Top 10 Report – October 14, 2019

Market Insight

It’s amazing to see how many newsletter writers, advisors and other “market professionals” have been exclaiming that the market is in a downtrend as recently as yesterday. Yet, the NASDAQ, S&P 500 and DOW all still have higher lows in place, while the Russell 2000 continues to trudge sideways. Not to mention, the follow-through day from 8/13 is still intact.

No doubt, we have seen some serious sideways chop over the last couple months, and yes, money could have been made on the short side during this time. However, as we’ve discussed in the last few reports, the recent bifurcated action is part and parcel to a healthy rotational process during a digestive/corrective phase of the market.

But, to call the last couple months action on the major indexes a downtrend and say there are few patterns worth looking at, is a total disservice at best. This is why it’s so important to understand how to properly interpret the health and breadth of the market’s leadership.

For starters, there is a huge difference between what leading growth stocks look like when the market is undergoing a normal, healthy digestive/corrective phase, versus when the market has put in a top and is in real trouble.

During a normal, healthy digestive/corrective phase of the market, rotation takes place among the market’s leading growth stocks, whereby new leaders have the opportunity to build new, constructive bases and take the place of the prior, broken leaders.

Keep in mind, that while this is taking place, leading growth stocks will be in all different phases of their base building process. Regardless, it is still easy to find stocks from across the market’s leading groups that are setting up in a healthy and constructive manner, even though they may not be imminently actionable.

The above scenario is enormously different than when the market has actually topped, and a real downtrend is in place. During these times, it is virtually impossible to find a leading growth stock that looks remotely healthy or constructive.

Fortunately, the action over the last couple months has clearly been and continues to be a case of the former. Unfortunately, this doesn’t guarantee a smooth ride higher as evidenced by the last two months of wild volatility. Hence, cash is often your best bet when the general market is in a corrective phase and high volatility is par for the course as it has been over the last couple months.

Nevertheless, there are constructive bases forming in the retail, medial/biotech, building/related, semiconductor and software groups, among others. Also, the line of least resistance decidedly remains to the upside.

So, continue to keep track of the strongest stocks in the strongest groups, with superior fundamentals. Set your alerts and be ready to initiate some long exposure, as entry areas present themselves.

The Indicies

The NASDAQ gapped up at the open, rallied 1.34% on heavier volume and closed back above all of its moving averages last Friday, despite the sharp selling that came in at the end of the session, which is a sign of strength.

The Russell 2000 rallied 1.79% on heavier volume, but the laggard small-cap index was the only index unable to reclaim its 50 and 200-DMA’s lat Friday.

The S&P 500 gapped up at the open, rallied 1.09% as volume on the NYSE expanded and closed back above all of its moving averages last Friday, despite the sharp selling that came in at the end of the session, which is a sign of strength.

The DOW gapped up at the open, rallied 1.21% on heavier volume and closed back above all of its moving averages last Friday, despite the sharp selling that came in at the end of the session, which is a sign of strength.



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October 13, 2019

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