The major indices showed continued weakness this morning as losses exceeded 1% on the NASDAQ before pausing at the time of this writing. With the clustering of 5 distribution days on the S&P 500 and the 4 on the NASDAQ that has occurred in just the last couple weeks, we have to be on the lookout for any further weakness that may signal the beginning on a new correction. What’s worse about today’s action is that the weakness on the indices is masking the weakness in leading stocks. Can you believe the Dow is actually up today, while most stocks I’m following are in the red? While weekly charts of the majority of the market leadership have not triggered any sell rules, the failed breakouts and reversals we are seeing on many daily charts, are a cause for concern.

As you probably know, daily market analysis requires the scrutiny of the major indices, the leading groups and the leading stocks. In my experience, weakness in leading stocks can confirm or even magnify the weakness you are seeing in the major indices. In other words, leading stocks often “lead” the rest of the market one way or the other. That is why I’m giving more weighting to the individual stocks right now.

Proper portfolio management is very important to us at all times, but particularly in a choppy market. The back and forth volatility can chew us up, and if we’re not careful, hit our equity hard. You may wish to revisit the previous 2 months of blog posts, as many portfolio management concepts were covered. Our number one rule is to never let our equity get hurt badly. That is why we cut all losses when they reach 7%. Giving back some gains or losing "a little" is OK and just part of the game. But the hits that take years to come back from do not happen to MarketSmiths.

For now we wait and watch the leaders. Keep in mind that we don't always have to be heavily invested when we are seeing weakness. Remember that cash is also a position. Also recognize that if you have no stock positions, you still need to stay in tune with the market. The last few corrections have been short and shallow, which is a sign that investors do not seem to have much patience for staying on the sidelines. If a correction does develop, it could be over very quickly, sending us back on our way again.

Best returns,

Scott O’Neil

President, MarketSmith Incorporated

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