Heavy Cash Position Preferred
There’s an old saying in the stock
market: “The market may never repeat exactly like the past, but it can certainly
rhyme.”
It was just eight months ago when the Nasdaq Composite stubbed its toe, only to give way to strength to the Dow Jones Industrial Average. While the leading Nasdaq Index drifted sideways into May of last year as its leading component, the Internet sector, corrected from a strong run, the Dow took the lead. Is the same beginning to unfold here? Perhaps.
“…if the
bull market remains intact, many of these leaders are probably not
finished with their overall move
yet.”
In addition to Friday’s strong recovery on the DJIA, which occurred on the second-heaviest volume day since the depths of October’s lows, the broader market joined the party as well. The S&P 500, NYSE Composite and the Value Line Index all closed strongly higher on heavy trade. Instead of the baton being passed from leading stock to leading stock, as was the case during the Nasdaq Composite’s strong run in the fourth quarter, the baton was passed off to more secondary names Thursday and Friday. Nonetheless, if this action persists from here, the bull market can live without as much as a downside hiccup in the major market
averages.
But just like the April-May period of last year when the rotation into Dow stocks supported the bull market, I remain in a very heavy
cash position in the fund I manage at this time. With the market’s leading issues either correcting from recent lofty levels or worse, the
intermediate-term trader should remain in his/her foxhole until it’s totally
clear the shooting has stopped. In other words, following last week’s sharp
decline in most leading stocks, the market’s top-performers need time to set up
in constructive basing patterns before they’re worthwhile buys again. Many of
these attempted to break out to new highs from short, extended basing patterns
— only to fail and break back to their base lows (see graph of Nokia
[NOK>NOK]).
But if the market is shifting its
leadership, why not try and catch some of the lagging stocks breaking out to new
highs for a move? Very simply, if the bull market remains intact, many of these
leaders are probably not finished with their overall move yet. And, as I pointed
out in Wednesday’s column, if you’re fiddling with lagging issues, you may be out
of position when it’s time to jump on the big horses again. One such big horse
perhaps setting up another strong leg up is Red Hat [RHAT>RHAT]. Red Hat is
now four weeks into a new basing pattern and continues to act exceptionally.
However, I would like to see at least another couple of weeks of base-building
before I would consider buying it. Historically, leading stocks should base out
at least six to eight weeks before another strong advance ensues. Otherwise, Red
Hat has a greater chance of failing if it breaks out too soon.
Outside of Red Hat, though, every leading stock I track is
correcting to one degree or another and not exuding a low-risk entry point.
Although I wouldn’t consider it a real market leader, there is one other high
relative-strength stock in the Internet Security group that bears watching:
Appnet [APNT>APNT].
Following a “shake out”
move below its base lows two weeks ago around 40, Appnet gapped higher last
Monday and closed in the upper half of that day’s trading range on very heavy
volume. However, it still needs some time to complete what’s now been an 11-week
basing pattern — not a buy yet under our strict buy discipline.
The
following is a list of leading stocks to watch in determining the stock market’s
general health and to follow as potential buys down the line. I actually have a
list of roughly 50 names that can be considered market leaders, but am
condensing the list to the 35 names that are unmistakable leaders: Actuate Corp
[ACTU>ACTU], Affymetrix [AFFX>AFFX], Ariba Inc. [ARBA>ARBA], Broadcom
[BRCM>BRCM], Broadvision [BVSN>BVSN], CMGI [CMGI>CMGI], Checkpoint
Software [CHKP>CHKP], Cisco Systems [CSCO>CSCO], Conexant Systems
[CNXT>CNXT], Cree Research [CREE>CREE], EMC Corp [EMC>EMC], ETEK
Dynamics [ETEK>ETEK], Exodus Communications [EXDS>EXDS], Home Depot
[HD>HD], Human Genome [HGSI>HGSI], Immunex [IMNX>IMNX], Infospace
[INSP>INSP], Internet Capital Group [ICGE>ICGE], JDS Uniphase
[JDSU>JDSU], Medimmune [MEDI>MEDI], Network Appliance [NTAP>NTAP],
Network Solutions [NSOL>NSOL], Nokia Corp [NOK>NOK], Oracle Corp
[ORCL>ORCL], Qlogic [QLGC>QLGC], Qualcomm [QCOM>QCOM], SDL Inc.
[SDLI>SDLI], Seibel Systems [SEBL>SEBL], Sun Microsystems [SUNW>SUNW],
Triquint Semiconductor [TQNT>TQNT], Verisign [VRSN>VRSN], Veritas Software
[VRTS>VRTS], Verticalnet [VERT>VERT], Vignette [VIGN>VIGN], Yahoo!
[YHOO>YHOO]. None of these currently offer safe entry points from an
intermediate-term perspective.
Additionally, also watch: Allaire
[ALLR>ALLR], Business Objects [BOBJ>BOBJ], Chemdex Corp [CMDX>CMDX],
Diamond Tech Partners [DTPI>DTPI], Echostar Communications [DISH>DISH],
IDEC Pharmaceuticals [IDPH>IDPH], Internet.Com [INTM>INTM], Legato Systems
[LGTO>LGTO], Protein Design Labs [PDLI>PDLI], RF Micro Devices
[RFMD>RFMD], Safeguard Scientifics [SFE>SFE] and Wal-Mart
[WMT>WMT].
Interestingly, out of all of the stocks above, Legato
Systems was the only one to completely break down over the past two
weeks.
Public Service Announcement: I’ll be appearing on CNNfn Tuesday, Jan. 11 at 7:40 a.m. ET.