Movers & Shakers

Let’s start with a look at the big picture. We’ve seen (a) a huge decline in the market over many months, (b) multi-year extremes in breadth and sentiment, (c) a brief bottoming process, (d) some positive divergences during that process (fewer stocks hitting new lows, etc.) and (e), this week, a strong three-day pop off the lows.

In fact, from a trend perspective, if the indexes can hold and build on these gains next week, our intermediate-term indicator could turn green.  

All of that is to the good, and if the intermediate-term trend does turn up, we’ll likely bump up our Market Monitor a notch or two and begin to slowly come off the sideline.  

That said, there are still plenty of potholes for the market to deal with. First of all, we haven’t seen the trend turn yet, and thus, we continue to stick with a defensive stance. It’s important not to anticipate any signal.

Second, even if the intermediate-term trend does turn up, we advise going slow. Why? Because the longer-term trend of most major indexes and the vast majority of stocks is still down; even after this pop higher, we see an average of 80% of NYSE and Nasdaq stocks below their 200-day moving averages.  

Yes, those figures are “oversold” and thus could lead to further upside probing, but it also means most stocks have a lot of overhead resistance (potential selling on the way up), which will tend to stunt any advance.

Moreover, following a seven-month, 17% to 21% decline (depending on the index), odds are that a three-week retest of the lows, as we saw, isn’t enough to build a solid bottom.

Long story short, we have seen some improvement in the evidence during the past couple of weeks, which is encouraging. But we can’t say the stars are all aligned either. Thus, you should just take it as it comes—right now, we advise a defensive stance, though if the intermediate-term trend turns up, we’ll slowly come off the sideline and see if the rally gains traction. Stay tuned.

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.

Michael Cintolo can be found on Google Plus.

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