The recent retreat wasn’t surprising—the major indexes had just run straight up into some resistance, and some signs of short-term optimism had arisen. And to this point, the dip (which could easily last another few days or more) has been normal and hasn’t changed the overall picture.
Thus, the intermediate-term trend remains clearly up, and the broad market is still in good shape. Moreover, on an individual stock basis, most Top Ten stocks that have retreated have barely given ground.
On the flip side, the longer-term trend of the major indexes remains down, and most growth-oriented stocks are still on their launching pads. Overall, the number of stocks hitting new highs remains very low, especially on the Nasdaq, which has seen an average of just 40 or so new highs each day during the past three weeks.
Going forward, on the bull side, we’ll continue to take our cue mostly from individual stocks—if more stocks break out on the upside, it will be a bullish sign for the market. As for the long-term trend, we’ll need to see the Nasdaq close a couple of straight weeks above 4,820 or so (its 35-week moving average) before declaring the major trend up.
On the downside, there’s plenty of room for the indexes to dip without damaging the intermediate-term uptrend, but we’ll be watching some sectors (especially the financials) for any major breakdowns. And, of course, if a bunch of Top Ten stocks begin to keel over, that would be a yellow flag as well.
For now, though, we’re sticking with our stance—we’re more invested than not, but we still have a good-sized cash position on the sideline. During the past 18 months, we’ve seen many promising market rallies peter out after four or five weeks, so it’s best to wait for more upside confirmation before getting out-and-out bullish.
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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.