Remain Defensive

The market finished mixed today, with the Dow falling 100 points but the Nasdaq rising 15 points.

Looking at the big picture, all three of our market timing indicators remain bearish, so a defensive stance is still advised. Moreover, there’s no question that growth stocks have taken it on the chin during the past few days, with many stocks disintegrating 15% or 20% in just two or three days. Thus, a big cash position makes sense.

On the positive side, we are seeing a minor retest of the January 20 lows this week in most indexes, and that retest has brought a positive divergence from our Two-Second Indicator (483 new lows Tuesday versus 1,395 on January 20). (We say “minor” because bottoms aren’t usually formed in just three weeks.) Throw in some continued extreme breadth and sentiment readings, and a short-term lift wouldn’t be surprising.

But what if the market just keeps sinking? Well, with the Model Portfolio nearly 80% in cash, and with investor pessimism elevated, we’re not eager to raise more cash—that doesn’t mean we couldn’t trim some shares here or there, but we usually don’t go 100% in cash, partially because you end up chasing your tail when a multi-week rally unfolds. The downside, of course, is that you could lose more equity during a huge bear move, but with just 20% invested, the risk of major losses is fairly small.

If you personally want to be “all out” of the market, there’s nothing wrong with that, but you’ll likely have to sit through some major rallies while being totally on the sideline, which can be mentally tough to do.

The main point here is what you do with that last 15% or 20% of your portfolio is more of a personal, “how you run your ship” kind of decision. We prefer to have a toe or two in the water, especially at times like now, when so much selling has already been done. But there are no absolute rights or wrongs to this question.

On the flip side, if the market does get off its duff, we’ll be watching for a buy signal from our Cabot Tides. Some levels to watch: S&P 500 1,950, Nasdaq 4,650, S&P 400 (mid-caps) 1,325, and S&P 600 (small-caps) 630. If the indexes close above their respective levels starting early next week, it could be enough to flip our Cabot Tides to a buy signal.

Obviously, there’s a long way between here and there, and even if the Tides do turn green, we anticipate going very slowly—the destruction in most growth stocks has left us with fewer potential set-ups, and the longer-term trend would almost certainly still be down. But it’s good to be prepared for a change in direction; our updated watch list appears below.

This is an excerpt from Cabot Growth Investor, where we’ve been picking the best growth stocks since 1970. Cabot’s flagship advisory combines expert stock selection and award-winning market timing. It’s the most complete and most helpful, growth-oriented investing advisory available anywhere.

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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