The market re-tested its August closing lows this week (~1,870 on the S&P 500 and ~4,500 on the Nasdaq), and so far, there have been a couple of positives. Not only have the indexes held those lows for the most part (though small-cap indexes look worse than others), but we’ve seen a couple of positive divergences in the broad market (fewer stocks hitting new lows, fewer stocks below their 200-day moving averages, etc.).That’s a good first step … but, obviously, it’s only a first step. What we need to see from here is (a) a push higher in the major indexes that creates a new intermediate-term buy signal, and (b) some bullish action among potential leading stocks.
For the indexes, it’s a moving target, but in general we’re looking for the S&P 500 to rise above 1,970 or so in the days ahead, with the Nasdaq leaping above 4,800 or so. Such a move would probably be enough to turn the intermediate-term trend back up.
Obviously, such a rally might not happen, but we’ll just take it as it comes—the key now is to be prepared. If the trend turns up, we’ll take a somewhat more constructive stance (though we’ll likely advise going slow, as the longer-term trend remains an issue), and if it doesn’t turn up, we’ll simply remain hunkered down.
Does this mean you should change your tactics if you own some broken stocks? Should you hold on because there’s a chance the market could get going? No. Again, we’re just dealing with possibilities—if you have lots of cash, it’s good to be prepared for the next upturn. However, if you’re still holding a lot of trash, we do think rallies represent selling opportunities until proven otherwise.