Bottoming in Process

 
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The major indexes rose nicely today with the Dow up 122 points and the Nasdaq rising 43 points.

Last week, most major indexes successfully re-tested their August lows and, importantly, we saw a positive divergence from our Two-Second Indicator. As we wrote in last week’s issue, that was the first step of the bottoming process.

Step two would be a new buy signal from one of our indicators. And we received that today—four of the five indexes we track are above their lower (25-day) moving averages, and those moving averages are turning up. That’s enough to turn our Cabot Tides positive, telling us the intermediate-term trend is turning up.  

The real question is what to do with that signal, as the overall evidence remains mixed. The rotation has been vicious in recent days, with money whipping out of formerly strong groups (especially biotech stocks) and, this week, into the most beaten-down areas (commodity and industrial stocks).  

The strength in beaten-down stocks has helped our Two-Second Indicator improve (three straight days of fewer than 40 new lows), but the move out of resilient stocks means the number of new highs has been next to nothing. Thus, at least right now, leadership is hard to spot, plus our longer-term Cabot Trend Lines are clearly bearish.

We will certainly respect the new Tides buy signal, but given the iffy action of growth stocks lately and the stance of the Trend Lines, our advice is to start slow. In the Model Portfolio, we’ll add two big-cap growth stocks today that have shown great resilience during the past two months and have huge growth estimates in the years ahead—but also keep about 50% cash on the sideline.

As always, we’ll use the market and the action of our stocks as feedback—if the market advances and we begin to develop profits, we’ll put more money to work. But should the longer-term downtrend reasserts itself, we’ll keep our stocks on tight leashes.

 


Michael Cintolo can be found on Google Plus.

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