I wanted to quickly touch upon a topic that is likely to come up in the weeks ahead. That is, once we get a new, sustained uptrend, what stocks do you buy?
Unfortunately, many investors go right back to the trough of the last uptrend. They’ll talk about Baidu (BIDU), Acme Packet (APKT), Riverbed Technology (RVBD) and Salesforce.com (CRM). After all, all are still good companies, all are still posting solid growth, and the underlying drivers of their growth are still in effect. So why wouldn’t they be good buys?
The funny thing is that, when coming out of a “normal” bull market correction–three-to-six weeks, maybe 8% to 12% declines in the indexes–such thinking often works. The leaders of the bull market are leaders for a reason, and they tend to lead through at least one correction (or, in the case of a mega-leader like Baidu, for the entire bull market cycle).
However, I believe that, no matter what you want to call the current downturn (bear phase, sharp correction, etc.), it’s been long enough and deep enough that many of those “old” names won’t come back. But don’t take my word for it–take the market’s word.
That is really the point of this whole discussion. If the stock you’re considering is sitting 35% or 40% off its prior peak, it might rally for a bit when the market does. But it’s not a leader anymore; a drop that severe, especially coming over many months, clearly tells you that perception has changed. Dead cat bounces can happen, but new, sustained upmoves are far less likely.
All of this is why I often harp on keeping an eye on those stocks that are resisting the market’s downward pull. By definition, these are the names that big investors are reluctant to sell … and hence, have a great shot of delivering profits during the next bull run. And, yes, some of them might be those “old” names–Apple (AAPL), Green Mountain Coffee Roasters (GMCR) and some others are still hanging in there nicely.
But don’t fall into the trap that, because a stock was good during 2010 or earlier this year, that it’s necessarily going to be good when the market gets going again. More likely is that those obvious, overplayed, over-owned names will lag as some fresher merchandise leads the next upmove.