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Best Wealth-Building Machine Known to Mankind

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The U.S. stock market is an unparalleled wealth-building machine, offering investors like you and me a unique avenue for financial growth. Its dynamic nature, characterized by a diverse range of industries and companies, provides ample opportunities for individuals to participate in the growth of successful businesses.

Just take a minute to think about and look back at the history of U.S. equities. Our equity markets have endured multiple “Black Swan” events in just the past quarter century, including the internet bubble burst of 2000, the global financial and housing crisis of 2008, and the COVID-19 crash of 2020. Each time throughout the market’s long history, the economy and stock market have consistently shown the ability to reward patient and strategic investors. Moreover, the market’s liquidity, transparency, and regulatory framework contribute to its status as a reliable wealth-building engine. Did you know that if you invested $10,000 in the S&P 500 Index in 1988 it could be worth more than $400,000 today. But if you put that money into the Zacks system, it could have skyrocketed to $24.5 million?

The Golden Goose of Capitalism

Though the capitalist system that we have in the U.S. is imperfect and sometimes controversial, it has undoubtedly produced the most robust stock market results in the world. “Golden Goose of Capitalism” refers to the economic system’s ability to generate wealth and prosperity through innovation, entrepreneurship, and free-market dynamics. Straightforward ideas such as the emphasis on competition and market-driven innovation are why rags-to-riches stories are so prevalent. For these reasons, the best entrepreneurs in the world flock to the states to start businesses, and it is still the center of commerce. Think about it: Tesla CEO Elon Musk was born in South Africa, Advanced Micro Devices CEO Lisa Su was born in Taiwan, and former Apple CEO was born to Syrian parents.

75% of Stocks Follow the Market’s Direction

Before we even scratch the surface of how to find winning stocks, we must understand the market environment that we are in. Just like a farmer must wait for the right season before planting crops, an investor should wait for a bull market before aggressively buying stocks. In other words, a farmer would not grow crops in the dead of winter when the ground is frozen over, and a savvy investor should not take on too much long exposure in a bear market environment.

Investors should understand that stocks are frequently beholden to the general market’s direction due to the interconnected nature of financial markets. Though certain stocks will outperform and others will underperform, it helps dramatically to have the market “wind” at your sails.

Determining Market Direction

Unlike many professions, there are multiple ways to “skin the cat” on Wall Street. However, being involved in the industry for more than 15 years has taught me an important lesson - that is, it’s usually not the traditionally smartest people like doctors or lawyers who make the most money on Wall Street (obviously, there are exceptions), as they tend to overthink and suffer from “paralysis by analysis.” Instead, the people who remove clutter and noise from their process, remain disciplined, and follow sound rules win.

“Simplicity is the Ultimate Sophistication” ~ Leonardo da Vinci

Today, I will take you through the three easiest ways to determine market direction:

The first method is qualitative, but takes only a second, so it’s worth practicing. Simply look at a weekly chart of the S&P 500 Index. Is it moving from the bottom left to the upper right of the chart? If yes, then the market is in an uptrend. It’s as simple as that!

Next, overlay a 200-day moving average on the daily chart. Above the 200-day means stocks are in a bull market, and below it means investors should be cautious. But don’t just take it from me; take it from multi-billionaire investing legend Paul Tudor Jones. In an interview with Tony Robbins, PTJ revealed: “My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: How do I keep from losing everything? If you use the 200-day moving average rule, then you get out. You play defense and you get out.”

Finally, track the net new highs versus lows in the market. If more stocks are consistently making new highs than new lows on a daily basis, then you guessed it, we are in a bull market.

Continued . . .


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Where to Find the Next Big Winner

The best way for you to discover the next big stock market winners is to profile previous winners and apply them to the current market. Ask yourself, “What did the greatest stock market winners have in common over the past couple of decades?” What I have found in my extensive market studies is that you need to look for three main things:

1) Strong Fundamentals: Robust EPS & Sales, but more importantly robust estimates

2) Revolutionary Product or Service: Innovation and disruption drive earnings in the long run

3) Institutional Sponsorship: Deep-pocketed institutional investors move markets, not retail investors

To model a winning stock, we will use a recent winner that we sold in the Technology Innovators portfolio service for a +120% gain in 3 months - Super Micro Computer (SMCI).

The Magic Elixir: Fundamentals, Innovation, & Institutional Sponsorship


The fastest and most straightforward method to size up a company’s fundamentals is to look at its Zacks Rank. The Zacks Rank was created by the Founder and CEO of Zacks Investment Research who spent countless years on Wall Street testing statistical models to uncover ways to beat the market. His research led to a breakthrough discovery:

“Earnings estimate revisions are the most powerful force impacting stock prices.”

Successful stock investing is about the future. With that in mind, find the stocks expected to grow the most in the future. Look for Zacks Rank #1 (Strong Buy) or #2 (Buy) stocks. SMCI has held those ranks for months.

Revolutionary Product or Service

The best stocks come from industries that are disrupting the way we live. For example, Artificial Intelligence is the fastest-growing industry in the market, and some Wall Street estimates expect the entire industry to grow at a Compound Annual Growth Rate (CAGR) of more than 40% over the next decade. SMCI is growing like wildfire because it specializes in providing the high-performance, energy-efficient hardware solutions that are needed by AI applications to scale.

Institutional Sponsorship

Institutions are the main drivers of stocks. Look for stocks that have smart, deep-pocketed institutional investors. For example, SMCI’s largest shareholder is BlackRock (BLK), the money manager with the most assets under management (AUM) worldwide.

Money Management 101

Depending on how you look at it, the beauty of the stock market is that you do not have to be perfect. Even if you find fundamentally strong, institutional quality stocks, you will be wrong and wrong often, and that’s okay. The key is to have what Peter Brandt calls “Strong opinions, held loosely.” Limit yourself to big wins, small wins, or small losses. Rule #1: cut losers.

I like to shoot for a 5-to-1 reward-to-risk ratio – meaning for every dollar I risk; I am shooting for a 5x the win. In baseball terms, you want to be a slugger like Barry Bonds, not a base hitter. By taking on an asymmetric reward/risk framework such as the 5/1 r/r, you only must be right 30% of the time to be profitable. Furthermore, if you are correct 40% of the time you will make a fortune. Let the simple math work in your favor when it comes to investing!

“Those who can both be right and sit tight are uncommon.” ~Jesse Livermore

"The real key to making money in stocks is not to get scared out of them.” ~ Peter Lynch

Like everything in life, timing is critical in the stock market. You can find the strongest fundamental stock in the world, but if you time it improperly, you won’t profit. Look for a stock emerging from a long base structure. Once you are in the stock, the tricky part is sitting on your hands. Conviction in the fundamental story and moving averages should help you to sit in the stock, though this is the hardest part of investing for most. Finally, understand that you can give a stock more room and sit through upside volatility as long as you have a profit in the stock. Discipline today can lead to profits tomorrow.

Alert: Artificial Intelligence to Ignite Tech Earnings (and Stocks)

As investing legend Stanley Druckenmiller has observed: "AI could be as transformative as the Internet."

Today, I invite you to look inside the portfolio I'm managing, Zacks Technology Innovators.

We've recently closed a flurry of winners like +1,007.1%, +147.9%, +121.0% and even +45.3% in just 6 days.¹

And the windfall is predicted to grow even more in the months ahead.

In fact, I'm about to add a stock to the portfolio that has exceptional upside.

You can be among the first to see this fresh pick and get aboard when it's posted Monday morning. Plus, you’ll also have the chance to immediately access all of the live picks inside the Technology Innovators portfolio.

Bonus Report, Too

Right now, you may also download our timely Special Report, “Software Is Eating the World.” In it, I discuss one of the strongest and most consistent growth sectors, and reveal 3 software stocks to own in 2024.

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All the Best,

Andrew Rocco

Andrew is Zacks' technology stock strategist. His passion is education, where he aims to provide valuable insights from both a fundamental and technical perspective, which he shares in his Technology Innovators portfolio.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.


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