However, the force of the selling during the past couple of days is definitely a yellow flag. The action among the leading stocks and indexes has actually been reasonable—big-cap indexes have dipped about 3% or so, and most of the big-cap leaders have given up a reasonable amount of ground. So that’s a small positive.
But the rest of the market is a mess. As we’ve written in recent weeks, wide swaths of the broad market have been struggling, and the laggards (especially commodity-related issues, though retail stocks are also being bombarded) took it on the chin this week. In fact, the small- and mid-cap indexes sank below their 50-day moving averages this morning, and most stocks are still stuck below their 200-day lines.
In our view, not everything is lost at this point—after a straight-up move in October, some ugly action was to be expected. But the next few days will be vital. If the market and the top leading stocks can generally hold up around here, then it’s likely that the narrow rally can continue … and possibly even broaden out. But if the weak broad market continues to “infect” the leaders, and we see more weakness from the S&P 500 and the Nasdaq, then the month-long rally is likely over.
Barring a massive turnaround this afternoon, it’s likely our Market Monitor will dip back into neutral territory on Monday.
At this point, the focus should be on managing your positions—sure, if you have a huge amount of cash (60% or more), we’re not opposed to taking a small position or two in a healthy-acting stock, such as the ideas we present below. But for the moment, it’s most important to honor your stops and cut losses short, while at the same time, gritting your teeth with your most resilient performers. Should the market hold support and rebound next week, many of these stocks could do well.
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.