Bringing Out The Best

The major indices all
continue to act well, following the recent rally off the lows of early
April. Although the Nasdaq posted the biggest gain for April, I’d mention not to
rule out keeping a close eye on the S&P 500 and Dow Jones Industrial
Average. Many breakouts are coming from all three indices and with the Dow
leading the pack in performance this year, they are worth keeping an eye on.

Oil and Gas, retail and various medical stocks
have been among the best performers. Out of the 197 industry groups I follow,
these three sectors dominate the top 25%. Stocks in these groups are breaking
out to new 52-week highs. Since last June, rallies have not shown the
characteristic of stocks breaking out to new highs in groups that have been able
to lead the market.

It is now time to begin looking for the best
companies to begin buying. Ultimately, these new purchases will be the best gauge
of the true strength of the market. Assessing what traits the successful
breakouts have had will give an investor their greatest chance of success. Of
course, since this is equity investing, there is no way to be certain of success
and a tight stop loss should be used in order to prevent significant losses.

Obviously, anyone reading the paper or watching
the market is seeing stocks breaking out with increasing frequency every day.
The key in figuring out which ones to buy comes into play when you begin looking
into the setups, both what has been working and what hasn’t:

Americredit
(
ACF |
Quote |
Chart |
News |
PowerRating) is the first I have seen and is
acting very well. The first indication that I saw were the phenomenal quarter-over-quarter
earnings growth rates, followed by nicely increasing sales figures. This one has
strong fundamental traits across the board and continues to trade higher.

Resources Connection
(
RECN |
Quote |
Chart |
News |
PowerRating) hangs in there
following its breakout on 4/10, although this is not for the faint of heart with
its tight supply. Retailers continue to display strong leadership. Christopher
and Banks
(
CHBS |
Quote |
Chart |
News |
PowerRating) has been moving higher after its erratic breakout on 4/9.
Charlotte Russe
(
CHIC |
Quote |
Chart |
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PowerRating) blasted through its pivot of 31.91 on strong volume, but
has drawn caution by its increase on lighter trade following the breakout.

Jones Apparel Group
(
JNY |
Quote |
Chart |
News |
PowerRating) is moving to the top of
its 13-week base. The stock has strong earnings, good cash flow and it is in one
of the top-performing groups. In January’s rally, American Eagle Outfitters
(
AEOS |
Quote |
Chart |
News |
PowerRating)
looked like it was going to leave everyone behind, but succumbed to the broader
market. It is now pushing toward the high-end of an eleven-week base. Ideally,
this one will form a nice handle on lighter volume before surging higher.
Fundamentally, the company has an annual growth rate of 114%, increasing
margins, 44% ROE and earnings growth in the recent quarter of 33%. (Next EPS
release coming up May 24.)

Skechers
(
SKX |
Quote |
Chart |
News |
PowerRating) is a recent success story as it
broke through its pivot of 29.32 and reached a 27% gain before starting a recent
pullback from the high. The stock displays all the right fundamental traits as
well as strong volume following the breakout.

In the oil-and-gas sector, Mitchell Energy
(
MND |
Quote |
Chart |
News |
PowerRating)
shows strong growth and is sitting in the middle of a 17-week double-bottom
base. Pioneer Natural Resource
(
PXD |
Quote |
Chart |
News |
PowerRating) EPS growth has been exploding over the past
two quarters, followed by growing sales. The stock is pulling back after running
into resistance on its 18-week base. Caution should be warranted, as 4/30 showed
slight distribution. Evergreen Resources
(
EVG |
Quote |
Chart |
News |
PowerRating) is pulling back slightly in its
ascending base of the last seven months. This one is definitely a leader in its
field, as it has refused to stop going down despite the recent market.

The latest rally has worked thus far. Technology
has not been the sector providing leadership and that is good, since so many
people are hung up on it from the 1990s. As these people and portfolio managers
move toward other sectors, their buying can keep fuel on the rally. In the meantime,
it will be important to watch the breakouts pull back and to see new stocks
continue breaking out. Lastly, keep track of the major averages and any signs of
distribution; such as was seen in the Dow yesterday and on 4/24: one or two more
distribution days this week or next will be cause for concern. Making the money
will come; it is more a matter of protecting what is made.

Good trading,

Tim