Now, to be clear, our main focus always remains on the intermediate- and longer-term trends—both of those remain clearly down, and thus, we continue to advise a defensive stance. For us to get an intermediate-term buy signal, we’d have to see the major indexes basically hit five-week highs, which is a ways off. Our Market Monitor will remain in bearish territory in the next issue.
But that doesn’t change the fact that the sellers may have finally exhausted themselves in the short-term. Not only did the market plunge during the past three weeks (as much as 15.7% in the Nasdaq over just 14 trading days!), but sentiment is in the dumps (the percent of individual investors that are bullish recently hit a 10-year low) and breadth measures got very stretched (85% of all stocks below their 200-day lines, etc.).
Moreover, Wednesday saw 1,395 stocks hit new 52-week lows on the NYSE alone—the highest reading since November 2008.
Of course, the market remains very tricky and news-driven, with the price of oil driving most intraday movements. (If oil prices tank 10% Monday, for instance, all bets are obviously off.) But given all of the data above, there’s a good chance the selling pressures may have exhausted themselves for now.
If we do bounce for a while, how should you handle it? Well, if you’re not defensive and are stuck with many broken stocks, we definitely advise lightening up into strength. Our guess is that there are many investors (professionals included) that will be looking to raise some cash (or at least rotate out of broken stocks) on any rally.
If you’re already holding plenty of cash, we would, for the most part, take little action. Sure, a nibble here or there (especially in a resilient stock that reacts well to earnings in the days ahead) could work. And, if you’re aggressive, you could consider playing the short side if the market rallies for two or three weeks.
But for the most part, we’re going to use any bounce as a chance to (a) judge the internal strength of the market (if the Nasdaq, for instance, can’t bounce halfway back to 4,720 before falling apart, it would be a sign of weakness) and (b) separate the wheat from the chaff among potential leading stocks (with the help of earnings season).
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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.