December 18th, 2008
Another hot topic at the MTA meeting last night (see previous entry) was the question of which types of stocks, if November 20 was truly “the bottom”, will lead the market out of the trough and into the next bull market.
There were all sorts of suggestions, ideas that all of you who watch business news or read business press have already heard about. One group reminded everyone that it’s usually the financial stocks (national and regional banks, savings and loans, etc.) who lead first because interest rates tend to be low in a recession boosting banks’ profit margins. Others suggested it would the stocks of companies that are going to participate in and contribute to what is anticipated to be Obama’s economic stimulus agenda — infrastructure stocks. A third group thought that the leaders would this time around will come from beaten down sectors like commodity, energy stocks, transportation and, even, home builders and REITs. Finally, there were the few stalwards who thought it would be from either technology, health care, consumer non-durables industries. I the discussion covered just about every base. “That’s what makes a market!” There was little discussion about whether the leaders would come from large or small caps.
Interestingly, there was little discussion among these market technicians about technical ways of identifying the new leaders out of this crash — all the discussion was basically in terms that would be very familiar to fundamental analysts. Granted, I’m a novice compared with all those professionals (even though I’ve had enough freelancing experience with technical analysis as they have had on a paid basis) but I would have expected some brilliant comments about “letting the market tell us who the leaders will be based on supply and demand which we can measure …… and let them fill in the rest. But I didn’t hear that.
So I’m going to stick with what my indicator, stocks with “Golden Crosses”. If you remember, these are stocks where the price is more than the 90-day moving average and the 90-day moving average is above the 180-day moving average. I first wrote about these stocks on October 17 in “Early-Stage Momentum Stocks”. Granted, that was two months ago but many of the stocks on that first list (a handful of which were listed in that post), have actually performed well since then as the market has declined 3.84%.
I just updated the scan and find that there are now 183 stocks (excluding ETFs, stocks subject to M&A, low activity stocks) that have made “Golden Crosses”. It’s still a very small number indicating that the market is still in the very early stage of its bottoming process. Furthermore, these stocks represent more diversity as to Industry Group and less concentrated among the banks.
Most of the stocks in the model portfolio came from the original list; new ones added are also among those stocks. My “bottom line”: the devastation in the market has been so pervasive and deep that coming out of it will be a “stock pickers’ market”. Stocks that show strength will draw more money because investors will want company — they’ll be afraid to put whatever cash they have left to work in stocks that don’t show a strong following. Industry-based stories will come later unless, of course, we start seeing a large number of infrastructure stocks starting to make “Golden Crosses”.
Send me an email if you’re interested in the latest updated list.