Last week was ugly.
During times like these your first reaction may be to “Sell” everything. However, the last thing you should do now is let your emotions take over, join the panicky crowd and dump your stocks.
Instead, you should remain disciplined in your strategy.
After all, being in the market when it goes down is much less painful than being out when it goes up. If you pull out now, you run the risk of missing out the inevitable rallies that will produce double- and triple-digit returns in the stocks you now hold.
But first, I want to address a question I’ve been hearing a lot.
At the start of this year, I told you that various “ignition points” continue lining up to create one of the greatest tech-profit cycles of all time.
Moreover, I’ve been saying that the U.S. economy is in sound shape – and poised to take our tech stocks even higher.
Now, after stocks have fallen nearly 7% over the past five trading days, you might be thinking I’m ready to change my analysis.
Here’s what else I’m following…
The Story the Numbers Tell
The empirical data I’ve seen over the past few days only reinforces my belief that our economy in good shape.
Let’s start with the jobs numbers that crushed forecasts. The United States added 292,000 jobs in December, a figure that is more than 25% higher than forecasts.
Not only that but the U.S. Labor Department revised October and November jobs numbers upward by 50,000, making the fourth-quarter monthly average about 284,000 new jobs. Unemployment remained at 5%.
The percentage of working adults rose to 59.5%. At first, that may sound weak, but it’s the highest level in more than six years. And the average 10.5 weeks of unemployment fell to a seven-year low.
Auto sales, a big driver of economic growth, had a strong December that capped a historic year. All told, consumers bought 17.5 million new cars and trucks, the highest on record.
The Consumer Confidence Index also rose last month. It now stands at 96.5, up roughly 4% from November’s level.
That’s a lot to cheer.
However, the recent sell-off doesn’t stem from concerns about the U.S. economy.
Instead, investors are worried about global conditions – particularly in China – and that fear alone seems to be driving the markets right now.
In the hopes of growing its exports against a strong U.S. dollar, China’s central bankers last week decided to guide the value of the yuan lower.
Simply put, it was an unmitigated disaster that sent shockwaves around the globe.
That’s because investors quickly feared the People’s Bank of China must have new data showing the world’s second-largest economy will grow slower than what economists have been predicting.
I don’t share that view. I think this is part of a strategy to pick up market share against the United States at a time when the dollar remains on the rise against other currencies.
We’re also seeing a much stronger than usual direct link between commodities – like oil and gold – and the stock market. Gold and silver stocks peaked in 2013 and have sold off… though the rest of the market continued to do well.
In this case, many worried that oil’s plunge could hurt the emerging economies of the world. These are formerly high-growth countries whose economies are tied to the price of oil and gas – as well as to the prices of other natural resources, like coal, timber and base metals, all of which are off sharply over the last several months.
And perhaps most vexing, the market’s own success is acting as a set of brakes. We’ve had a strong bull market since March 2009, and the negative headlines out there are convincing investors to protect all the profits they’ve made over the past five-plus years.
Indeed, the Nasdaq Composite Index is down more than the other major indices over the past month or so precisely because it has been the star performer of the past year… because of its success. That means there are bigger profits to protect – and investors are protecting them by selling.
Even after this week’s rout, the Nasdaq is up 12.8% for the past two years. That’s more than double the S&P’s 5.5% return and 18 times that of the Dow’s 0.7% return over the period.
Also, don’t ignore the effect that taxes had in last week’s decline. We just closed the books on 2015, meaning taking profits in the New Year puts off paying capital gains taxes for some 15 months.
Unfortunately, when emotions take over the markets, as they have in the past week, it’s hard to predict just when the losing streak will snap.
That’s why we have our portfolio-management tools in place that will help us weather any turbulence the market sends our way.
What to Do Now
The first is what I call the Moneyball Method. We carefully manage our gains by taking profits off the table whenever it makes sense to do. That way we can walk away with profits no matter what happens.
The second tool is my Cowboy Split entry system, in which we buy a portion at market and then put in lowball limit orders for additional shares. This allows us to turn the market’s volatility to our advantage by lowering our average costs.
And that’s just the start of what you can do to manage your risk.
Remember: Managed recklessly, stocks and other investments can drive you into the poor house. But managed skillfully, they can make you rich.
During my 30-plus years as an investor, I’ve developed five tools for turbulent markets. Through the years, they’ve always turned the table to my advantage.
With the stock market in general – and tech stocks specifically – going through a turbulent stretch, these five Choppy Market Tools will help keep you from making mistakes. I’ve designed them so you can navigate the choppy markets we’re seeing right now.
In the long run, they will make you wealthy. For a full report on all five of these tools, click here.
There is no way of predicting exactly when the markets will snap back.
However, I know that tech will once again lead the markets higher in 2016.
Past the “Tech Tipping Point”
We’ve entered what I call the “convergence economy” – when multiple, once-disparate trends of innovation are converging to create entirely new lines of technology.
The United States has always been a bastion of innovation – an environment and an economy where creativity and inventiveness are not only valued. They’re nurtured. We’ve seen it over and over: from the lightbulb to the airplane to the mass-produced auto to the smartphone.
And now it’s more powerful than ever before. With the “convergence economy,” we have overlapping rings of concentric technology – in a way and to a degree we’ve never had or seen before. People shop from their smartphones, power their homes with solar, have in-dash infotainment systems in their cars, use smart appliances at home, utilize wearable tech for fitness and medical monitoring.
That’s just on the consumer side. As I like to remind investors, these days every business is a tech business. By that I mean, companies need data analytics, e-commerce and mobile commerce solutions, hosted software for payroll, customer relationships and much, much more. There simply is no going back.
And right now, it’s all about stock selection: finding the quality companies that are deep into this “convergence economy” – and that can outgrow the U.S. economy and hand you folks outsized gains.
The best way to explain why this is a stock-picker’s market is to compare today with the current bull market’s March 2009 beginnings. Back then, you could buy a basket of stocks – an index fund – and do pretty well.
But since then, all the easy money has been made.
To find the remaining “hidden gems,” you have to drill down and find out what’s really going on with specific companies.
And that’s what we’re going to do here – and along the way, you’ll capture some of the biggest gains the technology sector can churn out.
Open Letter Update
On Friday, I showed you an “Open Letter” I penned to Virginia Rometty, CEO of IBM Corp. (NYSE: IBM). In it, I revealed a plan that I think could rescue IBM – and its shareholders – by making the company the undisputed leader in artificial intelligence, one of the fastest-growing sectors of the market.
After I sent that letter to you all, I mailed it to Ms. Rometty office at IBM’s corporate headquarters in Armonk, N.Y. I also sent it out to IBM investor relations and communications executives via my Twitter and Facebook feeds.
If I hear anything back from Big Blue, you’ll be the first to know.
I’ll be back later this week with three more critical tools you’ll need for success in 2016.
See you then.