Despite this morning’s rally, it’s shaping up to be another rough week in the market, with most indexes currently down a bit more than 1.5% on the week, though obviously that could change by today’s close.In the short-term, this week has brought a retest of the climactic January 20 lows, and there is some good news to report. First, so far, the indexes have generally held just above those lows; the exception has been the Nasdaq, which fell to new lows on Monday, but interestingly, found big-volume support near 4,200 in three of the past four days.
Second, we’ve also seen some positive divergences in the broad market—yesterday brought “only” around 1,200 total new lows on the NYSE and Nasdaq, for instance, compared to about 2,300 on January 20. Thus, the broad market isn’t nearly as weak today as it was three and a half weeks ago.
Combine all of that with horrid sentiment (the spread between the number of bearish and bullish advisors is the largest since 2009), and there’s certainly the potential for a solid short-term lift in the market.
If the market can get off its duff, we do think there could be some profit-making opportunities. Many of the worst sectors of the past year (commodities, transports, industrials, etc.) have held up relatively well during the past three weeks, and we’ve seen some other turnaround-type opportunities (gold stocks, some retail, etc.) lift on earnings. Many of these could stretch higher if the sellers step aside for a while.
However, right now, we’re less sanguine about the intermediate- and longer-term outlook. While this retest (if it holds) would be a good sign, it’s unlikely that a three-week bottoming process would be enough given all the damage to the indexes and individual stocks and sectors—even a normal market correction usually requires a five- to eight-week bottoming process, and there has been so much damage (especially among growth stocks) that it’s likely time will be needed to heal.
Still, as you know, we just take things on a day-by-day basis. If we get some intermediate-term green lights in the days ahead, you could open up your wallet and do a little buying in some newly strong stocks. But right now, the major trends are down, and few stocks are even holding up well. Thus, you should remain defensive, focusing on preserving capital and using any rally to sell broken stocks if you still hold them.
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.