Encouraging Action

by Michael Cintolo on October 22, 2014

This is an excerpt from Cabot Market Letter, where we’ve been picking the best growth stocks since 1970. Cabot’s flagship advisory combines expert stock selection and award-winning market timing. This is the most complete, and most helpful, growth-oriented investing advisory available at any price.

One week ago, we noted that the market was looking washed out—we saw about 950 stocks on the NYSE and NASDAQ combined hit new 52-week lows last Wednesday, which is extreme. More than 70% of stocks were below their respective 200-day moving averages. We saw a rush into super-safe Treasuries on Wednesday, another sign of panic.

Thus, we expected a bounce … but we are surprised by how strong it’s been, with the major indexes quickly recovering about 60% of their September/October decline in just four days! A bunch of growth stocks have also snapped back to their old highs, and on big volume, too! Lastly, we’re pleased that our Two-Second Indicator is acting better, with fewer than 40 new lows each of the past four days.

Simply put, the action is encouraging, and raises the chances that last Wednesday was a meaningful low—possibly the low for this correction.

But (you knew there would be a but, didn’t you?) that doesn’t mean stocks will kite higher from here. For one thing, both of our trend-following indicators—the Cabot Tides and Cabot Trend Lines—are negative. After such a vicious decline, it’s going to take more than a few up days to change the major trends. And that’s a good thing—such sharp, make-you-want-to-get-back-in rallies can be deceiving.

Second, as we wrote last week, history shows that such devastating declines (10% in just a couple of weeks) almost never lead to straight-up recovery action. This isn’t like the 4% to 5% dips we’ve seen during the past year or two—the recent decline was extremely punishing and was preceded by months of divergent, toppy action.

Because of that, we’re sticking with our defensive stance, holding just three stocks and one ETF and a cash position of 66%. However, we’re also staying flexible—if we get buy signals in the days or weeks ahead, we’ll be ready, as there are plenty of buoyant growth stocks out there.  

As usual, we’ll simply let the evidence tell us what to do—right now, that means practicing patience, while honing your watch list should the bulls continue to flex their muscles.

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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