The Iconoclast Investor

Today I want to write about a simple topic, yet one that few investors grasp: Big moves don’t just happen out of the blue.  In the market, stocks (and the market itself, for that matter) take time to set up.  And that means that the market’s crash during late-September and early October was entirely avoidable.

Most investors, of course, will believe that such-and-such news item caused the crash, or they might comfort themselves by believing there was no way they could have avoided such a meltdown.  I talk to many people in that camp every week.

Really, though, it’s all about study and discipline.  I love the challenge of the market, and am glad to have a job that allows me to advise others how to do well in stocks.  But everyone should learn at least some of the tricks of the trade when it comes to identifying bull and bear markets.  My studies are based on how the market has actually performed in the past … not my opinions on what should or should not happen.

Basically, when the market’s trends are down (as determined by the indicators followed in our Cabot Market Letter) and just about every stock and sector is in poor shape, as was the case in mid-September, you know that the market is in trouble.  That is NOT to say that I predicted the crash–not in any way, shape or form.  But putting 1 and 1 together, I was able to stay heavily defensive, and keep 90%+ cash in the Cabot Market Letter’s Model Portfolio since early September.

Looking ahead, however, you should know that leadership stocks also do not just come out of nowhere.  They build multi-week launching pads, and within those basing structure they show signs of powerful accumulation.  And this time of year, such accumulation usually occurs because of a big earnings beat–a big positive reaction to a great earnings report can set the table for further gains in the fourth quarter.

One stock that did react well to earnings was Global Payments (GPN), which made its way into Cabot Top Ten Report two weeks ago.  Here’s what I wrote about it:

“Global Payments, making its Cabot Top Ten Report debut, is a nuts-and-bolts financial company that does the back office work for merchants, corporations, financials and government agencies. The company helps its customers issue credit cards, process their transactions, verify their payment checks and set check cashing limits for casinos. It sells, installs and services ATMs and provides money transfer services to U.S. immigrants through its nearly 800 retail branches in the U.S. and nearly 100 in Europe. But it’s the settlement arrangements with about 12,000 banks, exchange houses and retail locations worldwide that indicate its scope. Global Payments has no exposure to subprime mortgages, and investors see it as a way to play the global rebound in the financial sector once the current storm passes. A great earnings result last week, along with expectations for 20% bottom-line growth in 2009, has also bought in buyers.”

Now, the only problem was that GPN’s great earnings result propelled the stock for just one day … and then the market crashed last week, dragging shares down from 49 to 40, before the stock found high-volume support last Friday.  It’s now in the lower 40s, and I believe more time is needed.  But with business solid (sales and earnings were both up 30% last quarter), I believe it has a shot to be a steady advancer when the market turns up.  Give it a look.

And keep your eyes open for growth stocks that explode higher following their quarterly reports during the next few weeks–they could be revealing big upside potential for the next bull run.