This morning looks particularly ugly, with another steep drop in oil prices led to an opening drop of around 400 points in the Dow. In the 11 trading days prior to today, the S&P 500 fell as much as 9.7% while the Nasdaq fell 12.6%. And the straight-down action produced some major extremes in breadth and sentiment—even after Thursday’s solid rally, 82% of all Nasdaq stocks were below their 200-day moving averages, while on the NYSE and Nasdaq combined, more than 1,200 stocks hit new lows both Wednesday and Thursday.
Obviously, after such straight-down action, a snapback rally is overdue. (Thursday’s solid rally seemed like it could lead to a decent bottom, but this morning’s huge gap down puts a dent in that theory.) Yet the market has been “oversold” for many days now, and the fact that it can’t get going for more than a day is not a good sign.
While we can’t (and won’t) predict when the bounce will come, here’s what we can say. First, regardless of the bounce, the intermediate-term trend remains down, so you should stick with a highly defensive stance. And second, the odds favor the next bounce (which, when it finally gets going, could last a couple of weeks) being sellable—the market is going to have to build a bottom for at least a little while after this wipeout.
Thus, we have no real change in advice when it comes to your stance—you should be holding lots of cash, keeping new buying to a minimum and waiting patiently for the selling pressures to exhaust themselves.
One final note: Given the intensity of the selling (this is the fourth huge selling wave the broad market has suffered since August), and the fact that many indexes have now pulled back 12% to 20% from their highs, it’s likely the next uptrend will be a sustained one (as opposed to the three- or four-week rallies seen so often in 2014 and 2015). Thus, it’s a matter of staying safe now, but staying in touch when the tide finally turns.
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.