Who would have thought that after a 7 1/2 year bull market (now officially the second longest bull market in history) that we'd be surging to new highs again in such earnest?
Actually, lots of people.
What's the difference between those who were caught flatfooted in the post-election rally and those who raked in the profits?
Just a few simple things. But they are so important, they can mean the difference between making spectacular gains and totally missing out.
Here's how to be in the know.
The Trend Is Your Friend
The market has been trading within a perfectly defined uptrend since Q1 of 2009.
There's been some bumps along the way. Every bull market has them. But the uptrend has remained firmly intact throughout its entire run (which, by the way, isn't anywhere near over).
The simple identification of the prevailing trend is how you can ensure you're properly positioned for maximum gains without getting bucked off prematurely.
Every time the market made one of its routine pullbacks, the investors who didn't understand this concept got chopped up -- either by bailing out of their favorite stocks due to fear, or getting short in anticipation of a collapse. This resulted in forfeiting huge gains when the uptrend resumed, or taking on substantial losses by being bearish in a bull market.
More . . .
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This was never more evident than during the pullback earlier this year. The market plunged in January and February in one of the worst starts to a new year in recent memory.
But one look at a chart and you knew exactly where the market would likely find support.
And sure enough, when the misguided were panicking the most, those who knew what to look for were picking up the best stocks at tremendous bargains and making a fortune as the market, once again, rocketed higher after hitting that time-tested uptrend line.
The market has now formed an unmistakable uptrend channel (outlined in the chart below). The uptrend line continues to form the backbone of this bull market. But now the top line of the channel gives us a clear indication of where the market is headed.
And the chart, which has provided a roadmap on how to make money in this market, is projecting a move to more than 2,400 in the S&P. That would represent an additional 10% move from where we are today. But that also means significantly larger upside potential in individual stocks where you could see gains of 20%, 50%, even 100% or more, if you know where to look.
Picking the Best Stocks
With the market firmly entrenched in an uptrend, the question now is how to best maximize this move.
That means picking the right stocks. But the task of analyzing which stocks are the best ones to get into is easier than you might think.
We already know that the economy is picking up steam. Employment is stronger now than at any other time during this bull market. The GDP, which was 'only' 1.1% in Q1 of this year, reported a 2.9% growth rate in Q3, and is now projecting a Q4 rate of change of 3.6%.
There's also a decidedly pro-growth agenda being set by the President-elect. Whether you voted for him or not is irrelevant. Analysts on both sides of the political spectrum agree that GDP forecasts could increase sharply to more than 4% and even as high as 5%. And since the market is a forward looking mechanism (it usually moves on what is expected 3, 6, and even 9 months out), the market will need to rally just to meet the current expectations, let alone the future expectations.
So, which stocks should rally the most? Stick with tried and true methods that work to find the best ones.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 23 of the last 28 years with an average annual return of more than 25%? That's nearly three times the S&P. But when doing this year after year, that can add up to a lot more than just three times the returns.
And did you also know that stocks in the top 50% of Zacks Ranked Industries outperforms 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. Although, 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.
No need to get overly fancy or complex. A short checklist can do wonders for your stock picking success.
When it comes to a stock's growth outlook, there's no need to find those with triple-digit growth rates. In fact, studies have shown that stocks with the highest growth rates perform almost as poorly as those with the lowest growth rates. How can this be? Because those sky high growth rates are unsustainable. And the moment those estimates see even the tiniest reduction, they'll come crashing down.
For example, a stock that just reported earnings of 1 cent per share, but is now forecasting an estimated EPS of 6 cents, has a 500% projected growth rate. However, if the analysts that follow that stock reduce those estimates to 5 cents, that's still a 400% growth rate, but that 1 cent downward estimate revision represents a -16.7% decrease, and the price will likely fall accordingly. For those wondering how a stock with a 400% growth rate could possibly go down -- that's how.
Stick with stocks with a growth rate above the median for its industry, but not crazy high above it. I have found that stocks with a growth rate above that threshold but less than 50%, are some of the best performers.
The Price to Sales ratio (P/S) is one of my favorite valuation metrics. Why? Because it has proven to be an invaluable stock picking tool. In fact, I'd be hard pressed to think of any strategy where adding the P/S ratio to it wouldn't improve it.
I wrote about this in my book 'Finding #1 Stocks'. In it, I go over a 10-year study which shows that stocks with a P/S ratio of less than 1 generated the best returns. Between 1 and 2 still handily beat the market. And between 2-3 were still showing excess gains. But once you got over 4, your chances of success plummeted, and you were more likely to lose money than make it.
Of course, there will be some stocks out there with low P/S ratios that will go down, and some with high P/S ratios that will go up. But the statistics show, beyond a shadow of a doubt, that you have a significantly better chance of making money with a P/S ratio under 3, and ever better under 1.
Studies have shown that stocks making new highs have a tendency of making even higher highs. I know there are some people who are reluctant to buy stocks after making a new 52-week high or all-time high. But if you are, you shouldn't be.
Think about it -- if someone were to ask you what the best stocks in your portfolio are, you'd probably mention the ones going up the most. The worst ones? The stocks going down the most. And you'd be right to say so.
Obviously, if you were already in those stocks making new highs, you'd be cheering them on. So it seems silly to be afraid of those types of stocks just because you haven't gotten into them yet. All you need to do is make sure their growth rates support the move (as outlined above), their estimate revisions are headed in the right direction (up), and their valuations (like their P/S ratio) are still in the high probability profit zone. And you'll be able to ride those stocks to even higher highs.
There are so many other quick tips that you can use in your checklist. But just incorporating the ones above can transform your portfolio.
Proven Profitable Strategies
Becoming a better trader is fairly easy. And you don't have to turn yourself into an analyst either.
Just concentrate on what has proven to work. One of the easiest ways to do that is to trade proven profitable strategies that have a long track record of success.
I've created and backtested many successful strategies over the years. Simply by taking your best stock picking ideas and testing them to see how they would have performed 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. On the contrary, even the best strategies 'only' have win ratios of 60%, 70%, or even 80% -- not 100%. But if your stock picking strategy picks winners far 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 are performing spectacularly well this year.
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 16 years (2000 thru 2015), using a 1-week rebalance, the average annual return has been 54.7% vs. the S&P's 3.8%. And so far this year (thru 11/18/16), this strategy is already up 64.3% to the market's 8.9%.
New Highs: As mentioned earlier, 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 16 years (2000 thru 2015), using a 1-week rebalance, the average annual return has been 51.9%. And so far this year (thru 11/18/16), it's up 67.1%.
Value Method 1: A special blend of valuation metrics drills down to find the best undervalued gems. It then combines the spark of the Zacks Rank to detect sharp upward earnings estimate revisions for explosive opportunity. Over the last 16 years (2000 thru 2015), using a 1-week rebalance, the average annual return has been 49.8%. And so far this year (thru 11/18/16), it's up a whopping 126%.
The best part about these strategies (aside from the returns) is that all of the testing has already been done. There's no guesswork involved. Just point and click and get your list of the best stocks for the week.
Where to Start
There's a simple way to add a big performance advantage to 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 without attending a single class or seminar. Do it online in your own home at your own pace. It covers the investment ideas I just shared and guides you to better trading step by step.
You'll quickly see how to get the most out of the system that has nearly tripled the market for more than a quarter century. Discover how to identify what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them for maximum gains no matter where the market is headed. The course also includes some of our best-performing strategies (like the ones mentioned above and more), and shows you how you can create and test your own.
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 know and have 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 midnight Sunday, November 27. So if you're interested, be sure to check this out right now.
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Thanks and good trading,
Zacks VP Kevin Matras is our chart patterns and stock screening expert. He developed many of Zacks' most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.