The market is in correction. There is a clear divergence between the Nasdaq, the index we focus on, and the S&P500, as investors have shifted away from growth stocks. Not only is the Nasdaq below its 50 DMA, but leading stocks are well off their highs.

 

It is amazing how quickly the market's character can change. Only weeks ago, the leaders were hitting new highs every day. Now, with few exceptions, those same leaders are well below their respective 50 DMAs. This abnormal action from the leaders forces us to maintain a more cautious stance. Look at the Nasdaq on a weekly chart, and you’ll notice we haven’t had an intermediate correction since January 2013. From that standpoint, we’re overdue for a break.

 

Over the last several weeks, there has been a tremendous amount of sector rotation out of growth stocks, particularly in the Biotech sector. Rotating into favor has been the energy sector, which is showing signs of strength. I ran a RS Line New High screen at the IBD Level 2 Workshop in Dallas over the weekend, and most of the names from that screen were in the energy sector. However, I’m not moving my own portfolio into these names, because of the current market direction and the fact that the energy sector is difficult to trade.

 

 

Market direction is the #1 most influential factor in making progress, so I’m waiting for a follow-through day to tell me it’s safer to start increasing portfolio exposure. On that day, I’ll be looking for stocks with great fundamentals breaking out of proper bases.

 

While most investors choose to tune out during a correction, I do the opposite. I tune in quite closely because corrections are very valuable for revealing the true leading stocks: Those that try to fight the general market's direction. So the best way to get ready for the next uptrend, whenever that may be? Run screens to find those that hold up best against the correction.

 

Best returns,


Scott O’Neil

President

MarketSmith Incorporated

Follow Scott O'Neil at Twitter.com/WScottOneil