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.
There’s no question the past few months have been devastating for many stocks. We’re not just referring to the major indexes, which have fallen between 12.3% (S&P 500) and 14.5% (Dow Industrials) from their highs on a closing basis, but also the broad market, where, as of Tuesday night, about 80% of all stocks on the NYSE and Nasdaq were below their long-term 200-day moving averages. 80%!Some investors will look at those figures and say we’re already in a bear market, but we’re not interested in labels, which are mainly meant to fill airtime or generate headlines. Instead, we’re focused on any potential bottoming action, especially as the major indexes tested their August mini-crash lows this week. Here’s what we’re looking for:
The first step is a positive divergence from our Two-Second Indicator … and we’ve seen one this week. As the indexes tested the lows, there was a maximum of 493 stocks hitting new lows, far fewer than the 1,300-plus in August. Granted, that August day had a bit of a “flash crash” characteristic that may have exaggerated the figure, but it is what it is.
However, a test of the lows with fewer new lows is just step one. Step two concerns the market’s intermediate-term trend—we want to see a buy signal from our Cabot Tides, which would be the first sign in weeks that the buyers are gaining the upper hand. It’s a moving target, but at this point, we’d likely need to see the S&P 500 north of 1,960 and the Nasdaq above 4,800 for a buy signal.
If the Tides flash a green light, we’ll almost surely do some new buying—but how much will depend on the action of potential leading stocks. If a bunch quickly rebound toward new highs, it’ll be a great sign, but if any bounce is led by junk off the bottom (things that are down 40%, etc.), it’ll tell us to take things slowly. With our long-term Cabot Trend Lines still bearish, it’s important not to fall prey to sucker rallies.
Of course, none of this might happen, but as one famous trader said, “You have no control over what the market is going to do. But you can know how you’ll react no matter where the market goes.” That’s the gist of things today—most investors we talk to are either (a) still buried under a ton of losers because they didn’t raise cash in the summer, and/or (b) obsessed with the daily headlines and swings in the market. So, while monitoring your few remaining stocks is key, so too is focusing on the next turn in the market, knowing when you’ll jump in and what you’re likely to buy.