Market Sends Clear Signals
The market
has been sending us very clear signals as to what is going on right
now. We have seen five days of institutional selling out of the last 12 trading
days on the NYSE. This is our first clear-cut sign of what needs to be done with
our investment portfolios at this time.
Secondly, very few, if any, stocks
have been able to break out of a sound base and steadily push higher. The big
breakout day, last Wednesday, saw Panera Bread
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Itron
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a few other firms breakout.Â
Out of these, ITRI and JJSF are the only two still
struggling to hold above their pivot points.
There are always exceptions to the
rule, and stocks like NVR
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out there, but I am telling you right now that it is false hope to believe that
is the norm right now. The majority of stocks are not able to successfully break
out and push steadily higher in stair-step fashion. This fact, coupled with the
market distribution, leads me to believe a cash position is a
wonderful place to be right now.
Recent history’s bear market has
provided conditions that need to be worked through. These exist both in the
stock market and in the U.S. economy. Every major hit the market has taken in
history leads to a period of re-building. Once this has finished, growth will
again stand out and give us many great opportunities. It is just not happening
right now.
Fortunately, stocks continue to build
bases every day. We are always five to eight days within a major follow-through
rally in a major index. When compared to a year ago, growth stocks have already
shown signs of improvement by simply breaking out of bases on heavy trade. Some
have even posted a day or two of follow through before succumbing to market
pressures. Take Williams Sonoma
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for example. The stock broke through a potential pivot of 50.59 yesterday
on heavy trade. Today, it was able to extend beyond its closing price.
It is not possible to predict the
stock’s eventual outcome, but I do believe this to be unique from a year ago.
Growth companies have been consistently setting up and breaking out since the
market bottom in late September. Over the past few years, we would encounter
this action, but it would only last a month or less before all growth setups
and the major averages would be taken apart. Now we are seeing growing
indications of improvement, but we are just not to where we need to be quite
yet.
Inevitably, we will see a confirmed
rally in the major indices along with stocks stepping up a “full set of
stairs,” as they go on to significant gains.
Here is a passage that I believe to be
every investor should read at this time. It will either build your confidence or
reinforce your thinking, or both! An acquaintance and an employee of Investor’s
Business Daily pointed out a perfect caption from How
to Make Money in Stocks, by William O’Neil (McGraw Hill, 1995, p. 178).
I believe these two paragraphs of “A Loud Warning to the Wise!” perfectly
describe the current environment:
“It
isn’t that bases, breakouts or the method isn’t working any more, it’s
that the time and the stocks are simply wrong. The price and volume patterns
are phony, faulty, and unsound. The general market isn’t right. It is
selling time. Even a skunk isn’t going to make a cent.
Be
patient, keep doing your studying and be 100% prepared. At the least
expected time when all the news seems terrible, winter will ultimately pass
and a great new, super bull market will suddenly spring to life. The
practical techniques and disciplines discussed here should work for you for
many, many future economic cycles.”
Have a great weekend!