Take A Deep Breath… And Make A Plan

Fear is coming back.

Last Tuesday, the S&P 500 Index closed down by 0.67%.

Then… on Wednesday… boom! Another decline.

On Friday, the Dow Jones Industrial Average dropped 665 points, or 2.5%. That’s the largest percentage decline since June 2016.

But Monday was the worst of all. After a wild ride of a day, the Dow closed down 1,175, the largest single-day point drop in history.

So, is the sky falling?

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Not quite. It just might feel that way…

This is what happens when raging bull markets bordering on irrational exuberance take hold. When markets have charged upwards for weeks… months… years, even — what would normally be viewed as a healthy profit-taking breather is suddenly viewed as if it were Armageddon, leading investors to wonder whether it’s all coming to an end.

As Bespoke Investment Group notes:

“We’ve been saying it for the last few weeks now, but we’ll say it again — when the market does finally experience a pullback, it’s going to feel exponentially more painful for investors because of the simple fact that we haven’t experienced any kind of meaningful pullback in so long. And when emotions run higher than normal, it makes investors more eager to push the sell button. This in turn can cause even bigger declines, and the feedback loop begins.”

I couldn’t have said it better.

Look, here’s the deal…

#-ad_banner-#The market has been doing fantastically well. I know I’ve been pretty damn giddy about it. Hopefully you’ve enjoyed it, too. But during times like these, it’s absolutely critical that you perform routine “gut checks” on yourself. You don’t want to find yourself doing it when the market goes to hell in a handbasket. That’s when mistakes get made.

The spike in volatility we’ve seen recently — and the unusual down market days we’ve seen this week — probably have more to do with inflation and interest rate concerns at this point, rather than signaling the end of the bull market altogether. The truth is, days like this are not that unusual at all. We’ve just forgotten what “normal” looks like. It’s not necessarily a sign that the bull market is over yet.

So by all means, yes, participate in this bull market. But don’t panic when the market has an off day or two. Remember, there have to be sellers as well as buyers in order for stocks to go up. So let the sellers have a day or two here and there. Meanwhile, the best thing you can do is enjoy the ride and make sure you have a plan in place to get out with your profits in the most pain-free manner when the time comes.

“You’re Going To Feel Pretty Stupid”
To further reinforce this point, my colleague Jimmy Butts recently highlighted comments made by Ray Dalio, who runs the largest hedge fund in the world, Bridgewater Associates.

At the recent World Economic Forum in Davos, Switzerland, Dalio said that even though the bull market is long in the tooth, “If you’re holding cash, you’re going to feel pretty stupid.”

Jimmy echoed this sentiment in his Maximum Profit newsletter by citing the real economic underpinnings behind the recent bullishness in the market:

“Consider these facts:

Fourth-quarter real gross domestic product (GDP) — which was released today — came in at a solid 2.6% growth. This comes on top of Q2 and Q3 GDP growth of 3.1% and 3.2%, respectively. The unemployment rate is at 4.1%, the lowest level since January 2001. The current U.S. economic expansion has lasted 103 months and counting. Small Business Optimism is at the highest level since September 1983. Recent corporate earnings growth is strong at between 9% and 10%, above the historical average of 6%. For the first time on record, the S&P 500 produced positive total returns in each month last year. And to top it off, recent tax cuts for corporations dropped from around 39% to 21%, with many large corporations repatriating massive amounts of cash held overseas.”

With all this in mind, it’s easy to see a strong case for more gains ahead in the market. But since we’re in the latter stages — and the bull market can’t last forever — it becomes all the more important to have a set of investment principles in place that you stick to.

Jimmy agrees, which is why he recommends you not only have a set of rules in place for buying — but also for selling. Here’s what Jimmy had to say about the Maximum Profit system’s role in helping investors stick to a set of rules:

“In its most basic form, momentum investing is simply buying stocks when they go up and selling when they start to go down. But as easy as this sounds, historically many momentum investors — well, ALL investors really — have struggled with knowing exactly when to sell. They either hold on for too long and watch their gains disappear, or they cut their winning positions too early and miss out on even bigger gains.

Another problem is not having a clear idea of what to buy next, which would lead to simply chasing the latest hot stock tip (in other words buying high and selling low.)

The Maximum Profit system addresses these common problems with a tool known as relative strength (or RS). With RS we can set clearly defined buy and sell signals, taking the emotion out of the investment process, which has proven to be a bane for most investors.”

So rather than simply chase hot stocks, Jimmy and his subscribers use two proven metrics to determine a stock’s Maximum Profit score, which dictates the portfolio’s buys and sells.

The Maximum Profit score is based on a combination of a stock’s relative strength rating and cash flow relative strength rating (we’ve written about these concepts extensively — go here for a refresher). These two proprietary indicators have proven to be successful at spotting when to buy and when to sell a stock.

How We Avoided A 10% Loss — And Booked 8.9% Gains Instead
Take what happened with MGM Resorts (NYSE: MGM) one of Jimmy’s picks back in 2016.

When the stock came across the Maximum Profit system as a “buy,” the stock went on to gain 8.9% in about four months. That’s pretty good, it’s not really the point here. As you can see from the chart below, just after the “sell” signal was issued, MGM dropped back to around $26 in pretty short order.

Most investors who bought back in October would have seen their gains wiped out. But if you had followed the Maximum Profit system’s buy and sell instructions to the letter, you would have walked away with your gains intact.

My point is this…

If you want to ride the wave of this bull market — but also be able to sleep comfortably at night — then I can’t stress enough how important it is to have a system like this in place.

Like Jimmy mentioned, having this level of quantification has a way of taking emotion out of the equation. And it’s led to some fantastic results.

Just take a look at some of the winners Jimmy and his subscribers are sitting on right now in the Maximum Profit portfolio…

The beauty of the Maximum Profit system is that it doesn’t pass judgment on what politicians or the financial media are preaching. Its job is to find stocks that are poised to rally (or fizzle out) in the short term. The average holding period for the stocks in the portfolio is about six months.

If you haven’t given Maximum Profit a try, then I encourage you to consider it now. Like I said, the system combines two indicators — one technical and one fundamental — to identify stocks with the most momentum. And by telling investors exactly when to buy and when to sell, it’s delivered gains like 82% in 48 days… 118% in 86 days… 266% in 12 months — and more. You can go here to check it out.