Separating the Forest form the Trees

The market suffered another round of huge losses today, with the Dow losing 365 points and the Nasdaq cratering 160 points.

Looking at the market right now, it’s important to separate the forest (the bigger picture) from the trees (the nearer-term picture).  

The forest, which is the most important part of any market analysis, continues to look bearish for the market. All of our market timing indicators remain negative—the S&P 500 and Nasdaq are each a few percent below their 35-week moving averages (Cabot Trend Lines), all of the major indexes we track remain well below their 25-day moving averages (Cabot Tides), and there have been hundreds of stocks hitting new lows each of the past few days (Two-Second Indicator).  

That’s why we advise a defensive stance. We came into today with 64% in cash and just four out of a possible 12 stocks in the Model Portfolio—and tonight, we’re raising a more cash.  

If you’re still holding a ton of broken stocks, or have just a little cash on the sideline, it’s best to do some selling, even into this decline. You don’t have to panic out of everything, of course, but it’s vital to at least take a couple of steps in the right direction.

Moving to the trees, there are a couple of short-term rays of light. The latest decline has brought sentiment down to pessimistic levels; the latest survey from Chartcraft showed that 28.6% of advisors are bullish, versus 35.7% who are bearish. (When bears outnumber bulls, the market is often close to a low.) Also, many oversold indicators are in extreme territory, such as the percent of stocks below their 200-day line (just 80% coming into Tuesday) and the extreme number of new lows (more than 1,300 on the NYSE and Nasdaq combined today!). So a near-term bounce (possibly an impressive rebound) could occur at any time.  

However, the problem is that the market has been “oversold” for many days now and, except for a few hours here or there, hasn’t been able to get off its knees. Of course, the market could always start a good rally tomorrow, but the fact that it hasn’t been able to rebound yet is worrisome.

If you’re already in a defensive stance, we do believe some restraint is in order; if you sell every stock that looks bad, you’ll have nothing left in your portfolio. Going to 100% cash is an option, but except for very rare instances during the past 30 years, it’s usually been best to keep a couple of toes in the water.

This is an excerpt from Cabot Top Ten Trader, which features the best trades to make every week.  Designed for experienced investors who want even more great growth stock ideas, this advisory recommends the best 10 stocks each month for short-term investment by aggressive growth investors.

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.

Michael Cintolo can be found on Google Plus.

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