That rally has obviously done the market a lot of good—the intermediate-term trend turned positive in late February, and more recently, our favorite measure of the broad market (our Two-Second Indicator) is showing extremely healthy action. Moreover, many of the worst-performing stocks have finally shown signs of bottoming out, and a lot of growth stocks are now etching good-looking launching pads, with a few looking ready to start their moves.
All of that is welcome news, and we’ve responded as any smart trend-follower would, by putting some money to work. After our new addition tonight, our cash position will be down to 41% or so.
But there are two more things we want to see before we conclude that a sustainable bottom is truly in place and move to a heavily invested stance: We need to see some growth stocks hit new highs, and we need to see the longer-term market trend (Cabot Trend Lines) turn bullish.
As mentioned above, many growth stocks are hovering just a few percent south of new highs, so it wouldn’t take much to see some real leadership develop. But close doesn’t count; even as the market has rallied, we’ve seen an average of just 30 or 35 new highs each day on the Nasdaq. That’s not a negative, per se, but we can’t conclude the buyers are truly in control until they plow into more than just steel, coal and gold stocks.
Just as important is the longer-term trend, which remains down. In fact, the S&P 500 has rallied right up into some tough resistance—its downtrending 40-week line, and overhead supply in the 2,020 to 2,100 range. Even after the recent rally, most indexes are still trading below their choppy ranges for much of 2015.
So that’s the situation; the bulls have marched up the field and have momentum on their side, but have yet to punch it into the endzone. Should the bears make a stand, we’ll keep our new purchases on tight leashes and cut any losses short. But we’re optimistic that growth stocks can kick into gear to lead a sustained run higher—we just need to see it.
This is an excerpt from Cabot Growth Investor, 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.
Michael Cintolo is Cabot's Vice President of Investments and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. To read customer reviews of Cabot Top Ten Trader, click here. To read reviews of Cabot Growth Investor, click here.