Lots of Set-Ups—and Crosscurrents

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.

In our last issue, titled “Here’s What to Watch For,” we detailed how we wanted to see a successful test of the market’s August lows, followed by a new Cabot Tides buy signal. And we got them! The re-test was completed just as that issue was published, and it only took another week for the Tides to turn green, indicating a new intermediate-term uptrend.

All of that is to the good. However, we also wrote this: “If the Tides flash a green light, we’ll almost surely do some new buying—but how much will depend on the action of potential leading stocks … if any bounce is led by junk off the bottom (stocks that are down 40%, etc.), it’ll tell us to take things slowly.”  

Well, guess what—the straight-up move during the past two weeks has featured great rebounds from commodity, material and industrial stocks, all of which had been destroyed in recent months. Meanwhile the many resilient growth stocks we’ve been following have done little (with some actually taking on water). Hence, we tiptoed into the water last week, buying two new stocks, but also keeping half the Model Portfolio in cash.

To be clear, initial strength in beaten-down stocks isn’t a bad thing; the broad market was in dire need of some buyers. But even if those groups have bottomed out (we’re still not 100% sure of that), they’ll have to build bottoms in the weeks ahead. Thus, we’re unlikely to have a sustained advance in the overall market unless real leadership—growth stocks hitting new highs—shows up.  

The good news is that there are a bunch of quality set-ups among growth stocks right now; we have more than a few on our watch list. And with earnings season getting underway, there’s the potential for leadership to quickly form if things go right.

But potential is the key word. There are plenty of crosscurrents in the market—don’t forget our longer-term Cabot Trend Lines are still negative—telling us that many investors are rowing in different directions.

All in all, there’s no doubt that the evidence has improved, and that prompted us to put some money to work. But we believe the real “tell” going forward will be the action of all these growth stock set-ups during the next few weeks. If most hesitate near their old highs or crack on earnings, we’ll keep plenty of cash on the sideline and bide our time. But if many of them lift off, that will be the signal to take the plunge.

Michael Cintolo can be found on Google Plus.

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