Mark Minervini on Finding Alpha | Investing With IBD

TL;DR

Mark Minervini says finding alpha requires judging individual stock setups and relative strength alongside market conditions, then controlling exposure through position sizing and risk management. He viewed the May 15, 2019 correction as a cyclical pullback within a secular bull market, noting that fewer than 50% of Nasdaq stocks were above their 200-day moving averages. Read on for his warning signals, market framework, and portfolio guidelines.

Transcript

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Key Insights

• 👾 The market correction was expected due to the rapid pace of growth and lack of stock setups.
• 🖐️ Market sentiment, as indicated by bullish sentiment and put volume, plays a role in predicting a pullback.
• 🫰 The Russell 2000 index, value line geometric, and New York Stock Exchange composite can provide a different perspective on the market compared to the Dow, S&P, and Nasdaq indexes.
• 🖐️ The market conditions and the GDP play a significant role in determining the market cycles and performance.
• 🥺 The Goldilocks scenario of moderate and stable growth is favorable for the market, while excessive growth or inflation can lead to bear markets.
• *️⃣ Position sizing and risk management are key to achieving successful growth investing and capturing alpha in the market.
• 💪 Uncorrelated stocks can provide alpha and strong performance even when the market is experiencing a correction.

Questions & Answers

Q: How does Mark Minervini find alpha in the stock market?

Minervini focuses on individual stock setups, relative strength, position sizing, and risk management rather than relying solely on major indexes. He also looks for uncorrelated stocks that can perform strongly even during a market correction.

Q: Why did Mark Minervini expect a market correction?

He saw few stocks setting up and many stocks already extended after a fast, V-shaped recovery. Bullish sentiment was elevated, put volume had fallen, and there was little pessimism in the market.

Q: What market-breadth signal warned Minervini about the pullback?

The Nasdaq and QQQ were trading near or at new highs, but fewer than 50% of Nasdaq stocks were above their own 200-day moving averages. Minervini described that divergence as a short-term warning sign.

Q: Did Minervini believe the correction marked the end of the rally?

No. He viewed it as a cyclical correction within a longer secular bull market and believed the market could move substantially higher over the long term if favorable conditions continued.

Q: When did Minervini expect the best buying opportunity?

He believed the pullback would eventually create a strong buying opportunity, but said the best opportunity might still be ahead. He suggested the market could first pass through the summer doldrums before better setups emerged.

Q: Which indexes did Minervini watch for a broader view of the market?

He cited the Russell 2000, Value Line Geometric Index, and New York Stock Exchange Composite. These could present a different picture from the Dow, S&P, and Nasdaq, especially when participation was not broad.

Q: How many positions does Minervini recommend holding?

The existing guidance recommends about 8 to 12 positions, with as many as 15 for larger accounts. Partial positions can also be used to maintain focus without becoming excessively diversified.

Q: How does Minervini manage position size and risk?

Position size should reflect the percentage of total equity at risk, as well as a stock’s liquidity and volatility. The stated guideline is to risk no more than 1% to 1.25% of total equity on a position.

Summary & Key Takeaways

• The market is currently in a correction phase, and investors should watch for a fall through day before making aggressive moves.

• Mark Minervini anticipated the pullback due to various factors, such as lack of stock setups and high levels of bullish sentiment in the market.

• While the correction presents a buying opportunity, the best buying opportunity may still be ahead after the summer doldrums.

• To achieve successful growth investing, it's important to focus on individual stock setups and relative strength, as well as the overall market condition.