Follow Your Game Plan
What is this
market doing? Is this really a bull market, simply consolidating or
is it the continuance of the bear market that has plagued investors since March,
2000? Early last week the market stopped going up and decided to reverse
directions. The S&P 500 posted one single day of distribution on May 22 and
then proceeded to finish the month on a negative note, dropping as much as 5% on
increasing volume. To date, I have counted three days of distribution in the
S&P 500 and the Nasdaq; not enough to sell everything or stop buying quality
breakouts.
Since the drop, the
market has now rallied steadily off the lows on receding volume up until today.
As I write this article, volume is much heavier than yesterday on all three
major indices and they are all up enough for things not to be considered “churning.”
This is a good case for the bulls.
Stocks continue to break out, but in a
much more tentative fashion than early May. Take Express Scripts
(
ESRX |
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PowerRating) in
the leading medical group, for example. The stock made multiple attempts at its
pivot of 101 and has lacked the volume to support any kind of move. It held up
today, hitting a high of 104.40 until it buckled to the pressure of higher
prices without big buying. Meanwhile, Quest Diagnostics
(
DGX |
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average volume, pulled back into the base, and is now pushing higher on below
average trade. This lack of conviction, or tentative action is a reason to be
careful and systematically honor small losses of 8% or less. This market is by
no means a sure thing right here, but the evidence we have seen thus far
supports a bull market and demands that well-researched stocks be purchased and
held.
BEI Technologies
(
BEIQ |
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remained firmly above its breakout price of 25.88 and is moving to a new high on
strong volume. Retail leader, Columbia Sportswear
(
COLM |
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gap-breakout. Even doughnut maker, Krispy Kreme
(
KKD |
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shorts and is up a solid 30% from its highest pivot point. These are all
examples of looking past the market’s temporary trials and seeing instances of
stocks working for investors; the ultimate confirmation.
The last time I remember buying stocks
and making good money was in June of 2000. I recall buying just about anything
that looked good, watching it immediately run up at least 20% and then flashing
glaring sell signs. Not all markets are this
straighforward! There are also markets where you buy stocks, a few work
and others kick you out at breakeven or for small losses. The important point to
remember is to hang in there with strong discipline, following sound rules that
have proven to work in the past.
Several small-cap stocks come to mind
when I’m thinking in terms of discipline: Penn National Gaming
(
PENN |
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PowerRating) and
First Horizon Pharmaceutical
(
FHRX |
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PowerRating)) are perfect examples. Both stocks are
small-caps and extremely volatile. They both broke out nicely, then fell apart
only to bounce. Despite the fact that these stocks moved higher, following
strict loss-cutting rules is important. Allowing investments to fall apart can
ruin a portfolio on the verge of greatness and even worse, destroy confidence
for future investments. Small and mid-cap names can definitely qualify as
potential investment candidates and should be played according to all the same
rules with the exception of one, more conservative money management. I will
usually take a smaller position in these names since they are volatile and can
knock you out very quickly, or I will take some profits on the way up.
In moving forward, Factset Research
(
FDS |
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PowerRating)
is ready to move and sporting great fundamentals with the cash flow to back them
up. In the Semi Equip group, Entegris
(
ENTG |
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PowerRating) is making the move up an
11-month base. Christopher Banks
(
CHBS |
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thinning trade. American Eagle
(
AEOS |
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moving average in hopes of a successful breakout.
Cryolife
(
CRY |
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PowerRating) is poised to break
the pivot of 36.63, but lacks in the areas of Return on Equity and Growth for
those pure fundamentalists. In my backyard, Planar Systems
(
PLNR |
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PowerRating) is
working up the right side of its base as its industry group works its way up the
ranks. Inverness Medical
(
IMA |
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PowerRating) and Hotel Reservation
(
ROOM |
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PowerRating) wedge
higher.
Keep a cautious eye out for overall
distribution and failing breakouts. For the time being, it is important to
follow a game plan until the market tells us to do otherwise.
Good trading,