Last week, I told you how Bespoke said the market is “overbought,” and I questioned why anyone would sell based on that fact alone, since previously overbought markets stayed overbought for a long time.
Bespoke provided further proof of this fact in the following paragraph: “Following most periods where the S&P 500 traded to overbought levels, it continued to stay overbought. In fact, so far this year, the S&P 500 has closed the day at overbought levels on 137 out of 212 trading days (65%). Compounding the frustration even further, when the correction finally did occur, the market bottomed above the levels it was trading at when it first became overbought. If you think 2013 has been frustrating, though, just thank yourself that this is not 1995, 1954, or for that matter even 1958. In all three of these years, the S&P 500 closed at technically ‘overbought’ levels at least 74% of the time…. In both of these years, the S&P 500 finished the day at ‘overbought’ levels on an astonishing 81% of all trading days.”
In a Five-Year-Old Bull Market, Stock Selection Becomes Paramount
The market will likely keep rising, but that does not mean all stocks will rise evenly. Several Navellier analysts have told me recently that they see thinner breadth in this market. The averages are rising on the strength of fewer and fewer stocks. Last week, I compared this earnings season to a tepid pool of equal parts boiling water and ice. This is the time in a bull market when stock selection becomes paramount.
Once again, I’ll quote Louis: “Even though a lot of market pundits like to say that indexing is better than active portfolio management, I have never heard one of these pundits admit that indexing caused the bubble in technology stocks back in March 2000 when 54% of the S&P 500 ended up in seven giant technology stocks due to the capitalization weighting associated with the S&P 500. In other words, much of the technology bubble that formed in the late 1990s underneath Cisco Systems, Oracle, and other large technology stocks burst in March 2000, due to the capitalization weighting that created a feeding frenzy.”
We believe now is the time to “look under the hood” of each stock you buy, rather than buying index funds or the biggest-cap fad stocks. Even in a solid bull market, traders tend to resemble a manic crowd that buys or sells first, then watches the tape, then regrets undertaking such a hasty action. As more brokers merely “chase” stocks, few are looking under the hood at the bubbles of excessive valuations that are forming.
Due to the recent flight to quality, it’s important to find advisors who are willing to examine each stock rather than jumping into the overall market. Look for the stocks with the strongest sales and earnings momentum, and also remember to trim stocks when they become over-weighted after outrunning the overall market. This stock market remains very selective, so now might be the best time in the bull market to consider one or more of the Navellier-managed growth portfolios (see www.navellier.com).
Written by Gary Alexander