A Perfect Mix
The market is finally showing its true colors! After weeks of the market
bouncing off the bottom and very little leadership emerging, we are starting to
see trouble afoot. The indices have reversed their mood as the past couple of
days have seen them opening strong and closing rather weak. Volume is running
heavy as I write this column, and if we were to close now, we would have a solid
distribution day in the major indices. It would be the third such instance in 11
trading days on the S&P 500
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$SPX |
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Each day, we are seeing leaders come from the bottom of the barrel, and that
is no way to kick off a new bull market. For example, the Fiber Optic group,
which is ranked 197 out of 197, was one of yesterday’s worst performers.
Leading groups and stocks have faced heavy selling over the last few days.
Many of the growth stocks that set up while the market was in rally mode,
have been making wild swings. Coventry Health
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CVH |
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stock has been making 1-2 point moves in a matter of minutes as the institutions
are not standing in there to support a nice, tight consolidation.
If investors were disciplined to cut their loss quickly, then
Coinstar
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PowerRating)
only handed out about a 7% loss at worst. On the other hand, for those who
didn’t, the stock went on to trade over 20% below its breakout point this
morning.
Nowadays, developing a strategy alone is not enough. Strong discipline must
also be present. Additionally, as investors/traders go for bigger gains, then
proper money management must also be there. After I watched the market confirm
the latest rally several weeks ago, I went on to look at growth stocks move
higher and provide the ultimate indication that we were in a bull market. Many
stocks broke out, but few followed through. Without this indication, a warning
flag must be present.Â
My
service has never posted a green light, which would
mean to buy full positions and let things run. The yellow light has always been
there because the market’s rally has been suspect this whole time. Choppy
periods such as this require very sound discipline and a conservative approach.
This is definitely not the time to go for home runs, or try to “make back
losses.” It is a time to start small and slowly build on that. Rome was not
built in a day!
There are growth stocks that continue to set up and will probably hold unless
the market decides to collapse. If the market can produce another rally, then
these stocks will probably break out. The reason we have seen so many failures
does not lie within a fault in analyzing a base or a company’s fundamentals,
but the problem most likely lies within the market itself right now.
Cognizant Tech
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CTSH |
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PowerRating) attempted a breakout today. When the market rallied,
the stock moved through its pivot of 60.60 to as high as 61.34. As the market
went negative, the stock sold back below the pivot.
Petsmart
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PETM |
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PowerRating) continues to set up in a handle of its 12-week base. What
happens next is up to the overall market.
Until leading stocks and groups present themselves, large moves will be quite
sparse. We need to see stocks such as CTSH move higher despite what the market
is doing that day. Stocks such as Isle of Capri Casinos
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ISLE |
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PowerRating) need to continue
holding strong and move higher on their own.
The first round has ended, and holding onto breakouts has not worked too
well. Applying appropriate money management, and using sound discipline with
stops will get investors and traders alike through these choppy times with some
money in the bank. We will continue to monitor the overall market and look for
new evidence that this rally is coming to an end.Â
For now, we must rely on
things we have already seen and adjust accordingly to maximize our gains or
limit our losses. Making a perfect mix of the three ingredients of trading:
Strategy, Money Management and Discipline are all-important right now. If an
investor is not comfortable with any one of these and the market has not treated
them well, there is no better time than the present to fix the problem.
Until Thursday,
Â