Leadership Still Holding

The market’s action since the Thanksgiving holiday has been—to use a highly technical term—wild and wooly. Coming into today, the Dow Industrials have closed 150 points higher or lower five of the past six days, mostly due to another leg down in oil prices ($1.95 at the pump right near our office!), and related weakness in most energy stocks and large areas of the credit markets.

That action, mostly on the downside, caused the broad market to again turn ugly. On Tuesday, a whopping 573 stocks on the NYSE and Nasdaq combined hit new yearly lows, compared to fewer than 60 that reached new highs!  Plus, about 65% (nearly two-thirds) of all stocks are still stuck below their long-term 200-day moving averages. And this weakness has also hit the major indexes—our Cabot Tides flashed a sell signal today, as small- and mid-cap indexes, as well as the energy-heavy NYSE Composite, turned negative.

Given all of the above—the weak broad market and an intermediate-term uptrend that looks to be over—it would be normal to see some (or most) of the relatively few leaders crack, as investors pare back on risk and take profits where they have them.

Yet, in the market, it’s often the unusual that is worth paying attention to. And in our book, it’s highly unusual that almost all of the leading growth stocks have not cracked. That’s not to say all of them look perfect (today was a rough day), but none have broken down and many are still with shooting distance of new highs.

Obviously, that can change at any time. We’ve read a dozen articles about how these growth stock leaders could be the new “Nifty 50” (the leaders of the market before the horrific 1973-1974 bear market) that will eventually crash. Maybe these authors are correct; narrow markets like the one we’ve seen all year, and especially during the past couple of months, often keel over into bear phases.

But our system is based on interpretation, not predictions. Sure, as students of the market, we run through various scenarios and precedents to get a clue on what may come. And, for what it’s worth, some of those scenarios are pretty bullish. But what counts most is what’s actually happening, and right now, despite the sour broad market action and growing uncertainties surrounding the energy collapse and Fed rate hike, the market’s growth stock leadership remains intact.  

That by itself is not a reason to be heavily invested, and in fact, with the Tides now bearish, we’re keeping our weakest stocks on tight leashes. However, we’re also holding on tightly to our top performers, and should the market decisively break out to new highs, we’ll be looking to get aggressively bullish.

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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