October 20th, 2008

IBD 100 Trying to Find Its Footing

I don’t know if you’ve been watching but IBD has done what looks like sweeping housecleaning of their list of the top 100 stocks. Clearly the move reflects the general tumult and upheaval going on in the market in general but I don’t remember when the list had so many changes and so much churning. This past Friday, for example, 22 new stocks were added the list of top 1oo leaders. In the previous list, 60 new stocks were added to the list and of those added, 38 had never been on the list before. Even more startling, 39 of the stocks added that week failed to return the following week.

Evidently, IBD is having as much difficulty finding momentum and follow-through as we are. They scanned their 197 Industry Groups and found their top 100 in 77 of those groups with the various Industry Groups in the Health and Financial sectors leading the way:

It was reassuring to find a healthy overlap between the stocks in IBD’s 100 and those on the “Golden Cross” lists I’ve been tracking. Clearly those are the stocks that are in the process of building a head of steam to generate the momentum needed to carry them higher when the market completes the base building process.

Yes, I’m cautiously coming around to the view there’s a high probability that we’re experiencing “bottoming” now rather than a consolidation leading to another leg down. It’s going to take time and we won’t get a powerful move outside the current range until early next year. Here’s a current view of this dismal market (as of 12:30):

I’ve extended this the S&P’s chart with what might be possible trajectories for each of the four moving averages. If the market doesn’t deteriorate further, then the base building process (in other words, the pause for market psychology to heal and turn more constructive) will have keep the index within the range circled on the chart. Note that the horizontal axis are months, so the process could take 3-4 months.

What I’m anticipating is that all the lines to start turning positive: 1) the index begins crossing above each of its lagging moving averages, 2) the 60-day moving average turn and cross above the 90-day, then the 180-day, etc. This should be sequential with each of the other averages performing cross overs so that, ultimately, their ranks reverse and the index should be above them all. That’s when a bull market is back in force.

There’s no need to jump to be the first since there could be some new surprise to throw the process off-kilter again. When the market’s healthy, bad news is taken as a bump in the road; when it’s sick, bad news is just another excuse to cascade down to a new low level. Let’s let the market heal itself before putting all resources back to work.

I’ve personally started nibbling by buying small positions in some of the stocks I’ve mentioned here recently (it takes a lot to hold a trader on the sidelines).

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