Sharp Drops Need Time to Heal
All of the
pieces for a sharp decline have been coming together for the past two
weeks now. So the recent spill in the Nasdaq Composite shouldn’t have come as a
surprise. The Composite broke out above its tight, trend channel
in late-December in a sharp upside run (see my Dec. 22 column), most leading
stocks were hyper-extended, new breakout moves on some leading stocks had run
too far too fast, and sentiment was becoming lopsidedly optimistic. All of these
negative characteristics were pointed out in this column over the past two
weeks.
| “…sharp drops like this week’s need time to heal.” |
And how are your stocks acting? Are they
breaking down on heavy volume? Sell ‘em. Are they holding up fairly well? Watch
‘em. If some of them have experienced large advances over the past couple of
months and you still hold them, don’t be a pig. Trees have never grown to
heaven, and neither will your stocks. Longer-term some of them may still be
okay, but from an intermediate-term perspective it’s time to nail down those
profits.Â
Despite Wednesday’s favorable price reversal on most major
indices, sharp drops like this week’s need time to heal. If even only for a few
weeks, the market will likely just gyrate around to build another launching pad.
At this juncture, though, a few weeks would be the best case. I wouldn’t count
on it, though. Look at the S&P 500’s chart. The sharp break this week looks
bad. This is not the action an intermediate-term trader is looking for. Remember
what I suggested two weeks ago: A breakout to new highs by the S&P 500
followed by a sharp pullback into its technical base wouldn’t be a good thing.
(See my column Dec. 22.)
Nonetheless, it’s not time to take a vacation. It’s time to keep
your eyes wide open to which stocks are holding and which ones are folding. If
one looks at the market’s valuation relative to history you can always make the
case that a bear market could begin at any time. But you could’ve said that for
the past two years. Heck, I was looking for one this year, until the market gave
me a signal to get aggressively long again in late-October. Although I may be
expected to speculate about the market’s long-term prospects when I’m
interviewed on television, the key to making money in the market is to remain
absolutely flexible. What if this latest pullback turns out to be just another
correction in an ongoing mega-bull market? You’ve got to be prepared and the
time to hunker down is now.
You should learn to look forward to periods
like this. The market maybe takes a breather here and you get the opportunity to
see what the market really likes. Those stocks that hold up the best during a
corrective period are the ones that typically act the best on the next run in
the market. Bear in mind, though, new base formations at this point need
time.
Some of the names to watch now are those that have made big
advances recently — new names like Internet Capital Group [ICGE>ICGE] and
Ariba [ARBA>ARBA]. That’s not to say that these stocks haven’t seen their
ultimate peak, but new technical basing formations have to begin somewhere. Many
of history’s biggest winning stocks started with threefold-plus moves before
going again.
It’s the new leadership names you need to focus on. Forget whether or not the cyclicals are ready for a move. I don’t waste my time. History’s biggest
winning stocks have always had something new going for them, i.e Cisco Systems,
American Power Conversion, Yahoo!, etc. Unless some nonferrous metal company has
come up with a new way to get you from point A to point B quicker than anyone
else, it’s not worth it. Because when it’s time to really jump on some new,
dynamic company’s stock, you may be out of position if you’re fiddling with
second-rate stocks.Â
Stay on your toes here, cut out your losers
quickly, and nail down profits on your big winners. The trend in the S&P 500
is over and is in jeopardy on the Nasdaq Composite.