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Year after year, the U.S. stock market offers up the opportunity to invest in some of the most innovative companies in the world. Over the past 10 years, for example, many widely known stocks have doubled, tripled, or sometimes quadrupled in price or more. Stocks such as Apple Inc (AAPL - Free Report) , Nvidia Corp (NVDA - Free Report) ,Monster Beverage Corp (MNST - Free Report) , and Alphabet (GOOGL - Free Report) have achieved multi-bag returns, as have many others. While the companies were already well known before their price advances, most investors missed the meat of the moves or lost money.
With ample chances to cash in, why do so many speculators fail to capture these tremendous price advances? The simple answer is emotions, lack of discipline, and absence of a process or parameters. Since money at risk tends to ratchet up emotions, speculators tend to do the opposite of what they should do in key situations. In other words, investors tend to get excited when the price of a stock is extended, leading to chasing, getting stopped out of the position, or holding onto an underwater position for too long. On the contrary, when a stock gets sold off into an attractive area, most tend to capitulate underwater positions or not purchase shares at all out of fear. Because most investors lack a proper game plan, they tend to throw the proverbial dart at stocks based on intuition. The problem with this method is that the market is the master manipulator and punishes arbitrary decisions.
What is the solution?
The solution to this issue is to devise a game plan that fits your personal investment framework (risk appetite, style, etc.) and is rooted in historical precedent. Today, we will discuss a simple indicator that has worked for 10 years running on the stocks mentioned above, the 200-week moving average.
Image Source: Zacks Investment Research
Pictured: The 200-week has contained the last 10 years of price action in the QQQ ETF.
200-Week Moving Average: A Long-Term Indicator
The 200-week moving average is where strong stocks and indexes tend to get scooped up by long-term investors looking for a discount. Because the indicator is long-term in nature, the market leaders tend to visit the area rarely. For instance, looking at the Nasdaq 100 ETF (QQQ - Free Report) example above, you can see that the ETF has neared the 200-day line a mere 3 times: the brutal end-of-year pullback of 2018, the coronavirus crash of 2020, and during this year’s inflation induced bear market.
As you will see in the coming examples, the 200-week moving average can be a powerful tool to assist investors in deploying long-term investments. Regardless, investors should:
· Understand that, like any indicator, the 200-week ma is not a panacea. Instead, the indicator is a potential area to size up risk-reward for the long term.
· Stick to true market leaders. Meaning stocks that have rising consensus estimates, are the leader in their industry and have ample liquidity. Combining these fundamental factors with technical indicators can give investors better risk/reward situations.
· Implement a risk protocol. Like any investment, 200-week situations should involve risk practices and an “uncle point” if proven wrong. Since stocks that are testing their 200-week moving averages tend to be volatile, one method that can be implemented is to downsize position size while widening the stop loss zone and pyramiding into the stock as it starts to move higher. By leaving a risk cushion, investors put themselves in a position of strength.
· Realize that time is a critical component: Touches of the moving average should be rare and spread apart by months or years. Truly solid stocks rarely test the 200-week level.
The following examples include 10-year charts that are overlayed with Zack’s EPS Surprise data.
Apple is a prime example of using the 200-week moving average to take advantage of a pullback in a fundamentally sound stock. The company is the undisputed leader in its industry and is a liquid institutional favorite. Notice how the company surprised to the upside on nearly every quarterly report over 10 years!
Like Apple, Nvidia is the clear leader in its industry. While the stock was a super performer over the past decade, it rewarded patient long-term investors by pulling into the 200-week moving average.
Monster Beverage is proof that non-tech stocks can reward long-term investors in these zones. Though earnings surprise results were spotty compared to the other examples, Monster’s exceptional growth and stronghold in the beverage industry garnered investor interest during corrections.
In the 2000’s Google became such a leader in the search industry that the company’s name is synonymous with and used to describe the practice of searching. During the pandemic catastrophe of 2020, Google provided prepared investors with a gift – the stock pulled into its 200-week moving average for the first time in years (nearly to the penny) and marched higher for the next year, tripling in price. Currently, the stock is trying to find support at the 200-week again. Ideally, Zack’s Consensus Estimates begin to increase in the coming weeks as the stock gets support. Presently, GOOGL holds a poor Zacks Rating of 4.
It isn’t easy to imagine the electric-vehicle industry without Tesla. Tesla successfully brought EVs to the mainstream and catapulted Elon Musk to be the wealthiest person on the planet. Though every major global automaker is entering the EV industry, Tesla remains well ahead. Last quarter, EPS grew at a 69% clip while revenue soared 56%. Recently, investors have soured on the stock since Musk turned his attention to Twitter, the macroeconomic picture worsened, and product delays have plagued plans recently.
Nevertheless, potential catalysts are plentiful. Two significant catalysts are the Cybertruck and the Semi. The much-anticipated Cybertruck is slated to enter mass production in 2023. Tesla also plans to roll out production of its Semi truck for commercial use in the coming months and has already secured purchase orders from Walmart (WMT - Free Report) ,PepsiCo (PEP - Free Report) ,FedEx (FDX - Free Report) , and others.
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Very Rare: 2 Leaders Near Long Term Buy Zone
Year after year, the U.S. stock market offers up the opportunity to invest in some of the most innovative companies in the world. Over the past 10 years, for example, many widely known stocks have doubled, tripled, or sometimes quadrupled in price or more. Stocks such as Apple Inc (AAPL - Free Report) , Nvidia Corp (NVDA - Free Report) , Monster Beverage Corp (MNST - Free Report) , and Alphabet (GOOGL - Free Report) have achieved multi-bag returns, as have many others. While the companies were already well known before their price advances, most investors missed the meat of the moves or lost money.
With ample chances to cash in, why do so many speculators fail to capture these tremendous price advances? The simple answer is emotions, lack of discipline, and absence of a process or parameters. Since money at risk tends to ratchet up emotions, speculators tend to do the opposite of what they should do in key situations. In other words, investors tend to get excited when the price of a stock is extended, leading to chasing, getting stopped out of the position, or holding onto an underwater position for too long. On the contrary, when a stock gets sold off into an attractive area, most tend to capitulate underwater positions or not purchase shares at all out of fear. Because most investors lack a proper game plan, they tend to throw the proverbial dart at stocks based on intuition. The problem with this method is that the market is the master manipulator and punishes arbitrary decisions.
What is the solution?
The solution to this issue is to devise a game plan that fits your personal investment framework (risk appetite, style, etc.) and is rooted in historical precedent. Today, we will discuss a simple indicator that has worked for 10 years running on the stocks mentioned above, the 200-week moving average.
Image Source: Zacks Investment Research
Pictured: The 200-week has contained the last 10 years of price action in the QQQ ETF.
200-Week Moving Average: A Long-Term Indicator
The 200-week moving average is where strong stocks and indexes tend to get scooped up by long-term investors looking for a discount. Because the indicator is long-term in nature, the market leaders tend to visit the area rarely. For instance, looking at the Nasdaq 100 ETF (QQQ - Free Report) example above, you can see that the ETF has neared the 200-day line a mere 3 times: the brutal end-of-year pullback of 2018, the coronavirus crash of 2020, and during this year’s inflation induced bear market.
As you will see in the coming examples, the 200-week moving average can be a powerful tool to assist investors in deploying long-term investments. Regardless, investors should:
· Understand that, like any indicator, the 200-week ma is not a panacea. Instead, the indicator is a potential area to size up risk-reward for the long term.
· Stick to true market leaders. Meaning stocks that have rising consensus estimates, are the leader in their industry and have ample liquidity. Combining these fundamental factors with technical indicators can give investors better risk/reward situations.
· Implement a risk protocol. Like any investment, 200-week situations should involve risk practices and an “uncle point” if proven wrong. Since stocks that are testing their 200-week moving averages tend to be volatile, one method that can be implemented is to downsize position size while widening the stop loss zone and pyramiding into the stock as it starts to move higher. By leaving a risk cushion, investors put themselves in a position of strength.
· Realize that time is a critical component: Touches of the moving average should be rare and spread apart by months or years. Truly solid stocks rarely test the 200-week level.
The following examples include 10-year charts that are overlayed with Zack’s EPS Surprise data.
Apple (AAPL - Free Report)
Image Source: Zacks Investment Research
Apple is a prime example of using the 200-week moving average to take advantage of a pullback in a fundamentally sound stock. The company is the undisputed leader in its industry and is a liquid institutional favorite. Notice how the company surprised to the upside on nearly every quarterly report over 10 years!
Nvidia (NVDA - Free Report)
Image Source: Zacks Investment Research
Like Apple, Nvidia is the clear leader in its industry. While the stock was a super performer over the past decade, it rewarded patient long-term investors by pulling into the 200-week moving average.
Monster Beverage (MNST - Free Report)
Image Source: Zacks Investment Research
Monster Beverage is proof that non-tech stocks can reward long-term investors in these zones. Though earnings surprise results were spotty compared to the other examples, Monster’s exceptional growth and stronghold in the beverage industry garnered investor interest during corrections.
Current Examples:
Alphabet (GOOGL - Free Report)
Image Source: Zacks Investment Research
In the 2000’s Google became such a leader in the search industry that the company’s name is synonymous with and used to describe the practice of searching. During the pandemic catastrophe of 2020, Google provided prepared investors with a gift – the stock pulled into its 200-week moving average for the first time in years (nearly to the penny) and marched higher for the next year, tripling in price. Currently, the stock is trying to find support at the 200-week again. Ideally, Zack’s Consensus Estimates begin to increase in the coming weeks as the stock gets support. Presently, GOOGL holds a poor Zacks Rating of 4.
Tesla (TSLA - Free Report)
Image Source: Zacks Investment Research
It isn’t easy to imagine the electric-vehicle industry without Tesla. Tesla successfully brought EVs to the mainstream and catapulted Elon Musk to be the wealthiest person on the planet. Though every major global automaker is entering the EV industry, Tesla remains well ahead. Last quarter, EPS grew at a 69% clip while revenue soared 56%. Recently, investors have soured on the stock since Musk turned his attention to Twitter, the macroeconomic picture worsened, and product delays have plagued plans recently.
Nevertheless, potential catalysts are plentiful. Two significant catalysts are the Cybertruck and the Semi. The much-anticipated Cybertruck is slated to enter mass production in 2023. Tesla also plans to roll out production of its Semi truck for commercial use in the coming months and has already secured purchase orders from Walmart (WMT - Free Report) , PepsiCo (PEP - Free Report) , FedEx (FDX - Free Report) , and others.