From Cabot Top Ten Trader
This week’s issue was titled “Decision Time” and it certainly looks like the market has finally made a definitive move—the post-Fed reaction on Wednesday, coupled with Thursday’s carnage, means the intermediate-term trend is clearly down.
Thankfully, there were enough clues during the past two or three weeks to at least get us off a heavily invested stance; the market’s whippy, up-and-down action, the horrid action among the broad market (especially interest rate-sensitive groups) and the general lack of upside progress among many stocks all raised some eyebrows. We flipped our Market Monitor to neutral at the start of June, and that’s where it remains today.
In terms of actions to take, it really depends on your current stance, as well as the action of your holdings. By all means, if you haven’t sold much of late and have a bunch of broken stocks, you should do some selling; sure, it never feels good to sell after a big downturn in the market, but it’s important to respect what the market and your stocks are telling you.
If you did follow our advice and back off in recent weeks, we wouldn’t panic out of a ton of stocks, for a couple of reasons. First, yesterday’s action was very intense, and could lead to a short-term respite (if not something more). On the NYSE, there were nearly 20 stocks down for every one that rose, one of the more extreme readings in history. In fact, on that exchange, down volume swamped up volume by more than 10-to-1 both Wednesday and Thursday, which is historically rare and often signals some short-term panic.
Second, going through our list of stocks on page 12, we’re surprised by how many remain in good shape. Don’t get us wrong—we have quite a few sells in today’s update, and even among the “good” stocks, few are pushing higher. Moreover, we’re noticing this morning that a few of the resilient stocks are getting bludgeoned (the sellers are coming around for stuff that hasn’t been hit much yet). But given the month-long correction and huge selling barrage this week, a surprising number of names are acting just fine.
That’s no reason for complacency, but if you already have raised a good amount of cash, we don’t advise bailing wholesale. Keep mental stops on your remaining holdings, and as we mentioned above, be sure to sell your broken stocks. But holding a few resilient performers makes sense.
As for what comes next, it’s anyone’s guess, and you shouldn’t waste energy trying to figure out the market’s next move. The one thing we would advise is to keep an open mind. Maybe this will be a lot like the last couple of years, when 10% to 15% corrections weren’t uncommon. Maybe it morphs into something much worse. Or maybe the aforementioned skewed breadth readings mean the bottom is near!
We’ve been at this for a few decades and know that, while you might correctly predict a market turning point here or there, it’s rare and not a profitable way to invest. Just take it day-to-day and you’ll be out of any major downmoves and invested during major upmoves. Right now, caution is warranted.