In the past three weeks, IBD’s stock market outlook has made a full cycle — from uptrend under pressure to a market in correction, to a confirmed uptrend.
What do those three terms mean, and how should investors position their portfolios for each case? We’ll break down how to change your trading based on those designations.
Stock Market Outlook: Confirmed Uptrend
Most of the time, the stock market is trending higher. In the Market Pulse that appears with The Big Picture, “confirmed uptrend” is how we designate a normal, rising market. This is the best time to be in stocks.
Investors should make most stock purchases when the market is in a confirmed uptrend. It’s also a good time to add to existing holdings at follow-on opportunities, such as support at the 50-day moving average or at the 10-week moving average.
Portfolios should be 100% or close to 100% invested in quality growth stocks, such as those in the IBD 50. In the current postelection market, value stocks may have a leg up. It’s even possible to be leveraged by using margin. That’s a boom or bust way of investing, but in a strong market it can pay off handsomely.
Uptrend Under Pressure
Inevitably, the stock market will start to weaken as investors take profits or anticipate a slower economy. The Nasdaq and S&P 500 will start suffering distribution days, that is, declines in rising volume. That’s a reliable sign that institutional investors are unwinding positions. You’ll also see leading stocks start to crack.
“Uptrend under pressure” is IBD’s way to warn investors to take a defensive posture. They should stop buying stocks, aside from exceptional breakouts in exceptional stocks. This is also a bad time to be adding shares to existing holdings. A market under pressure means get off margin, too.
Investors should be taking some profits. Target stocks that recede after they’ve rallied 20% or more from buy points.
This is the time when it’s crucial to stay on top of sell signals. Any stock that falls 7% or 8% from your purchase price should be sold in whole. With stocks that have been rising above their 50-day or 10-week moving averages, beware of sharp breaks below those lines.
Stock Market Outlook: Market In Correction
When indexes show persistent weakness, and top stocks sell off, the market falls into a correction. Under this designation, avoid buying stocks altogether. Investors must start raising cash. You should be entirely off margin.
Start by selling your weakest performing stocks first. If you have great conviction about a stock and have a profit cushion, consider holding through the correction. Sell signals must be followed strictly. Consider selling stocks that are less than 7% below the purchase price.
Start preparing for the market’s next leg up by updating your watchlist. Pay attention to stocks that are contracting less than others or less than the main indexes. Those will tend to have rising relative strength lines.
This article was originally published Oct. 10, 2020. Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him at @IBD_jarancibia
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