The divergence in the major U.S. stock indexes on Wednesday is one of those low-level alarm signals that let you know to pay close attention to what’s happening. The Dow made its seventh straight advance and topped 22,000 (and Dow 22,000 grabbed the headlines) in the process. One look at the daily chart of the Dow shows the optimism of blue-chip stock investors.
On the other hand, a glance at the Nasdaq shows that growth investors, including the followers of the tech and other aggressive stocks that populate the index, are feeling a little discouraged. The index pulled back below 6,400 last Thursday and hasn’t been able to summon the energy to attack that level again.
Looking at the market more broadly, weakness in transportation and small-cap stocks confirms the shift in emphasis away from growth stocks.
If you add in that the market is now entering the traditional August doldrums, when fund managers and other whale investors go on vacation, it’s a recipe for a pullback.
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The antidote to taking this shift too seriously is to take a look at how the indexes are performing versus their 25- and 50-day moving averages. Even with a five-day pause under its belt, the Nasdaq is still safely atop both of those averages, indicating that the medium-term trend is still up.
The key to handling this kind of market volatility is to pay especially close attention to the action of your individual stocks. If they’re just pausing in parallel with the Nasdaq and haven’t leached away your profit (or handed you a loss), you can probably hold on without excessive risk.
Yes, you should watch for technical tipoffs like dips through support or heading lower on unusually high trading volume. But until the market declares itself by dropping the major indexes below their 50-day lines (it’s possible that Dow 22,000 is short-lived), a little patience will probably serve you just fine.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More