A Pat On Your Back

  • November 10, 2000
  • Loren Fleckenstein

Congratulate yourself if caution and
cash have been your bywords these past weeks despite the Nasdaq’s attempts to
find a bottom and the Oct. 31 follow-through day. Rather than fretting about the
market, respect for the market for what it is and act accordingly.
Take as much pride in staying in cash at the right time as in moving into stocks
at the right time. 

As I have stressed before, the indexes
serve as valid general indicators of market health, but they don’t convey a complete picture. Without a proliferation of
high performance stocks forming near complete bases, the intermediate-term
trader should remain suspicious of early signs of rallies and stay largely committed to cash. 

Besides, without such a multiplication
of qualified stocks, you have little to buy. In a way, I never decide what to
buy or when. I narrow my list of potential buys down to a select few that meet
my strict criteria. Then I wait for the market to tell me (1) when conditions
appear favorable for going long (follow-through days, proliferation of high RS
forming bases) and (2) which stocks to buy and when (when the great stocks
complete bases and breakout).  

This column deals with analyzing the
charts of stocks in light of recent news, or vice versa. We now are in a time
when news is dominating the markets. Don’t let yourself become mesmerized by the
doomsayers. If events since Tuesday should have taught us anything, we should
have learned that the political prognosticators know nothing.

Stick to your discipline. Focus on the
tape and those individual stocks meeting your buy requirements. Look for the
emergence of industry group leadership. Ignore the pundits. Buying into
elaborate theories of how the markets will respond to the election confusion
will only blind you to what the market is trying to tell you.

However, since fear seems to be the
order of the day, I do encourage you to keep up your contrarian guard by
pointing out that, whatever the outcome, we’re in for a period of closely
divided government, whoever becomes Prez. Miller, Tabak bond market strategist
Tony Crescenzi’s suggests in a recent commentary
that divided government should be positive for bonds. And I subscribe to the
view that a healthy bond market is one ingredient for a healthy stock market. Of
course, as a momentum trader, I don’t time my stock entries on the bond market.
I time my entries according to the stock market. 

The biggest of Friday’s news movers
was Dell Computer
(
DELL |
Quote |
Chart |
News |
PowerRating). The computer maker closed down 5 3/8, or 19%, to
23 on triple normal volume. Overnight, Dell slashed its sales growth outlook for
next year to 20%, well off historical norms. Analysts said they were concerned
that Dell’s results foreshadowed deeper pricing cuts across the sector. Rival
computer makers followed Dell south. Apple Computer
(
AAPL |
Quote |
Chart |
News |
PowerRating) lost 5.6%,
Hewlett-Packard
(
HWP |
Quote |
Chart |
News |
PowerRating) 8.9%, Compaq
(
CPQ |
Quote |
Chart |
News |
PowerRating) 5.2%, IBM
(
IBM |
Quote |
Chart |
News |
PowerRating) 6.5%.

This is another example of a potential gap-down
short. However, be wary. The market has been discounting an awful lot
of bad news. The farther we fall on the averages, the closer we are to a bottom.
As always, watch your stops like a hawk.

Healthcare, healthcare insurance and
pharmaceuticals remain pockets of strength in the market. Reprising Tony
Crescenzi’s theme of divided government, the market apparently has concluded
healthcare has relatively little to fear if Al Gore wins the White House. A
divided Congress is unlikely to allow his anti-business campaign rhetoric to
become the law of the land. 

But I see few stocks in this arena
that have both the powerful earnings growth and the chart patterns that would
enable the intermediate-term momentum trader to climb aboard. 

Consider Trigon Healthcare
(
TGH |
Quote |
Chart |
News |
PowerRating).
After Thursday’s close, the Richmond, Va.-based managed healthcare company
reported Q3 income, excluding realized gains and losses, of 92 cents a share, up
70% from 54 cents a year ago and topping analyst estimates averaging 89 cents, according to First Call/Thomson Financial.
Revenue rose 13% to $666.5 million. I like to see both top line and bottom line
growth, the latter outpacing the former. 

However, the stock is too extended
since breaking out of a cup-with-handle pattern (or saucer-and-platform pattern)
on Oct. 11 (see Point A in following chart).
Note that I’ll accept a much shorter “handle” or “platform”
than other traders, more of a pause than a full handle. For further reading, see
TradingMarkets’ lesson on the fine points of handles.

Remember that all stocks are
speculative and risky. On any trade, reduce your risk by limiting your position size to a percentage of your total
account equity and setting inviolable price stops. For an intro to combining stops with
position sizing, check out my lesson, Risky Business.

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