Note: The following article is excerpted from the latest issue of Cabot Growth Investor. To read all of Mike’s thoughts on the state of the market and for access to his top picks, subscribe to Cabot Growth Investor today.
After a big advance in the major indexes last year, we saw a three-month period of stalling out starting in late October featuring a ton of crosscurrents, a marked shift in leadership and some very sour action from a lot of growth stocks. That sort of setup, with defensive and cyclical names leading after a big run alongside elevated (complacent) sentiment, usually leads to bad things. That’s why we stayed close to shore during that time, and of course, the sellers did come out of the woodwork, with the past two months seeing sizable top-to-bottom declines in the S&P (nearly 10%), the Nasdaq (nearly 14%) and the broad market (8% to 10%, depending on what you’re looking at).
Today, though, we’re seeing something of the opposite situation—a decent, potentially bullish setup that could bear fruit if all goes well. After three months of grinding sideways and two months of declines driven mostly by a high-profile event (the Middle East war), many have hedged or even thrown in the towel (down to 35% bullish advisers in the Investors Intelligence survey), yet growth titles—which have a far better success rate of leading sustained advances—have been acting resiliently even as global uncertainties have heated up. Our Aggression Index (which compares the growth-y Nasdaq relative to defensive consumer staples, XLP), in fact, is on the verge of an intermediate-term green light (if the Index can get above the 270 area), while more than a few growth stocks are already testing new high ground.
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To be fair, a good setup is just a first step; we still need to see institutional buyers show up and create a new, sustained uptrend. And that hasn’t happened yet—our Cabot Trend Lines, Cabot Tides and Two-Second Indicator are all negative, our Growth Tides are in the same boat, and something like 70% of stocks are in intermediate-term downtrends. Thus, your best move is to continue to stay close to shore right now.
But as we’ve been writing for a while, it’s key to remain flexible—let everyone else spout opinions about oil prices, the war’s future, the economy and interest rates. Instead, just stick with the system, which is the reason we’ve avoided much of the mess of the past few months and, for that matter, haven’t been on the wrong side of a major market move (up or down) for many years. When the market is ready for a sustained advance (with growth stocks likely in the lead), our indicators will give us some green lights. Until then, let’s stay mostly on the sidelines while waiting patiently for the Fidelitys and T. Rowe Prices of the world to begin a fresh buying campaign.
What to Do Now
Remain cautious but also flexible, seeing if this rally attempt can flourish despite the worries that are out there. In Cabot Growth Investor, we’ve been biding our time for a few weeks and will continue that trend tonight, sticking with our existing positions and a big chunk of cash. However, we continue to fine-tune our watch list, and if we see some indicators flip (still a big if), we could take a nibble or two on some of the many resilient growth names out there.
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