Watch for Abnormal Selling Pressure
The other day I saw a graphic showing how the Nasdaq Composite was about four standard deviations above its 200-day moving average. The study was provided by John Roque, technical analyst at New York-based Arnhold and S. Bleichroder. To put that in historical context, no major market index has ever been this extended above its 200-day moving average in the history of the U.S. stock market – not at the market top in 1929, not even the market top in ’87. Amazing!
Nonetheless, signs of institutional selling pressure, or distribution, which can occur either in the midst of an advancing market or at the immediate end, remain absent. Additionally, the rotation among leading stocks that I’ve discussed over the past two weeks continues to buoy the market. When one market leader pauses, another moves higher. With that said, though, most leading stocks have already left the starting gate. New, base breakout setups are virtually nonexistent among high, relative-strength stocks that meet my fundamental and technical criteria in the aggressive growth arena.
Moreover, even many of the newer, base-breakout moves have already become pretty extended in price and are well past safe buying zones. When I refer to base breakouts I’m not referring to the two- or three-week price consolidations, but to leading stocks, like Immunex [IMNX>IMNX], that have recently emerged from multimonth basing structures.
So what’s the intermediate-term investor left to do at this point? If you’re in some leading issues, watch for signs of abnormal selling pressure to determine when to exit all or part of the position. A Nasdaq Composite this historically extended is apt to begin a meaningful decline at any time, especially now with some key sentiment gauges reaching into levels of extreme optimism. For example, the Investor’s Intelligence sentiment survey of 100+ investment advisors currently shows 55% Bulls and just 27% Bears. This bull-bear spread is getting close to levels associated with many intermediate-term market peaks of the past. Bear in mind, though, sentiment gauges are secondary indicators and should only warn of impending market turns. The market itself has the final word.
RealNetworks [RNWK>RNWK] represents a good example of a leading stock that recently experienced an abnormal price break on significant volume. When you see this kind of action it’s time to part company. In a market like this that’s treated a lot of the leading issues with great kindness, you have to ask yourself “why is this thing going the other way?” Simple enough.
Another issue that recently attempted to re-assert itself as a market leader is Internet content provider Go2Net [GNET>GNET].
After successfully breaking out from its recent, multimonth basing structure two weeks ago, GNET immediately pulled back sharply, then rallied higher just as sharply the following day before settling back down around the original breakout spot. Not the type of price action typical of a stock about to embark on a meaningful advance. If you own it, it makes sense to sell it here. It’s acting way too funky. If it can pick itself up from its bootstraps and develop a tight trading range, then we buy it back if it tries to go again. Yeah, we’ll buy it back higher, but the whole idea in buying a stock breaking out from a long, basing pattern is to catch it just before it takes off on a good advance, without looking back. There’s no reason to hold a stock that’s acting questionable as it only ties up capital when there may be another horse to hop on.
Also, look at America Online [AOL>AOL]. Why has this issue pulled back into its recent breakout area? Either the market’s losing faith or it just has to set up again. I sell it when it acts questionably like this, and if it sets up again I just buy it back at a higher price. Who cares that I’m paying up for it again? If a stock has the potential to rise 50%-100% I don’t care whether I’m paying $80 or $86. When investing in the intermediate-term it’s all about being on the horses that are out in front of the pack for a big move. If it stumbles and breaks its leg, maybe it can heal or maybe they kill it.
I realize some of the concepts I’ve been referring to over the past several weeks may be a bit foreign if you don’t have a lot of experience in the market. However, Kevin Marder and I will be conducting a seven-part trading course soon, which should help clear up some of your questions. Ultimately, though, your own experience will help you better understand what’s working well and what’s questionable.
Never, ever give up. If you get completely frustrated sometimes, I know where you’re at. I’ve been there. Believe me. Sometimes I’m still there. But, at this point in my career, if I get frustrated over decisions I’m making in the market it’s usually because I just deviated from my discipline, which typically costs me money. I absolutely believe that following my discipline and losing money is better than not following my discipline and making it. The latter will just reinforce bad habits.