Time To Move Forward
Capital
preservation and capital appreciation are two equally important
traits that I focus on. Staying out of
trouble can be very difficult, while making money in the bull markets is usually
not too tough. I am willing to miss minor
rallies such as in January and the current one which launched the Nasdaq up 33%,
but when real growth is happening in new, innovative companies such as we saw in
Yahoo
(
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PowerRating), America Online
(
AOL |
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PowerRating) and Microsoft
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PowerRating), I
will be in them. I will also do
my best to put readers of this column into these stocks and explain the rationale
leading up to the investment.
My goal in this column is to advance the careers and investment accounts
of my readers and I welcome all of your feedback. I intend for this column to be
a place to offer my insights from years of experience and provide interactive
responses directly to you through the column as well as through email, and to
give you the edge that successful investing requires.
Last week, the
market reacted to important earnings reports from bellwethers such as Intel
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INTC |
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PowerRating)
and Microsoft, and a surprise rate cut from the Federal Reserve.
The reaction was extremely positive. On
the heels of the previous week’s 14% move, the Nasdaq led the indices with a
gain of 10%. The S&P 500 was up a
healthy 5%, and the Dow Jones Industrial Average was up about 5.5%.
As the chart below
shows, Tuesday and Wednesday (4/17 and 4/18) moved higher on increasing volume
from the day before. Following the recent
run, the market is pulling back on lighter volume each day.
This is the ideal situation of a bull move with up days seeing good,
heavy volume and down days coming on lighter trade.
The market is trying
very hard to emerge from the massive bear that has had it in its claws over the
past year. This would not seem like an easy task, given the magnitude of the
recent decline, but the Nasdaq has managed a 33% rally off the lows by going
straight up! Institutions, the ones who are responsible for 80% of the
money in the market, appeared to be net buyers of stock over the past couple of
weeks. I’d have to say that things
are shaping up to be friendlier. The
Fed’s rate cut last week will definitely help corporate profits, but the effect
may not be seen for some time.
Since we don’t know
how much the recent economy has really affected companies and how much or when
the rate cuts will matter, we have to rely on the action in the market and
trading in individual companies. Here’s
where I’m still being very careful: I do not see very many companies at or near
new highs that are in industries that have been capable of leading markets
higher. Here are a few examples of that
direction.
Christopher &
Banks
(
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PowerRating) has been one of the recent breakouts that has continued to
move higher.
After breaking out on April 9, it moved up about 16% above its pivot
point of 32.50 and then proceeded to sell off over 21%.
It has since recovered, but successful breakouts and creating a good
opportunities for success preclude swings that are this large.
Chicos FAS
(
CHS |
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PowerRating)
advanced to new high ground on 4/18 with volume very slightly above normal.
Ever since then, it has crept higher on decreasing volume.
Where are the large buyers? They
are obviously not willing to buy it at the current levels, or at least they are
not doing so right now.
Harrah’s Entertainment
(
HET |
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PowerRating),
is doing something similar to Chicos. It
did manage to break into new high ground on phenomenal volume following an
upside earnings surprise. Since the
breakout, it has been drifting higher on decreasing volume, a bad sign.
Digital Lightwave
(
DIGL |
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PowerRating)
is an example of a stock faltering after moving higher on light volume.
Eventually, this scenario unfolds in a bad way: Stocks that creep higher
on lighter volume hit a price level at which someone large is willing to sell.
Since there is very little buying pushing the stock higher, it will be
overwhelmed by any selling and usually face a quick, steep sell-off.
Now that we’ve seen
reasons to be nervous, it’s time to move forward and give the market the benefit
of the doubt. Caution
is warranted because it is still difficult to find stocks that look perfect.
There are a few issues shaping up that have solid fundamentals and decent
technical patterns.
Buca
(
BUCA |
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PowerRating) is
setting up a base on top of a base. Earnings
have been exploding over the past three quarters with good sales figures backing
up the growth. Nvidia Corp.
(
NVDA |
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PowerRating) is one of the first technology companies to hit new
highs from a solid, 28-week base. Sales,
earnings and Return on Equity are all very healthy.
Two immediate things to keep an eye out for on this one are the quality
of its institutional holders and its light cash flow.
NRG Energy
(
NRG |
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PowerRating)
looks like it may be ready to emerge from its 29-week base.
While living in Oregon, I have noticed the extremely low levels of
reservoir water and the high relative strength of the energy group and do not
chalk that up to coincidence. A
weekly chart of this one provides the best view.
Alza Corp.
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AZA |
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PowerRating)
provides an interesting technical picture as well as fair fundamentals.
Charlotte Russe Hldg
(
CHIC |
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PowerRating) acts very resilient, as do many of the
retailers, although its base is very sloppy. Americredit
Corp.
(
ACF |
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PowerRating) recently gapped above its pivot point of 38.02 on incredible
volume and has since moved higher. It is
currently pulling back on light volume and acting very nicely.
ACF is one I was tempted by but kept out of due to the strict criteria I
follow.
Until next week,
keep an eye out for successful pullbacks in both the market and individual
issues on lighter trade, as well as companies working through solid bases.
See you next week,