Optimistic that Growth Stocks Can Lead the Market Higher

We thought we’d start off this week showing you three of the charts we’re watching most closely right now.

The first is a weekly chart of the IBD 85-85 Index, which tracks stocks that have excellent relative strength and a record of strong earnings growth—the type of stocks we like to own. It’s a good measure of how growth stocks are performing.

You can see that growth stocks had been lagging, but are beginning to show a few signs of life—the relative performance (RP) line was at multi-month lows coming into this week, but has begun to perk up.  And the Index itself is knocking on the door of its long-term moving average. Further strength would be a clue that growth stocks are finally kicking into gear.

The second chart tells a similar story—it’s a daily chart (going back a year) of the number of stocks hitting new yearly price highs on the Nasdaq. There have been a couple of glimmers of light lately when new highs perked up, but the readings still pale in comparison to last October’s market rally, never mind the levels of last June and July. That tells us most growth stocks are still on their launching pads … though some are beginning to emerge.

These two charts suggest the growth area of the market—which started this rally on its knees, with most leaders 20% or 25% off their highs—is getting closer to lifting off. The third chart makes us even more optimistic that it will happen.

This is a chart of the percent of all S&P 500 stocks trading above their 50-day moving averages. Not surprisingly, the readings were in the dumps during late January and early February, and have rallied strongly in recent weeks, leaping above 90%.

But what is surprising—and very encouraging—is what this high percentage portends. Since 1990, whenever this percentage has risen above 90% following a time the S&P 500 itself was below its 200-day line, it represented a “blastoff.” In the nine times this has occurred since 1990, the S&P 500 was up an average of 6.5% three months later and 12% six months later. 

Thus, we’re optimistic the market can continue higher, and that growth stocks can help lead the way. However, we still need to see it actually happen—if it does, that will be the sign to become more aggressive.

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. It’s the most complete and most helpful, growth-oriented investing advisory available anywhere.

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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