Watching And Waiting
The inevitable pullback that was due in the markets has arrived. The Dow is nestled up to 11,000, which has provided a nice level of support. The good news is that the pullback came on lighter volume. The bad news is that it came on lighter volume leading into a holiday weekend in which volume would have been light anyway.
Daily
chart of Dow Industrials with NYSE Volume
I have been keeping an eye on leadership and the individual issues that comprise the leadership during the pullback of the market. It has been very important to see how stocks act when faced with selling (profit-taking) in the indices. One group that led the market as it began rallying in April has shown us all why stop losses are important: The Builders. Ryland Group
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PowerRating) stands 15% off its pivot point, Pulte Corp.
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PowerRating), the supposed leader of the group and first to break out was the first to show trouble and sits just over 8% off its pivot, Beazer Homes
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PowerRating) sits over 6% off its pivot and highflier, Meritage Corp.
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PowerRating) sits about 9% below it pivot point and 27% off its high.
A lesson lies in the recent performance of this
group. Leading stocks that break out successfully will only move back into their previous base for one
reason: Something is wrong!
As the pullback in the market has continued, the retailers have shown signs of trouble too. These are not as consistent as with the builders, but they are there. Charlotte Russe
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PowerRating) has fallen steadily below its pivot and done so on heavy volume, indicating something may be very wrong. American Eagle
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PowerRating) has continually failed to break out of its base and showed two large days of distribution on May 23 and May 24.
Of course, after the distribution was evident and the stock was unable to break out
“for some reason,” a news article came out stating that the Schottenstein Family has had a “Blue Light special on American Eagle shares,”
(Pittsburgh Post-Gazette, 5/28.) The family has managed to unload 6.2 million shares or 8.5%
of the company. This example of institutional selling is mentioned as a way for us to all understand what moves stocks up or down. Anyone watching this stock over the past few weeks saw it has not been allowed to break out.
Another point worth mentioning is that with the exception of Columbia Sportswear
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PowerRating) these stocks have all moved out of bases that have been less than desirable. This fact alone could lead the group to failure or at least a period of consolidation.
The go-go market of the late 1990s is over and it is important to watch for stocks breaking out and displaying all the right characteristics before buying into just anything. Recent successes include Krispy Kreme
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PowerRating) FEI Co.
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PowerRating), and Factset
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PowerRating) although it showed slight distribution today. Medical stock, Forest Labs
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PowerRating) has moved steadily higher and Diagnostic Products
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After all, the market is only as strong as its leadership.
On the sideline, Express Scripts
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PowerRating) is working on the right side of its base. Hotel Reservation
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PowerRating) is working on a handle, and paints a fairly solid fundamental picture. Inverness Medical Tech
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PowerRating) is a recent find worth keeping an eye on. Jack Henry
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PowerRating) is sitting within 13% of its high and consolidating on the right-hand side of its base. Unfortunately, the Computer Integrated System group is falling in relative strength and may take its toll on JKHY.
Planar Systems
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PowerRating) works up the wall of its cup. Ralph Lauren
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PowerRating) hits a new high atop its upward wedging base. Recent breakout, Quest Diagnostics
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PowerRating) is falling back into its handle after a breakout, indicating it is not quite ready to move out of consolidation.
This week I’m watching for two things: 1) signs of distribution in the market, specifically the Dow and S&P, and 2) leading stocks breaking higher or quietly consolidating after moving higher. This is the first pivotal point since the markets confirmed their rallies in April and it will be important if things are to eventually move higher.
Keep the eyes peeled,
P.S. Please keep any feedback about the column coming. Collective questions and thoughts about the market and stocks are important to helping everyone, myself included, maximize profits and stay out of trouble!