That said, we’re still sticking with our neutral-ish overall stance—while the major indexes are well above their rising 25-day moving averages (which keeps the intermediate-term trend up), all are still meaningfully below both their longer-term moving averages (the 35-week lines are near 2,006 and 4,850 for the S&P 500 and Nasdaq, respectively), and we want to see both of those indexes above those levels for a couple of weeks before calling the longer-term trend positive.
We’re not throwing cold water on the rally so far. While the number of stocks hitting new highs has been relatively sparse (just 37 on the entire Nasdaq during Tuesday’s thrust higher), most sectors have lifted nicely, especially the in-the-dumps groups that were decimated during the past few months, leading to a nice drop-off in the number of stocks hitting new lows. And we’ve seen some stocks perform very well, too, offering some buying opportunities.
The game plan remains the same—if you were heavily defensive for the past two months, now’s a time to do a little buying. If you develop some profits (not just 1% or 2%, but maybe 5% to 10% in a stock), you can both bump up your loss limit (thus cutting down your risk of loss) and snap up another stock or two.
This way the market will “pull” you into a more heavily invested position if you start making money, and presumably, as the rally gains steam. If the rally stalls out, of course, you won’t end up putting much money to work because your stocks will likely do the same.
Overall, then, you should remain somewhat neutral but continue to look for low-risk entries on new potential leading stocks. If more emerge, the odds that the rally will gain steam increases.
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.