLY was beating the market by 3.5 percentage points in just six trading days.

In the four trading days through Thursday, the S&P 500 fell 2.9%. At the same time, FLY actually rose fractionally, widening its lead over the market to six percentage points. Since the close of trading on June 7, when Mike added FLY to the Maximum Profit portfolio, shares rose 3.6%.

Mike revealed his second top-ranked stock last night. In fairness to his subscribers, I can’t release the name. But I can tell you that from Monday through Thursday, the new No. 1 was already beating the market by 4.4 percentage points.

Here’s more from Mike…

Bob: So, Mike, what now?
Mike: For the stock market in general, I’d be lying if I said I wasn’t concerned about the next six months. If the recent decline continues, and my Maximum Profit system says risk is too high, it will stop issuing new buy signals.
This is not a theory; my strategy is specifically built to reduce risk. That’s what happened in 2008. Five months before the market bottomed in March 2009, my system was completely out of the market. This allowed me to make a small profit in 2008 while the market fell 37%.
That being said, though, the long-term trend in the market is still up, and I will continue to recommend stocks my system signals as “buys.”
Bob: What do the current market conditions mean for individual investors?
Mike: It means individual investors need to be selective.
Market sell-offs can be deep but brief. These sell-offs can often occur in a bull market, and that is where the idea of “buying the dips” comes from. When prices fall 5% to 10% in a long-term bull market, it is important to be a buyer so that you benefit from the recovery.
It’s difficult to tell where we are in the bull market that began in 2009, but we are probably somewhere between the fifth and ninth inning, to use a baseball analogy. If we’re only a little past the halfway point, there are incredible profits to be made in the next few years. If we are close to the end, the market will confirm that soon enough. But falling 5-8% below all-time highs is no reason to panic. It is a time to focus on finding high-quality stocks.
Bob: How do you find the right stocks to buy in this volatile market?
Mike: I use the same time-tested techniques that have allowed me to find stocks in the past. Once a strategy works, it’s important to stick with it.
Warren Buffett, for example, follows the same approach in bear markets that he does in bull markets. He doesn’t change his strategies just because market volatility changes. In fact, Buffett warned against letting market volatility drive decisions, and to instead focus on the data. Buy when the price is well below the fair value, sell when the price is significantly above fair value.
In my case, I focus on cash flow and relative strength (RS) regardless of the market environment. When a stock is a market leader in both of these metrics, it is a buy — whether we are in a bull market or a bear market. When a stock I like starts to lag in RS or cash-flow growth, it is a sell.
Companies need cash flow to grow their business and reward their shareholders. If cash flow is growing, revenue and earnings are also likely to be growing. RS tells me when the market believes these great companies offer value and are attracting interest. It helps me avoid “value traps,” or companies with great fundamentals but whose share price fails to move for years at a time.
Bob: Is your system ever wrong?
Mike: Nothing is guaranteed when it comes to the market. If anyone tells you different, stay away.
As with any metric, there can certainly be times when RS fails to work in the market. But this powerful indicator does steer me toward the stocks that are the most likely to go up over the long term. It has been proven to work using stock market data that goes back to the 1920s.
I don’t ever claim to be 100% accurate. I make money in the long term by catching big trends rather than moving quickly in and out of stocks for a few pennies at a time.
But, as you also previously noted, I limit the chances of short-term pain by buying only stocks held in a StreetAuthority portfolio. By focusing only on StreetAuthority recommendations, I’m able to reduce the universe of investments to just a handful of the best investments in the market. Then, by combining cash-flow trends with traditional RS, I’ll own companies that are doing well fundamentally, but only when their stock is beating the market.
This simple strategy outperformed the market by 14% a year on average during my decade-long test, and I’m confident it will continue to do so. To learn how you can invest alongside my Maximum Profit system, I encourage you to watch this presentation. If you’d like to join Maximum Profit now, click here.

P.S. The beauty of Mike’s system is that it can be used to find stocks most likely to beat the market from any group of stocks — not just those from StreetAuthority. Among the free reports you’ll receive when you join Mike’s Maximum Profit advisory are these: The 5 Stocks Most Likely to Double in 2013; “Billionaire Stocks” For You to Own Today, and 4 High-Yield Plays Signaling “Buy.” To learn more, follow this link.