"[There are] three Sentiment Stages of a Secular Bull Market:
1 = Disbelief / Blue Chips [aka, large-caps]
2 = Belief / Secondary Stocks [aka, mid & small-caps]
3 = Complacency / Speculative Stocks [aka, small-caps]
This Secular Bull Market is in its second sentiment stage -- small and mid-cap stock leadership is a sign of belief and trust in this market."
-- Ralph Acampora, CMT [October 6, 2013]
Please see my "Gentlemen, Start Your Buy Lists (Ladies Too)" [One] article for more in-depth discussion of the above quote. I've included the quote again because this article is somewhat an extension of, and update to, that first article. However, I don't refer to the quote directly in this article because I'm also trying not to repeat myself too much.
One thing I should repeat, however, is clarification of the article title. What I mean with "start your buy lists" is that I think there is likely to be at least one more good opportunity to use our buy lists between now and the end of the year. I say at least one "more" because it turns out that the last couple weeks of August were a decent time to buy stocks.
And, as I mention every chance I get (and discussed in my Instablog), one of my strongest opinions about stocks is that when to buy is just as important as what to buy. However, I also want to make very clear that I am not talking about "timing the market". I am simply talking about having the discipline to wait for, and the presence of mind to identify, the most opportune, and occasionally predictable, times to buy the stocks we like. So, I'll discuss here some of my opinions about acting on the thinking behind that "when to buy" statement.
By the way, I also realized from my first "… Buy Lists …" article that some readers expected a ready-made buy list of stocks perfectly suited to their time horizon, risk tolerance, investment goals, etc. So, to appease those readers, I have included at the end of this article some of my favorite picks, most of which I already have articles about or will at some point.
As that first "Buy Lists" article details, the Russell 2000 small-cap index recently made a new all-time high. Expecting small-cap outperformance as part of the typical cycle, I've focused on small caps most of this year, even though a larger portion of my portfolio is large-caps. Although it was only a month ago that I wrote "I believe small-cap outperformance will continue for a while", recent activity has made me see the need to slightly adjust that statement. What I mean is that, last week, the Russell 2000 dipped ~2.5% while the S&P 500 only dipped ~0.50%. Some already say that means the small-cap outperformance is over, but I don't believe that. So, what I should've said is that "I believe small-cap outperformance will continue overall, with brief periods of exception within the overarching trend." I mention that to reiterate one of the main points of that first "Buy Lists" article of mine -- that the time to figure out which stocks we want to buy is before they're ripe for buying, not once that is already happening.
For example, if small-cap outperformance does continue, last week was a decent time to buy small caps. Monday's trading might even indicate that the trend is already resuming. If that is the case, there are likely to be other brief exceptions to that trend, so before the next one is the time to refine the small-cap portion of our buy lists. That's why I stopped in the middle of a large and mid-cap article to write about another small cap first. It's also why I stopped in the middle of that small-cap article to get this one posted first -- because I can't finish articles fast enough to catch each opportunity I see like last week's small-cap selloff. So, I want to first remind readers that articles are rarely finished and posted exactly when I consider the right time to buy the stocks recommended within … I simply try to get the ideas out there before the next "right" time.
As far as when those right times occur, there are two categories I'll discuss, each of which has several separate factors within. The first category is more general and applies to all time periods. The second category is specific to the time period we're heading into very soon.
In general, I consider there to be four factors that determine how any stock moves at any time. They are what is happening with:  world economies ("macro" factors),  the entire market,  the company's sector, and  company-specific performance and news. In fact, in my opinion, the direction and velocity of all stock moves are always a function of the very fluid and ever-changing combinations of those four factors.
My experience is that the "sweet spot" for when to buy any stock is when 2-3 of those four factors brings a particular stock (or all stocks) down to undervalued territory. I consider 2-3 of the factors to be the sweet spot because, when only one factor is holding a stock down, it usually only creates very minor undervaluation. Conversely, when all four factors conspire to bring a stock down, buying before at least one factor relents practically guarantees additional downside. In my view, this entire year has only provided a few buying opportunities in select stocks at different times because the buying opportunities were always created by factors  and . There have only been very few, very brief and very small contributions from factor . No help from factor  is great news in general, but not particularly helpful for finding undervalued stocks.
This where the second category comes into play -- the specific time period we're approaching. Since world economies are in a relatively stable place and the market as whole is relatively strong, our best opportunities may be somewhat artificial weaknesses in an otherwise strong market. As also mentioned, but not really expanded on, in that first "Buy Lists" article of mine, many traders and investors tend to do more selling toward the end of each calendar year for a number of reasons including:  political risks,  holiday season profit taking,  tax-loss harvesting, and  portfolio rebalancing; which sometimes combine to create buyable dips.
The year-end political risks factor is because various elections and other important political actions take place toward the end of each year. This year, however, it seems the political risks that may affect the market may occur in January instead of the usual year end that coincides with the other three year-end factors. For that reason, I think it's even more important than usual to always average into new positions. In other words, if a good opportunity to open new positions does come from a combination of year-end factors, it may be safest to wait until January to add to or complete the positions. At the same time, also be aware that the "January Effect" could offset volatility from politics.
The other three year-end factors are fairly self-explanatory and very interrelated so I'll touch on all of them together. Although most of us learned early in our investing careers that money we may need within five years should never be tied up in stocks, very many investors and traders ignore that guideline. So, the end of each year tends to bring holiday season stock selling as people shore up their finances to fund holiday shopping, parties, vacations, etc. And, holiday season selling further perpetuates more of the tax-loss selling that investors do at the end of each year in order to realize losses for tax benefits. For example, holiday season selling often means taking profits from winning stocks and realizing capital gains, which often encourages more loss harvesting to offset those capital gains. Those factors also coincide with the portfolio rebalancing many investors do at the end of the year. So, while none of these factors alone could create a significant market dip, the fact that they all occur together sometimes creates enough of a dip to make a decent buying opportunity. However, a "Santa Claus Rally" sometimes occurs in the week between Christmas and New Year's Day so, if a year-end dip hasn't occurred by that point, it's less likely to happen.
As you can see there are a lot of different factors and phenomenon that can drive the market at a given time. Again, I am not proposing that readers attempt to "time the market". In fact, what I'm really proposing is far simpler -- in short, pay attention. If we do that, it becomes increasingly rare that we have no idea why when the market makes a significant move, and that helps us invest better.
Use Your Strengths
For readers who didn't see it the first time, I'll again wrap up with my number one favorite investing quote of all time, and my take on it.
"The trouble with you, Byron [Byron Wein - Morgan Stanley], is that you go to work every day and think you should do something. I don't. I only go to work on the days that make sense to go to work. And I really do something on that day. But you go to work and you do something every day and you don't realize when it's a special day."
-- George Soros
I immediately loved that quote when I saw it because I identify with what I believe Mr. Soros was getting at since it's exactly what I do. That is, I work relentlessly on the days that make sense to do so -- the "special days". Perhaps even more important is that, on the days that don't "make sense to go to work," my primary goal is to avoid screwing up everything I accomplished on the special days. I've found that approach beneficial in most every aspect of my life, but especially in the context that it was originally intended -- the market.
I mention that again because I think it is so very important at all times; but especially when the market takes its periodic breathers, trades sideways and there isn't really much to do. Many investors think they should be doing something so they over-trade in a sideways market and lose much of what they made when the market was strong. Perhaps all we should be doing on some days is refining our buy lists to prepare for the "special days". As retail investors, we should never forget the main advantage we have over professional money managers -- we don't have to "go to work" every day. We don't have to buy or sell stocks every day, against our better judgment, because we have clients insisting that we put their money to work at the worst times possible or cash them out at the worst times possible. We have the option to only buy stocks at opportune times so why not use it? Again, the main point is that when to buy is just as important as what to buy.
Below are some of my favorite picks and there are articles on most of them here. Please consider various recommendations before deciding which, if any, might be most suitable for your portfolio. My Instablog includes general information about my overall approach that is, therefore, relevant to all of my stock picks. I still hold all of the names below and plan to buy more of them all. I refer to my initial buys because I hadn't yet started officially contributing to SA when I bought so I could not have fully shared my initial calls, per se. Even so, the buys equate to calls since I only buy stocks that I think will go higher. All of the companies are dividend payers, but dividends are not included in the return amounts shown. Several have also had spinoffs that added additional returns, but those returns are not included in the amounts shown either. I mention the returns that I've made not to gloat, but simply as evidence to support my opinions beyond a "trust me" . With that said, these are only my opinions so please supplement with your own due diligence and make thoughtful investment decisions that are right for your situation.
Thanks for reading and I appreciate comments, even if just to let me know that someone is in fact reading so I'm not wasting my time.
Aceto Corporation (NASDAQ:ACET) [up ~14% since my initial buy]
CECO Environmental (NASDAQ:CECE) [up ~46% since my initial buy]
Consolidated Water (NASDAQ:CWCO) [up ~107% since my initial buy]
Cott Corporation (NYSE:COT) [up ~12% since my initial call]
HCI Group (NYSE:HCI) [up ~152% since my initial buy]
Mueller Water Products (NYSE:MWA) [up ~214% since my initial buy]
Trinity Industries (NYSE:TRN) [up ~116% since my initial buy]
Manitowoc Company (NYSE:MTW) [up ~73% since my initial buy]
Aetna (NYSE:AET) [held this stock ~20 years so not fair to include returns]
Blackstone (NYSE:BX) [up ~37% since my initial buy]
General Electric (NYSE:GE) [up ~38% since my initial buy]
Halliburton (NYSE:HAL) [up ~80% since my initial buy]
Kroger (NYSE:KR) [up ~78% since my initial buy]
Magna International (NYSE:MGA) [up ~144% since my initial buy]
Pfizer (NYSE:PFE) [up ~36% since my initial buy]
Valero (NYSE:VLO) [up ~21% since my initial buy]
Williams Companies (NYSE:WMB) [up ~77% since my initial buy]
Disclosure: I am long ACET, AET, BX, CECE, COT, CWCO, GE, HAL, HCI, KR, MGA, MTW, MWA, PFE, VLO, WMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am long ACET, AET, BX, CECE, COT, CWCO, GE, HAL, HCI, KR, MGA, MTW, MWA, PFE, VLO and WMB and may buy additional shares over the next 72 hours.