See, Believe, React

July 17, 2000
Greg Kuhn

Feels good to have a little breathing
room in your recent stock purchases.

Looks even better when more and more
breakouts are working, and more and more stocks are setting up right behind.

If you subscribe to Investor’s
Business Daily, then I’m sure you’ve seen my mug next to K. Marder’s over the
past couple of months in an ad for our trading
course. Although I try to keep as
low a profile as possible, even as my business grows, I’m not running the show
at TradingMarkets.com. That honor, of course, goes to our fearless leader Mr. Laurence Connors.

Nonetheless, there is one line that
stands out to me in the ad highlighting the course: “The only two market
indicators you need to know to time the market.” Of course, I learned this
approach through the teachings of William J. O’Neil. Remember, too, I’ve used,
at one time or another in my career, everything from overbought this, to
oversold that, to the percentage of stocks doing this or that, to, etc.
…. You get the picture.

As the ad correctly states, there are
only two market indicators you need to know to time market: 1) follow the
market’s price-and-volume action, and 2) follow the price-and-volume action of
the market’s leading stocks — those stocks with high RS ranks, strong earnings
growth, mostly in the strongest industry groups, and breaking out to new highs.

If you’ve been following my column,
which is really just listening to the market, then you should be pretty fairly
long stocks at this point. Of the main list of stocks I’m currently
tracking I’ve identified 31 successful breakouts so far, and only nine failed
breakouts.

However, if you’ve been hung up on
what the Fed’s next move is going to be, what second-quarter earnings will look
like, whether or not the economy is slowing too much — possibly leading to a
recession, which could be viewed as a good thing since the Fed would then begin
lowering short-term rates, (or would it, if it effected corporate profits too
much?), so forth and so on, then perhaps you’ve done nothing but worry. If
you’ve been hung up on all of this noise, then you’re probably frozen like a
deer stuck in headlights. Yes, all of this stuff is important to the long-term
health of the stock market, but it’s not going to help you time it properly.

Most of the time, all of the
information emanating from the airwaves and print will be far too confusing to
make any immediate sense out of it. Always remember this: the intermediate-term
movement in the market has far more to do with perceptions and expectations than
anything else. The stock market is ALWAYS looking ahead. There is no better way
to gauge what the market is seeing into the future than by just following its
own message. If you do this consistently you will ALWAYS be on track. Either in
or out.

The Nasdaq Composite came through with
another good session Friday. Although volume came in a bit lower than Thursday’s
1.8 billion-share day on the upside, it was above average — the third such
session in a row of above-average, upside trade. This is a healthy development
and follows on the accumulation that developed within the Naz’s recent trading
range just before it broke out. It also follows on the strong move off the
bottom for the week ending June 2, which contained three O’Neil follow-through
days. The third one on June 2 was the most convincing, though, because it was an
up-gap day, which has yet to be filled on the downside (this is bullish) and
occurred on above-average volume — the first two didn’t.

Additionally, more stocks either broke
out to new highs from sound basing patterns (stocks with high RS and EPS
rankings), or scaled the right side of their basing patterns on increased volume
last week.

This positive price-and-volume action,
along with vast improvement in the broader market (as discussed last
week), and
the action of leading issues (more and more of them breaking out of sound basing
patterns) is all we need to know at this point. This twofold message (the only
two market indicators we need to follow) should have been enough to bring you
into stocks again last week.

If it hasn’t though, don’t fret. As I
pointed out in the trading course — something I’ve learned from O’Neil, and have
seen firsthand over the years, potentially big-winning stocks will emerge for up
to 13 weeks in the early stages of a new bull market following a successful FTD.

Just think, if a new bull market is
still developing, we have yet to see more leading stocks break out. True to form
then, they should be setting up the right side of their basing patterns right
now. The Naz is only heading into its seventh week from its most recent FTD. So
keep digging!

Applied Micro Circuits
(
AMCC |
Quote |
Chart |
News |
PowerRating) is
certainly one to home in on. The company reported better-than-expected earnings
Thursday and the stock gapped right up to its old high.

The stock is a leading member (RS rank
of 98) of the leading semiconductor group, has now come through with five
straight quarters of accelerating year-over-year earnings growth — 50, 60%,
120%, 220% and 250%, and is at the top edge of a 14-week base. Revenue growth
has also accelerated over this period, topping 134% in its latest quarter.
Moreover, after-tax profit margins have accelerated for eight consecutive
quarters from 16.7% to a whopping 37.5%.

Celestica
(
CLS |
Quote |
Chart |
News |
PowerRating) is another leading
member (RS rank of 91) of another leading industry group — Electronics Products,
ranked No. 5 in the O’Neil database. It too shot up the right of its 17-week
basing pattern on heavy volume late last week. There was a pivotal buy point at
54 1/16, however it may give you another one if it pulls back from here.

Rational Software
(
RATL |
Quote |
Chart |
News |
PowerRating) also
blasted off on heavy trade late last week on a better-than-expected earnings
number. However, this one broke out from its cup-with-handle basing pattern
already.

On the other hand, California
Amplifier
(
CAMP |
Quote |
Chart |
News |
PowerRating) failed on its breakout attempt from a
cup-“without”-handle pattern. As I’ve pointed out previously, beware
of cups without handles. Although a lot of them worked with the explosive, but
quirky, Internet stocks over the past few years, their higher failure rate on
breakout attempts still appears to be the rule.

A whole list of good-looking setups to
chew on. If a new bull market is already in force in the Nasdaq Composite, i.e.,
tech-land, some leaders are probably brewing in this pot.

Let the market bring in one stock at a
time, and obey your stop-loss discipline. There have obviously been some
breakouts that haven’t worked. Last week’s list of failures included Forrester
Research
(
FORR |
Quote |
Chart |
News |
PowerRating) and Advent Software
(
ADVS |
Quote |
Chart |
News |
PowerRating). Although Advent is a
member of a tremendously weak group — Computer Software-Finance, currently
ranked No. 178 in O’Neil’s database of 197 groups, I’m not sure what Forrester’s
problem was.

React first, figure out later.

See, Believe, React

BUY THE FEAR, SELL THE GREED

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