October 17th, 2008

Early-Stage Momentum Stocks

The stock market passes through life cycle stages as it moves from bear to bull and back. Some say we are now in the Accumulation phase:

This phase occurs after the market has bottomed and the herd (corporate insiders, a few value investors, smart money managers and experienced traders) begins buying, guessing that the worst is over. Valuations are very attractive, general market sentiment is still bearish, the media preach doom and gloom and those who were long through the worst of the bear market have recently given up and sold the rest of their holdings in disgust (the “capitulation”).

But in the accumulation phase, prices stay relatively flattened and for every seller throwing in the towel, someone is there to pick it up at a healthy discount. Market sentiment is in the early stages of switching from negative to neutral. In the accumulation phase of the Market Life Cycle, few reliable chart patterns have developed, most stocks are far from making new highs (one of my favorite criteria for identifying upside momentum), traditional momentum scans offer few candidates and it is still too early for reliable relative strength filters (stocks movement relative to S&P 500).

The common denominator of the early leaders in the early phases of the last bull market (2003-2007, as the Tech Bubble Crash was bottoming out), however, were stocks that formed “Golden Crosses” (where the 90-day moving average crossed above the 180-day moving average and closing price higher than both). Currently, a third of the 157 stocks (still a mighty small number but more than just a couple of days ago) of stocks forming “Golden Crosses” are regional banks. Besides regional banks, other Industry Groups including stocks with “Golden Crosses” formations (see “What to look for at the bottom“) follows:

Some of the more widely traded non-bank names include (click on symbol for chart):

  • FDO (Family Dollar Stores)
  • THOR (Thoratec Corp)
  • QSII (Quality Systems) [note: has actually also formed a “Platinum Cross”]
  • SF (Stifel Financial) [note: has actually also formed a “Platinum Cross”]
  • AFAM (Almost Family)
  • DMND (Diamond Foods)
  • LPHI (Life Partner Holdings)
  • BECN (Beacon Roofing)
  • OSIR (Osiris Therapeutics)
  • PSS (Collective Brands)
  • DUF (Duff & Phelps)
  • USNA (Usana Health)

Understand that any of the above are still highly speculative since the MTI hasn’t yet indicated that the risk of owning stocks has been reduced. But these stocks may make nice trades during the up phases of the market’s base building process.

I’ll periodically report on the swelling number of stocks and industry groups showing “Golden Crosses” as the market proceeds in the accumulation phase moving towards full recovery and the mark-up phase.

[Send me a note with your return email address if you’re interested in a complete list as of yesterday.]

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