Stocks have been on a roll this year with all three of the major indexes; the Dow, S&P, and Nasdaq hitting new all-time highs last week.
With the market performing so well, some have begun to wonder if we’re going up too fast and too easily.
But didn’t people say that very same thing about 8 weeks ago when the market pulled back a few percent?
Back then it was the ‘rising yields’ and how it was a possible foreshadowing of the market’s demise.
Inflation was going to rise and the Fed would raise interest rates sooner rather than later.
But, of course, none of that was true.
Inflation remains stubbornly low. (Quite frankly, a bit more inflation would be great for the economy.) And the Fed has repeatedly said they see rates staying near zero thru 2023.
Then, just like that, stocks embarked on their next leg up with the Dow gaining more than 12% since then, the S&P up 12.5% since then, and the Nasdaq gaining 15% since then.
And everybody stopped talking about rising yields.
But now people are citing the fact that more than 95% of the companies in the S&P (as of last week) are trading above their 200-day moving average.
That’s the new thing to watch out for.
That’s because statistics show that a broadening rally is bullish for the market, not some dooming omen.
In fact, according to Frank Cappelleri, a desk strategist and executive director at Instinet, it “typically has only happened at a beginning stage of a longer-term move.”
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Over the past five years (2016 through 2020), while the market climbed an impressive +103.9%, these strategies actually produced gains up to +424.1%, +429.0%, and even +477.8%.¹
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It’s a rare occurrence to see 95% of those stocks get above their 200-day moving average. So rare that’s it’s only happened three times since 2003. But when it did, the S&P climbed even higher and finished with gains 6 months later and 12 months later.
Moreover, Keith Lerner, chief market strategist for Trust Advisory Services, notes that 90% of the S&P 500 stocks crossed above their 50-day moving average as well.
He goes on to say that in the last 15 times that has happened, the market was higher in 14 of those 15 times 12 months later. And the average annual gain was more than 16%.
Granted, this usually takes place after a correction. And we’re up more than 91% from the pandemic lows last year.
But much of that gain was making up for lost ground.
And with forecasts for soaring economic growth ahead, one could make a case that the economic boom is just beginning.
Full-year GDP forecasts were just raised to 6.5%, which would make it the fastest growth rate in 36 years.
Fed Chairman, Jerome Powell, in a recent interview said, “what we’re seeing now is really an economy that seems to be at an inflection point.” And that, “we feel like we’re at a place where the economy’s about to start growing much more quickly and job creation coming in much more quickly.”
Sounds pretty bullish.
And economic report after economic report continues to show an economy on the mend.
Now add in the unprecedented amount of stimulus money being pumped into the economy, and stocks are poised to soar.
Roughly $6 trillion in stimulus funds have already been approved. And with another $2.25 trillion infrastructure package on the table, we’re about to see a record amount of pent-up demand meet a record amount of stimulus money, and that’s a recipe for explosive economic growth and stock market gains.
Jamie Dimon, CEO of JP Morgan Chase, in his annual shareholder letter summed it up best when said, we could be looking at a “Goldilocks moment” for the economy.
He went on to say that, “this boom could easily run into 2023 because all the spending could extend well into 2023.”
Pretty bullish indeed.
History In The Making
What we’re seeing right now is history in the making.
And historic times typically lead to historic price gains.
So you need to make sure you’re taking full advantage of it.
That means getting into the right stocks, and staying out of the wrong ones.
And not squandering this opportunity with preventable mistakes.
Do What Works
So how do you fully take advantage of this historic opportunity?
By implementing tried and true methods that work to find the best stocks.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 26 of the last 32 years with an average annual return of 24.7% per year? That's nearly 2.5 x the S&P. But when doing this year after year, that can add up to a lot more than just two and a half times the returns.
And did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!
Those two things will give any investor a huge probability of success and put you well on your way to beating the market.
But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.
So the next step is to get that list down to the best 5-10 stocks that you can buy.
Proven Profitable Strategies
Picking the best stocks is a lot easier when there’s a proven, profitable method to do it.
And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.
For example, if your strategy did nothing but lose money year after year, trade after trade, over and over again, there’s no way you'd want to use that strategy to pick stocks with. Why? Because it's proven to pick bad stocks.
On the other hand, if your strategy did great year after year, trade after trade, over and over again, you'd of course want to use that strategy to pick stocks with. Why? Because it's proven to pick winning stocks.
Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success.
Here are a few of my favorite strategies that have regularly crushed the market year after year.
New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 21 years (2000 thru 2020), using a 1-week rebalance, the average annual return has been 45.5% vs. the S&P’s 6.6%, which is nearly 7 x the market.
Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 21 years (2000 thru 2020), using a 1-week rebalance, the average annual return has been 51.2%, beating the market by 7.6 x the returns.
Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 21 years (2000 thru 2020), using a 1-week rebalance, the average annual return has been 51.3%, which is 7.7 x the market.
The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.
Where To Start
Now that the economic recovery is in full swing, there's a simple way to add a big performance advantage for your stock-picking success. It's called the Zacks Method for Trading: Home Study Course.
With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.
Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more.
You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.
You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles.
The best of these strategies produced gains up to +424.1%, +429.0% and even +477.8% over the past five years (2016 through 2020).¹
The course will also help you create and test your own stock-picking strategies.
Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.
Please note: Copies of the book are limited and your opportunity to get one free ends Saturday, April 24, unless we run out of books first. If you're interested, I encourage you to check this out now.
Find out more about Zacks Method for Trading: Home Study Course >>
Thanks and good trading,
Zacks Executive VP Kevin Matras is responsible for all our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.
¹ The results listed above are not (or may not be) representative of the performance of all strategies developed by Zacks Investment Research.