The market plummeted again.
Last week, the S&P 500 fell 5.9% and the tech-heavy Nasdaq 100 fell 7.3%. It was the biggest weekly drop since the market correction in January 2016.
It’s made investors nervous. My phone has been going crazy with people asking, “Why now?” and “What should I do?”
I’ll explain everything you need to know—and how to profit—in today’s Daily…
Usually I don’t spend too much time getting into why the market is falling. Often, it’s more constructive to look forward and figure out what the best investment will be.
But we have an emerging theme playing out… one that’s making Wall Street nervous…
President Trump is getting things done.
I’m not here to comment on whether these things are good or bad… just that Trump is starting to use his presidential powers to their fullest extent.
Now, Trump was fairly predictable during his first year. Wall Street liked that. No changes meant investors had more certainty. They were able to predict future profits and were willing to pay a premium for that predictability.
The S&P 500 rose 37% from the day after the election to its January 2018 peak. But that’s changing…
Predictability Is Gone, Volatility Is Back
Within the past couple weeks, Trump seems to have gotten more comfortable in the Oval Office.
He’s cleaned house and hired people who agree with him.
And he’s doing things the president can do without congressional approval—like initiating $50 billion worth of tariffs against Chinese goods.
These unilateral moves have Wall Street worried. That’s why you’re seeing the market sell off. And it’s why volatility is back—the Volatility Index (VIX) is back above 20.
We were spoiled the past couple years with record-low volatility. The market slowly marched higher. We didn’t see any major pullbacks.
With the exception of January 2016, we’ve had seven years of slow moves higher. But we’re going to see some volatility now. We need to get used to that and use it to our advantage.
Do Not “Panic Sell”
On Friday, the S&P 500 closed exactly where it bottomed in early February. And it closed right on its 200-day moving average. Those are two major support levels.
That’s why the market jumped on Monday. Wall Street looks at these support levels… So we should expect a bounce.
I called for a double-bottom a couple weeks ago. And it’s here (admittedly, after the Nasdaq jumped higher than I thought it would).
Do not panic sell. Stick to your plan. Know when you’re going to exit… and don’t let emotions trick you into selling.
Remember, the market is still in an uptrend… and the economy is still strong. Unemployment is still low. Manufacturers are still planning more projects. And GDP is projected to grow over 3% this year.
We are not witnessing systemic weakness yet. But as I said above, we can use this recent volatility to our advantage…
It’s Time to Take New Positions in Market Leaders
This recent volatility gives us a chance to see which stocks are the strongest in the market. It gives us a chance to add to our positions in certain stocks. And right now, we want to look for stocks that are classified as “market leaders.”
Market leaders are the strongest companies in the biggest growing markets. We’re looking for stocks with massive sales, profits, and cash flow growth.
And we can uncover the ones Wall Street is looking for during declines like we’re seeing now. That’s because these stocks will be making higher lows and outperforming the market.
A few market leaders I see emerging right now are Amazon, Netflix, Adobe Systems, and SolarEdge.
We’ve detailed the rise of Amazon multiple times over the past year. We even brought you an interview from a man who predicted Amazon would be the first trillion-dollar company.
Since then, Amazon’s sales are growing 38% annually, profits are up 40%, and its shares have risen 62%.
Netflix is another emerging market leader. I’ve been bearish on it before. But it never broke the line in the sand that I mentioned. So, hopefully, holders followed my advice and held on. And since then, Netflix shares rose 83%.
Adobe Systems is a software provider for the corporate world. Most of us know Adobe as the maker of the PDF file. It’s a way to send documents across the web and read them in the free Adobe Reader program.
SolarEdge is a small, yet speculative name. It creates power converters used by solar panels. And as far as I know, they are the only company that makes this kind of converter.
Regular readers know that we’ve been bullish on solar power for a while. SolarEdge is a great way to play that trend… The more solar panels that are made, the more converters they’ll sell. And profits are surging, up 210% this past year.
If you are a “growth at a reasonable price”-type investor, this is perfect. Its PEG ratio (a way to normalize profits with growth) is 0.7, making it a bargain.
Most of this run occurred after its last earnings report because profits started to pour in. Revenue was up 32%, but earnings per share grew 210%. And profit margins increased from 2% to 5%. Netflix is becoming a lot more profitable.
But the company also has super high-end software that businesses pay a high monthly fee to use. And they’re raking in sales and profits. Sales grew 25% last year and profits surged 45%. This business also has a ridiculously high (and growing) profit margin of 23%.
All these companies have crushed the market despite the recent pullbacks. And I predict these market leaders will soar as the market resumes its uptrend.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
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