Nothing Beats Following the Leaders
As long as this game goes on in the
leading sector of the market, the advancing trend in the Nasdaq Composite can
maintain its upward trajectory.
Despite the fact that many of the Nasdaq
Composite’s leading stocks are really extended into their intermediate-term
moves, other potential leaders continue to emerge by breaking out from solid
basing patterns on strong volume; just like the passing of a baton in a long
relay race.
One of the primary ways I go about analyzing the stock market
is by simply following the action of the market’s leaders. None other beats this
insight. I don’t care what your stochastic is saying, or whatever other novelty
indicator or canned program suggests, learn to read the market from this
perspective if you ever expect to maximize your profits. Yes, I do look at a
handful of other things, such as the CBOE put/call ratio, but something like a
sentiment indicator is a lot more anticipatory than predictive. Put another way,
most indicators are far more descriptive than predictive.Â
| “…why would Microsoft just now break out to new highs if the market was about to get into serious trouble? “ |
For
instance, in following sentiment I like to track the CBOE 15-day Equity Only
put/call ratio, which is currently into its historical danger zone showing too
much optimism at this stage for the market to move much higher. Or can it? That’s what I mean. I’ve seen the market stop dead in its tracks with this
much optimism. However I’ve also seen a market with this much optimism rise for
several more weeks before running out of steam.
The bottom line is: If you want to
maximize your profit and play a trend to its full potential, a single indicator
or even some magnificent model could get you to sell stocks at the worst
moment. In some cases, the end of a trend can wind itself up into a wild,
climactic event that could produce nice profits in its final days. But let
me get off my soap box and get to the meat of my analysis. This is not an
all-inclusive list, but should, nonetheless, give you the right flavor for what
I’m seeing.
Extended market leaders: Infospace
[INSP>INSP], Exodus Communications [EXDS>EXDS], Nokia Corp [NOK>NOK],
Veritas Software [VRTS>VRTS] and CMGI [CMGI>CMGI] to name a handful.Â
Can some of these issues move even higher? You bet. In fact, Veritas Software
broke to another new high Friday on increased volume. Interesting. Here’s an
extended market leader still making new highs. What should that say about the
market? Cellular king Nokia can still move higher, but CMGI looks pretty spent
at this point.
  Â
Also, look at Qualcomm [QCOM>QCOM]. Interestingly, Qualcomm
broke out to new highs last week from what appears to be a high, tight flag
basing formation. A high, tight flag occurs when a stock doubles in four to
eight weeks, bases in a tight, trading range of no more than 20% from high to
low over a three-to-five week period, then breaks out to new highs again.
Although this pattern is difficult to identify sometimes and is risky, some
market leaders can double from this formation again, which, is pre-split price
of 800 bucks for Qualcomm. Wow! But that remains to be seen. More important,
it’s an extended market leader – we’ll call it THE market leader – still moving
up. But if I keyed too much on sentiment, say the put/call ratio in this
case, I wouldn’t have purchased it for my fund last week at 403.
Now
let’s look at what recently broke out to new highs: Lycos [LCOS>LCOS], still
acting fine; Verio [VRIO>VRIO], still getting volume in all the right places
and holding well above its recent breakout at 43; Inktomi [INKT>INKT], looks
good; and TMP Worldwide [TMPW>TMPW], another new high Friday. There are
others, but you get the point. Oh, one other. Look at Microsoft [MSFT>MSFT]
last week. How about that volume on a breakout?
If you track the market in this manner, one question you should ask
yourself about the market is, “why would Microsoft just now break out to new
highs if the market was about to get into serious trouble?”
What about
some other stocks that just broke out to new highs. How about Ariba
[ARBA>ARBA]? Friday’s breakout had volume to boot. And look at Twenty-Four
Seven Media [TFSM>TFSM]. Great price-and-volume action.
Can this
picture change tomorrow? Absolutely. But you’ll be able to identify it in
real-time by determining the market’s condition from this perspective. Many
of the market’s leaders will start to fall hard on increased volume, while
stocks that just broke out to new highs will fall right back into their basing
patterns. A good example of this occurred within days of the market peak in the
summer of ’98. It was a real tell-tale sign to dump your positions before the
bloodbath that ensued in the autumn.
Yeah, I know, by waiting for your
positions to go against you it can be pretty painful before you decide to sell.
But I will show you in an upcoming trading course how I decide to sell part of a
position on the way up, even if it means buying back my full position at a
higher price, to avoid giving back too much profit if a position turns
sour.
If you want to maximize your profit and avoid bolting from
profitable positions too soon, even if you ignore 99% of everything I else I
share with you, please learn to follow the market from this perspective. Once I
finally figured out this little nugget, my performance in the market improved
immensely. It’s definitely tedious, but well worth the effort.
color=#008000>Television Appearancecolor=#008000>: I will be a guest on CNNfn, Tuesday, December 21 at
7:10 a.m. EST (it’s only happened once in several appearances, but the time is
subject to change). Don’t blink, though. The segment will only last about four
minutes.