Editor's Note: We're sharing Bill's Private Briefing with you today because the strategies and stocks he discusses here with our Technical Trading Specialist D.R. Barton are essential to making money during periods of high volatility.
It's tough to be an investor today. This is perhaps the most challenging market since the meltdown in 2008.
The sobering headlines, full of dire predictions and uncertainty about the commodities collapse and the "slowdown" in China, certainly aren't helping.
At the same time, investors need to be in the market to have any hope of growing their wealth.
But here's the thing… No one needs to consign themselves to unnecessary risk and subpar returns.
To learn about how best to stay invested and in the black, I sat down to talk with D.R. Barton, Jr., author of the upcoming book "The Ten Minute Millionaire" and editor of the Stealth Profits Trader research and advisory service.
He told me the specific stocks to look at right now, and just as important, how to buy them. D.R. normally shares these stocks and strategies with his paid-up subscribers, but the market is so dicey right now that we feel everyone would benefit from this.
Here's what he had to say…
Why "Stock Pickers" Will Have a Much Easier Time
William Patalon, III: I had the pleasure of sitting next to you at a Money Map Press management conference in mid-December… something that gave us the time for an extended discussion.
We covered a lot of ground during that talk, and you made several predictions. The one that really sticks out was your assertion that the first half of 2016 would be marked by substantial volatility.
As it turns out, "substantial volatility" is precisely what we're seeing. And that's made for a pretty rough start for the new year – a start that's wiped out a fair bit of shareholder wealth. Let's talk a bit about that.
What's driving this whipsawing action in the markets? Will it continue? And what's the downside risk?
D.R. Barton, Jr.: That's an excellent place to start, Bill, because the market's messiness is clearly what's on most investors' minds.
Let me set the scene a bit, since some of the key ingredients for what we're seeing right now were mixed in last year.
Here in the United States, for instance, stocks actually sold off a bit in the last half of 2015. But it was worse overseas – for instance, Europe and China were down big.
What this meant was that, on a relative basis, the U.S. markets were, in fact, quite a bit stronger than the rest of the world – even though the broad market indexes were flat.
WP: But there's a lesson here, isn't there, D.R.? And it's one that you told me about.
DRB: Exactly, Bill. You see, the U.S. markets didn't have substantive, or broad, participation – something that technical analysts like me would call "breadth." Big-name tech stocks like Amazon.com Inc. (Nasdaq: AMZN), Alphabet Inc. (Nasdaq: GOOGL), Netflix Inc. (Nasdaq: NFLX), Facebook Inc. (Nasdaq: FB), and even Microsoft Corp. (Nasdaq: MSFT) had hefty second-half gains.
WP: You point out these big performers. But, by extension, that also means there were some hefty laggards, too.
DRB: That's right, Bill. It was very much a market of the "haves" and "have-nots."
WP: That brings us to the New Year.
DRB: Right. So now – here, at the start of 2016 – with stocks under big downward pressure, it was logical to see profit-taking in 2015's biggest winners. And without those big-cap winners buoying the market, the external influences of the crude oil price crash and a weakened China have overwhelmed the American market.
WP: During our talk in December, you likened it to an overladen lifeboat being swamped by heavy waves that crash over its sides.
DRB: (laughing) I said that? Well, it's a great analogy – if I do say so myself.
WP: And here's where volatility enters the picture…
DRB: That's right, Bill. And since we're kind of "setting the scene" here, let me do the same with the concept of volatility.
So volatility comes from strong influences on both sides of the trades that take place in the capital markets – from the sellers who see and understandably fear the risks posed by a global slowdown and from the buyers who see "Big Tech" and other select stocks that are poised to benefit from fundamental growth and, therefore, poised to experience increases in price.
So that gives us two sides with strong opinions…
WP: Strong and opposing opinions…
DRB: Right, strong and opposing viewpoints…
And those opposing opinions are robust enough to move the markets up strongly and then down strongly – from one day to the next, and very often within the same day. There's a real – I think you called it – "whipsawing" effect. That's the essence of a high-volatility market. And it can be disconcerting for investors who lack the right perspective, the right strategy, and the right set of tools.
It won't decrease volatility, but having this information – and an understanding of precisely what's happening – lessens the uncertainty those investors will feel. That will lessen their fear… and – I hope – reduce the likelihood that they'll make a costly mistake.
WP: Kind of like "forewarned is forearmed."
DRB: That's exactly right.
WP: Okay, you've done a great job "setting the scene" here. Now let's drill down a bit.
Here's a crucial question to consider: With the troubles we've seen in China, in South America, and in Europe, can the U.S. economy – and the U.S. financial markets – remain an "oasis of prosperity?"
DRB: I anticipate that the U.S. will continue to outperform, but I think "buy and hold" will be a tough strategy to follow in the first half of the year.
WP: In other words, we're firmly ensconced in what most of our experts here at Money Map Press describe as a "stock-picker's market."
DRB: We are…
WP: So how does the U.S. economy fit into this thesis? I know from our talk that you formally "modeled" the American economy, made formal projections for the next few months. What does that model tell you?
DRB: Fundamentally, the U.S. economy has been the "best of bad lot," with a modest jobs recovery and weakening earnings showing us good and bad examples.
So my analysis shows U.S. outperformance for the first half of the year, and that's looking like merely a smaller drop than other regions.
WP: So in other words, the U.S. economy will slow. But that slowdown will be much less than other economies around the world. By virtue of that smaller slowdown, the American economy will "outperform" its rivals from elsewhere around the globe…
DRB: That's correct, Bill.
But here's what's important to note: There will still be good moves to play on individual stocks and in some sectors. I expect some good earnings reports out of Big Tech that will give at least shorter-term pops to names like Amazon and Alphabet/Google.
WP: That's what you mean by a "stock-picker's market."
The Three Biggest Risks Right Now
WP: Okay, we have a good picture of a slowing market. What's the biggest threat to market stability? Give me a worst-case scenario…
DRB: That's actually a great question, Bill. The biggest threat to the global financial markets are the credit markets. The emerging markets have huge debts – corporate and sovereign – denominated in U.S. dollars. And a strong dollar that continues to appreciate versus emerging-market currencies makes those debts harder and harder to service.
Two more things add fuel to that fire: The first is the depressed state of commodities prices, as many of these emerging countries count on raw-material exports for cash flow, for the revenue required to run everything.
The second is China's slowdown, which specifically means slowing orders for raw materials and semi-finished goods – which also hurts.
WP: What're the one or two or three factors that might turn this around? Give us a picture of that outcome might look like – and perhaps an estimate as to how likely or unlikely this more upbeat scenario might prove to be.
DRB: The most likely turnaround scenario is for oil prices to stabilize and move higher in concert with other commodity prices. Throw in a softer U.S. dollar and you could be looking at a situation in which the emerging markets have some room to start growing again.
But neither of these "triggers" seems very likely to show up in the near term.
WP: Given the backdrop you've just described here, how do traders and investors make money in this type of market? I have to think that a lot of disparate things factor into this… Bring up any you feel are warranted: investment techniques, investor sentiment and emotion, money-management strategies, and the reality that this truly figures to be a "stock-picker's market."
DRB: In uncertain markets – especially those with the juiced-up volatility that we're seeing – investors and professional traders need to narrow their time frames. Identifying stocks and sectors that are stretched too far is one of my favorite strategies. In bearish or "sideways" markets, this is easier to do at tops (overbought) and bottoms (oversold).
WP: And, just to clarify, because I know what you mean, but I want to make sure our readers understand: When you talk about a "sideways" market, what you really mean is a "trendless" market – one that's neither up nor down.
DRB: That's right, Bill.
WP: So how should investors handle markets of this type?
DRB: In choppy markets like those we're seeing right now, I strongly believe that traders and investors also need to be more aware of the whole money-management process. Risk management has been a point of emphasis me for the almost three decades I've been involved in the markets. It's a true difference-maker. I've seen it separate those who survive in this business and those who don't.
WP: How can investors be certain to make this all work?
DRB: A key need for everyone is to have a plan: I talk with so many people that have only a half-baked investment plan – or don't have one at all. The lack of a full plan almost guarantees that emotions will take control at key "decision points" – the precise time when we need to keep our wits about us. And emotions are notoriously unreliable when it comes to making investment decisions.
How to Get Superior Returns
WP: In our talk in advance of this sit-down, D.R., you said the "online theme" has been dominant. And you cited such stocks as Facebook and Alphabet/Google for online advertising, Amazon for online retailing, and Netflix for online content delivery as the major beneficiaries.
Can these stocks continue to outperform?
DRB: Well, Bill, many analysts – including me – are looking for wide price swings in these leading stocks: They will get overbought (rise above fair value) and then correct (falling below fair value). Then they'll repeat this cycle again – and they'll do this violently.
The question, of course, is whether this type of volatility is going to be with us for a short time or for a long time, which would determine whether we need to adopt a new investing strategy.
While my main tools of analysis are technical and quantitative in nature, you have to look at the fundamental picture with these stocks: They are dominating in the world's biggest growth area – online commerce.
So they are the companies that are winning the battle
WP: D.R., I've heard you refer to these as the "FANG" stocks.
DRB: That's right, Bill: "FANG" is an acronym for those tech stocks that led the run-up in the second half of 2015: Facebook, Amazon, Netflix, and Google (Alphabet).
WP: So which of these FANG stocks do you like for the first three months to six months of 2016?
DRB: If we get even more of an economic slowdown, I still like the online advertisers: Facebook and Google.
Facebook showed in its last earnings report that it grew its per-user ad revenue 24% on a year-over-year (YOY) basis – thanks to some advanced analytics from partner International Business Machines Corp. (NYSE: IBM). And that's on top of continuing its double-digit growth in users. Those are phenomenal numbers.
And Google continues to dominate and grow in search: In the fourth quarter, this is a company that held a 63.9% U.S. market share. Additionally, RBC Capital Markets analysts estimate that Google's YouTube alone will generate $7 billion in revenue in 2016. When Google chooses to break out those YouTube numbers in its quarterly reports – watch out! That's a stock that could easily enjoy a bump in price like Amazon did when it finally reported Amazon Web Services financials for the first time.
As a strategy, I like to buy these hot momentum stocks on pullbacks and then sell them into strength. We did that in Stealth Profits Trader with Apple Inc. (Nasdaq: AAPL) and caught its last run-up in 2015 for some nice triple-digit gains.
WP: What else to you like?
DRB: I'm going to be buying so-called "defensive plays" early this year until this volatility slows a bit. I look at the utility sector as a short- to intermediate-term place to stash some cash. American Electric Power Co. Inc. (NYSE: AEP) throws off a nice dividend of just under 4%. And it's a company that should continue to benefit from low fuel prices.
WP: That's great, D.R. And what stocks or sectors – if any – should investors avoid?
DRB: Eventually, the really beat-down sectors like energy and mining are going to get a pop. But it's a very tough game to try and pick those bottoms even for skilled traders – because of the complex supply/demand picture. So for most investors, I'd suggest waiting for a clear indication of a bottom – I'll tell you my favorite indicator for that when we talk trading tactics.
I also think airlines are in for a tough year: As an industry, the carriers did a nice job of growing their capacity-per-plane numbers and taking advantage of much lower fuel costs – while also defending airfare pricing. But I think they've gotten the lion's share of the benefit out of those issues, and the stocks will be a tough play in a volatile-to-rising jet-fuel environment.
WP: Finally, are there any other moves folks can make that would position them better for safety? For profits?
DRB: Another great question, Bill. I mentioned that it's tough to pick bottoms in unloved sectors like energy and mining. One trading/investing tactic that has proven itself is to wait for a "confirmation" of an uptrend before making an intermediate- or long-term investment.
WP: What would define the uptrend?
DRB: Well, focusing again on longer-term investments, we've found that waiting for a stock price to be higher than it was eight weeks ago keeps people from trying to catch the proverbial "falling knife." For more intermediate-term trades, a four-week to five-week time frame is useful – meaning don't buy until the price of a stock is higher than it was four to five weeks ago.
WP: This is great stuff, D.R. – timely and useful. We'll be back to update folks on these predictions, and to give them your newest insights.
DRB: That sounds great, Bill.
WP: Thanks, D.R.
Bill and D.R. didn't get a chance to talk about this in their Q&A, but there's a huge growth sector out there that's being rocked by three powerful profit catalysts right now. It has to do with the $57 trillion infrastructure "upgrade" America has coming, and the one firm with the new technology to make this build-out work. This stock could surge 208% in the short term, and spike even higher as this huge project gets underway. Here's what you need to know…
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.