While today’s market action seems pretty poor, it may not turn out as bad as it seems at first glance. First of all, there is nothing wrong with most leading stocks, themselves. Today’s negative reaction is purely a Washington-led issue. Focus on what the charts are telling you. Leadings stocks should pull back to logical support areas. Cut exposure by raising cash and taking profits on stocks that are above the 20% profit zone illustrated by MarketSmith’s pattern recognition feature. We don’t want to have large givebacks prior to the debt ceiling debate resolution or the uptrend resuming.

We want to have multiple plans at this juncture:


1) Adjust your portfolio management approach to be more defensive or out completely until a resolution is reached and earnings dictate where the market should go.


2) The market could have a big bounce on an announcement, markets may jump higher, and you should be prepared for this scenario as well by keeping watch lists fresh.


3) We are now entering earnings seasons again, and that is always the most significant variable. Make sure you know when your stocks will report. Earnings may push the uptrend to resume.


4) Leadings stocks could breach logical areas of support. If earnings don’t help out, we could stay in a correction.


As always, it’s better to keep focused on the weekly charts to maintain perspective. Give your best stocks the benefit of the doubt, but remember that the distribution day count is high, so now is the time to be cautious. At the end of today we will have 7 distribution days on the S&P 500 and 4 on the NASDAQ. Washington or earnings season may or may not derail the rally. So we just have to wait and see, and remain in a protected position.


Best Returns,


Scott O’Neil


President, MarketSmith