The stock market continues to set records. Shares of premier companies like IBM and General Electric are near their highs for the year. What's an investor to do but wait until the next pullback?
There are options.Many in the frenzied world of stock-market investing, professionals and amateurs alike, are purchasing stock and making money despite the new highs that individual shares are hitting day in and day out.
These buyers view record highs as confirmation of a company's strength, not a signal that stocks are pricey. They tend to view the market not as a supermarket, where you buy the meat and produce on sale that day, but as a boutique, where you get what you pay for.
They have various monikers - momentum investors is perhaps the most widely known. They all have one big thing in common: They go with the prevailing market direction, and that direction is up.
"Our approach to making money in the market is it is not a stock market but a market of individual stocks," says John Wylie, a portfolio manager at Nicholas-Applegate Capital Management, a mutual fund company based in San Diego.
Wylie says he isn't concerned so much with market averages setting new highs as with the performance of the companies he is tracking. Are they profitable? Are profits growing at a sustainable rate? Are the companies' products new and interesting?
A stock moving to new highs won't cause Wylie to avoid it if all else says "buy."
Indeed, some investors buy stocks precisely because they are setting records.
Pure momentum investors tend to look at issues making highs and companies whose profits are accelerating, 20 percent growth one quarter, 22 percent the next, etc. Many use stock charts, which look at price movement and trading volume, to clue them in to good levels at which to buy.
The theory is like riding an escalator up a floor, then jumping off and getting onto another to keep moving higher. Momentum investors buy stocks moving up and sell when they stop gaining ground.
"To be a successful momentum investor you have to ring the cash register periodically," says William LeFevre, senior market analyst at Ehrenkrantz King Nuss-baum Inc., a New York-based brokerage firm.
"You have to get out of it before it hits the top."
Akin to momentum investors are others, like Nicholas-Applegate's Wylie, who look at the factors momentum investors study but also take into account so-called fundamental issues, like a company's balance sheet, products and management.
"Just because a stock is trading at its 52-week high or not doesn't mean people should buy it or not. It depends on what is happening on a fundamental basis," Wylie says.
Taken together, though, momentum investors and the like are generally betting stocks that are moving up will continue upward long enough for them to book profits. That separates them from so-called value investors, who look for stocks near their lows that will turn around and run.
"One of the basic adages of Wall Street, `Trend is your friend,' really works," says Hugh Johnson, chief investment officer at First Albany Corp., a brokerage firm.
"The one discipline that has served me well though the years has been to identify trends and stay with them."
Does that mean jump in and buy stocks just because they're hitting new highs? No. Does it mean anything moving up will continue to move up? Of course not.
The main point of momentum investing and similar philosophies is if the stocks of companies turning in strong earnings and developing powerful new products are moving up, there's a reason. It's not necessarily a signal to stay away.