It’s been a very interesting week, so let’s get right to it.
From a top-down perspective, the market remains in good shape. By our measures, the intermediate-term trend turned up in early October, and since then, we can’t say much bad about the action of the major indexes—pullbacks have generally been brief and have been followed by strong upmoves to new recovery highs. And this morning’s pop is also encouraging.
Now, as we’ve written during the past couple of weeks, we’re still seeing most of the action in either beaten-down groups or, more recently, defensive stocks (consumer staples, tobacco, etc.), which isn’t ideal. And some of the growth-oriented indexes (mainly small- and mid-caps) have been lagging a bit, too.
Still, we focus mostly on the overall trend, so we have to conclude the overall market is supportive of the bulls here.
But below the surface, the action has been incredibly wild, with some stocks and sectors imploding while others ramp higher. Of course, some of that is due to earnings season, but the moves are exaggerated even taking that into account.
With all these crosscurrents, it’s easy to get confused, but we’re just sticking with our game plan of taking our cues from the action of leading stocks—if many of them get going (ideally lifting out of multi-month bases following earnings reports), not only are those stocks buyable but it would bode well for the market’s rally. If, however, many falter (we’ve seen quite a few blowups this week), it’s best to go slow and hold some cash.
Overall, we are cautiously optimistic; there’s enough evidence to do some buying in strong stocks. The pieces are in place for a good run in Top Ten (i.e., high relative strength) stocks … but we’re waiting for further confirmation before from those stocks before becoming heavily invested.