2 Threats to the Stock Market – May 22, 2015 – Zacks.com

2 Threats to the Stock Market – May 22, 2015 – Zacks.com

The big lesson of the past year is that the broad market can go nowhere for several quarters, while many individual stocks launch like rockets and make stock pickers far richer than “indexers.”

If I were to drop some names that worked for us during the last six, “meat grinder” months, I would have to mention Ambarella, Skyworks Solutions, Synaptics, Acadia Healthcare, and Avago Technologies. This stock picking led to my FTM portfolio outperforming the 1% return of the S&P 500 in Q1 with a +14% trouncing.

And right now, it’s not only still a great time to be a stock picker, it is actually crucial to your portfolio and wealth-building campaigns. Why crucial? Because there are 2 threats staring at your stock market money…

Threat #1: More of the Meat Grinder

When it comes to justifying the S&P 500 trading at 18 times trailing earnings, the fundamentals “have left the building” this year. The economic data and earnings growth just aren’t there.

But the market is forward-looking and expectations for GDP growth and corporate profits the rest of the year are rosy enough to keep the S&P flirting with all-time highs above 2125.

For now, that is. I think the market is vulnerable to a lot more volatility in the near future. There’s just too much hope and too little evidence to support it.

Sure, the S&P could rally up to 2200 this summer, but it will still be a merciless and choppy ride where “average” stocks will be frustrating to own. And the more likely scenario – big swings of pessimism with violent sector rotation – will make owning below-average stocks very painful.

The solution is simple, but it’s not easy: find and buy superior stocks because these are the ones that will fall the least and be the first and strongest to rally when investor risk appetite resumes.

My favorite strategy has 2 steps. First, I capture the sweet spot of earnings momentum with a strong Zacks Rank. Then I overlay another specific criteria: institutional buying.

Essentially, I “follow the money” of institutional portfolio managers – those running $100 million or more – as they pile into growth stocks. By matching the earnings momentum of Zacks #1 and #2 Rank stocks against a database of SEC 13D and 13G institutional filings, I can screen for stocks that are under accumulation by the investors who move markets.

More . . .

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Threat #2: The Correction Is Coming!

Many big name investors like Ray Dalio of Bridgewater, the biggest hedge fund on the planet, and David Kostin, chief US equity strategist for Goldman Sachs, are worried about market valuations and deteriorating fundamentals propped up by QE.

When smart money is talking like this, a correction could unfold at any time. This is the scenario that every investor fears the most, and none of us can predict. All we can do is play the odds. And I think we have about a 1 in 3 chance of seeing a 5-10% correction this summer.

But do you know what professional money managers like Steve Mandel of Lone Pine Capital, or the many funds of BlackRock, or even Carl Icahn do? First, they check to make sure the fundamentals are still in place that warrant a bull market vs. a bear market.

Then, they keep focused on picking exceptional stocks that others are irrationally selling because these investors look out past the volatility to what they see as the intrinsic value for their investments, which will be realized over time.

And that’s why I love following these “whales” of the investing world. I am using their superior research teams and their capital to make outsized gains for my customers.

Bring It!

So I actually look forward to another correction. Just like we did in October. We were scooping up bargains left and right. That’s when we first bought Ambarella at $38.50.

If a big correction does begin to unfold, it doesn’t mean you run for the hills. The whales certainly aren’t doing that. After they sell some of their big winners, they are buying new stocks on the way down.

Again, quality growth stocks will be the first to turn higher and run the strongest when the panic is over. And that’s when the big money is made buying quality on sale.

Bottom line: you want to be positioned for those rallies by getting into great stocks that the whales love. All this requires is having a formula and the discipline to follow it.

My edge is not that I am the greatest stock picker in the world. It’s that I know how to follow the best.

From Panic to Profits

One of the most effective stock strategies for any market condition is to watch where the smart money is starting to go and then jump aboard for the full profit ride. Of course, catching the earliest entry points of professional money managers is difficult for individual investors because it takes an enormous amount of time and resources.

That’s why I invite you to consider turning to my Zacks Follow the Money Trader.

This portfolio starts by exploring a vast, ever-changing database to detect the best trades before funds and plans fully build their positions. Then we distill those moves even further through our proprietary fundamental and technical indicators. Finally, we issue “buy” alerts before other institutions join in and drive up the prices. Currently, only 7 stocks make the grade as FTM recommendations.

FTM has far outpaced the S&P 500 this year and I am about to add 2 new buys after Memorial Day, so you can be among the first to get in on them. Another reason to look into our portfolio now is that an eye-opening Zacks Report, 5 Stock-Picking Secrets of the Whales, is available to you for free. This special opportunity is only good until midnight Saturday, May 23.

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Good Investing,

Kevin Cook

Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and noted for predicting and tracking the movement of smart money. He provides commentary and recommendations for the Zacks Follow the Money Trader.

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2 Threats to the Stock Market – May 22, 2015 – Zacks.com

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