How To Identify The New Bull Stock Market Winners

Last Monday (Feb. 20) I described the rationale for a new, distinctively different bull stock market in “A New, Exciting Bull Stock ‘Market’ Is Emerging.” Such a shift occurs when a significant selloff terminates previously popular market rises. So, what are the steps to take advantage of it?

• First, dismiss past viewpoints, reasoning, expectations and actions. The media are still locked onto those issues, but that’s just mental inertia. That past construct has come undone, and it will not be seen again. It will take time for the media and most investors to recognize a new movement is afoot.
• Second, accept that the next bull stock market will be unique, and that means completely different. That does not mean the next movement will be a simple 180-degree reversal – for example, value stocks in place of growth ones.
• Third, realize that media reports will be of no help in identifying what’s coming. Also, don’t expect those “so-and-so is now buying XYZ” articles to help. They only occur after the fact.
• Fourth, know that most professional stock fund managers do not try to foretell a stock market shift. Instead, they will continue to focus on finding attractive stocks within their investment approach (called their “investment style”). They realize their style will vacillate in popularity over different market periods, but, with good stock selection, they can beat the market in the long run.

The next step – Trying to identify the new trend

There are many stock portfolio management tactics, from using passively-managed index funds to selecting actively-managed funds to choosing an investment adviser to doing your own stock picking.

What makes the challenge of catching the new stock market wave so difficult is the drivers are unclear. In turn, that makes the characteristics of the future, outperforming stocks unknown.

It’s important to understand that it’s not just individual investors who are in the dark. So, too, are the professionals. That’s why the latter stick to their investment styles.

What happens in the stock market is that certain companies begin to be favored on their merits. As more companies are added to the favored list, similarities become visible and the trend drivers emerge. By then, of course, those companies’ stocks already have risen nicely.

A way to get ahead

Because stock trading is “transparent” (that is, publicly visible throughout the trading day), the early signs (called “technical indicators”) of a favored stock is its outperformance on increased trading volume. That link is certainly well known, and enjoys widespread use in bull markets – “relative strength” and “momentum” investing are the common labels.

However, investors start to lose interest in technical indicators when stocks fall significantly. By the time a market selloff hits bottom, like now, interest is paltry. In fact, investors have lost interest in speculation, with many exiting the stock market – the “shakeout” I discussed previously (Nov. 21 – “Stock And Bond Investors: Markets Headed To Shakeouts – Raise Cash”).

Therefore, when those first, professionally-chosen stocks begin to show positive signs, few investors see them. Plus, it will be some time before investor-speculators return in force.

There is one problem, though: There are always “false” stock moves – that is, increased trading volume rises that do not come from professional investor accumulation. Three examples are a good earnings report bump, a widespread industry blip, and a day-trader buy. The false moves tend to have one revealing characteristic: Poor subsequent numbers – That is, a decline in volume with little or no price increases.

Then, there is this helpful step…

Narrow search to all-time high stocks

Stocks selling at their all-time highs have two very important characteristics:

• Investors are willing to buy at high prices, meaning they see reasons the company and its stock will perform well in the future
• All shareholders have a profit, confirming that their reasons for buying were correct

I realize that looking at all-time high stock charts and technical indicators can seem overly simplistic. However, doing so has worked for me since I began investing in 1964. It’s not my only strategy, but it has provided me with key information, especially at market bottoms, like now.

The bottom line: Now looks to be the right time to act

The current market environment is particularly well suited to this approach. Based on the initial stocks selected, the new bull market will likely focus on individual stocks of smaller companies that are not household names and probably not included in the S&P 500.

In other words, increased interest in companies that are more focused, less burdened, more flexible, and have higher growth rate potential. Also, smaller means increased investor interest can move the company’s stock appreciably.