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It’s been just over a month since the market low in mid-October, so we wanted to take a step back and relay our thoughts not just on this week, but on the rally as a whole thus far.
First, the major indexes are acting excellently, with hardly any pullbacks and lots of tight, quiet trading following the three-week surge from mid-October through early November. And this morning, of course, brought a wave of buying on news of central bank easing in China. All of that is to the good.
Second, under the surface, we have seen something of a rolling pullback in many stocks and sectors. There have been some failures (mainly on poorly received earnings reports), but for the most part, the selling thus far looks normal, especially in the context of the huge rallies from mid-October. Ideally, today is the start of some upside follow-through that will confirm that these stocks are headed higher.
Third, in terms of leadership, most of the best performers generally represent what we call “defensive growth” stocks and some cyclical names—things like REITs, defense contractors, HMOs, auto parts retailers and the like, along with stuff like transportation stocks. Not only did these names sport the strongest rebounds into new high ground, they’ve held firm in recent days, too.
We’re not saying that as a negative; nothing says these stocks can’t do very well if the market continues higher. But, so far, the more volatile, more speculative growth stocks haven’t let loose on the upside. Said another way, big investors are more focused on quality growth than rapid growth, at least for now.
Back to the overall market, we wrote before that how the market handles its first pullback will be meaningful. If many stocks start to skid below key support levels in the days ahead, we’ll back off our bullish stance.
But because the evidence thus far has been encouraging, we remain optimistic, and that means we’re sticking with a generally bullish stance—it’s OK to hold your top performers and look to do a little buying as stocks either pull back to lower-risk entry points or lift out of tight trading ranges.
Michael Cintolo is Vice President of Investments at Cabot Heritage Corporation, and Chief Analyst of Cabot Market Letter and Cabot Top Ten Trader. A growth stock and market timing expert, Mike is a true student of the market and a technical analysis specialist.
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