3 Steps to Trade This Bull by Kevin Cook

[ZACKS Weekend Wisdom] 3 Steps to Trade This Bull By: Kevin Cook August 06, 2016 --------------------------------------------------------------- Make no mistake, the stock market is riding high on central bank support. The only reason the S&P 500 moved toward 2200 is because we got certainty from the big 3 -- BOJ, ECB, and the FED -- that rates would remain very low for very much longer. Well, it's not the sole reason. The other side of the coin is that institutional investors "have to buy" and there is nowhere else reasonable to put their money right now but into equities. As they say, it's a TINA market: There Is No Alternative to stocks. That's because yields are crushed in safe-haven government bonds, while earnings yields and dividend yields are much more attractive in stocks. And the tailwind of record corporate buybacks using cheap money doesn't hurt either. So how do you play this market? Here are 3 ways I believe will work well going forward this year... Step #1: Focus on Earnings Winners After I just got done telling you that the market is riding high on monetary policy, now let me give you the full picture by making two more facts perfectly clear. First, the bull market is not over. They still do not just die of old age and valuations are not at an exuberant extreme. Second, as long as the economy is chugging along with low odds of recession, there will be some macro growth that translates into solid earnings growth for many companies. Our job is to find the best of those companies. Continued . . . . [Window Closing for Extreme Profit Opportunity] Zacks Senior Strategist Kevin Cook is calling for new S&P 500 highs, and heading up a Zacks initiative to harvest substantial profits in 1 to 12 weeks. See his new selected trades and also download Zacks' Special Report, 7 Must-Buys for August, 2016 as a free bonus. These stocks were culled from 220 Strong Buys because they have the best potential for immediate breakout. Hurry - your invitation to get in on this push for short-term profits ends midnight Saturday, August 6. [See live trades now >>] But if the path of the equity markets is higher into 2017 because of the steady-as-she-goes economy and the central bank tailwind, can't we just buy index funds or ETFs? No. You still have to be very selective about what you buy. And a dose of good timing will help overall returns too because the rise to new highs will undoubtedly be a choppy path. This means you can't hide out in over-priced dividend stocks either just because that's where institutions feel safe parking their money. Remember, my second "secret of Wall Street" after they "have to buy" is that they "don't have to sell." In other words, institutional investors are just chasing the benchmark and each other. And since they are all doing about the same thing, they want to have good names in their portfolios. If things blow up, it's not their money. We, meanwhile, have to fight for our survival and the way to do that is to screen for earnings winners . By that I mean those companies producing solid earnings growth in their industry, even as the economy stumbles. Those are the companies that institutions really want to own and which will always be bought on the dips. That natural demand gives them a higher margin of safety. Start with Zacks #1 Ranked stocks, and then filter even further by EPS growth, sales growth, industry metrics, and valuation. Step #2: Wait for the Pullbacks On August 1, Richard Turnill, Global Chief Investment Strategist for BlackRock penned a note titled "Making the case for caution." Here's what he had to say... "Moving through a mixed earnings season, we think it'll take more than optimism to drive stock market returns higher. Equity markets are running on fumes... multiple expansion - or rising price-to-earnings ratios - has been the main driver of returns in many markets this year. Earnings growth has been flat to negative." BlackRock is not alone in this view this summer. They are joined by Goldman Sachs, Bank of America/Merrill Lynch, Fidelity, JPMorgan, and others. So on the one hand, we have the broad macro analysis of lots of investment strategists leaning cautious-to-bearish. And on the other, we have individual fund managers who we can't hear or see buying stocks and pushing them to new highs, as if they can't help themselves in their bid to keep their jobs competing with each other and the benchmark. What is the solution to this puzzle? To be patient. Because after the market gets done levitating, it will experience another 3-6% panic once the buying cash is exhausted. And we can buy that flush with relative certainty of good odds for future profit as the market "re-levitates." This is true because the odds of a correction that starts the next bear market are low right now - near just 10% according to many models that crunch the economic data. And the market just broke out of a year-long ceiling at S&P 2135. Historically, when the index has done this, it leads to meaningful gains of 8-15% over the next 12-18 months. Combine these fundamental and technical facts with undying central bank support and liquidity, and you have the recipe for "buy the dips" clearly still on the menu. Step #3: Have a Clear and Bold Plan When the 3-6% pullbacks come, you have to be ready to buy. That means you must have been doing your stock screening for earnings winners in advance and have "buy ranges" that you feel offer solid risk/reward potential. There is no "perfect" here. There is the difference between (a) buying a good company 10-20% on sale from its highs to catch the next wave to new highs, and (b) missing the boat completely. Plus, I like to add a twist here where you add some relatively safe leverage on the dips by buying index and sector ETFs that give you two to three times the performance of the conventional ETF. You only want to do this leveraged ETF move near good support areas in a pullback so that you have a good margin of safety. Fortune Favors the Bold Finally, you have to execute on your plan and pull the trigger. The first reason most investors don't buy the dips is because they didn't have a plan and they let fear rule their decision-making. The second reason is because they were unsure about the risk of their plan. You eliminate that uncertainty by knowing the price levels and allocation size you want to buy, and then timing that plan against the macro backdrop. In other words, if fear is running high but it seems overdone given the real potential of the macro news, you take a stab with at least half of your plan's allocation size. That way, you are already "on board" and can comfortably step back, watch the action unfold, and then decide if you like the opportunity enough to deploy the rest of your plan. As anyone who has created wealth in the stock market will tell you, fortune still favors the bold. How You Can Seize the Day In my view, the current market offers us a flat-out exceptional profit opportunity. And when the inevitable dips occur, we can make even more money from them. How do you take advantage of this historic windfall? The easy way is to let me do the prep for you. You're welcome to look inside my portfolio, the [Tactical Trader.] I will fire off every weapon in the Zacks arsenal to gain the most from the market's all-time highs, and will also pounce on the pullbacks. For added thrust in today's ascending market, I've arranged for you to download Zacks' just-released Special Report, 7 Must-Buy Stocks for August, 2016 free of charge. From 220 Strong Buy stocks, our experts distilled 7 with the highest potential for immediate breakout. But I must caution you that this free bonus is only available until midnight Saturday, August 6. [Look into Tactical Trader and Zacks' 7 Best Stocks now >>] Good Investing, Kevin Cook Kevin, a Global Market Expert at Zacks, is well noted for predicting and tracking the movement of smart money and calling market swings with remarkable accuracy. He provides commentary and recommendations for the [Zacks Tactical Trader.] Follow Us: Manage Your Newsletter Subscriptions [Update Preferences] [Update Your Profile] [Unsubscribe All] [Feedback] [Send to a Friend] This free resource is being sent by [Zacks.com] to our subscribers. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. [www.zacks.com/disclaimer] Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. 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