March 29th, 2009

Now’s The Time To Be Prudent

Fence-sitters aren’t wishy-washy or cowardly, they’re merely being prudent. I say this in response to a thought provoking and welcomed comment yesterday.

“Methinks you may be ahead of yourself Guru. Just about a month ago you said ‘I must confess I allowed myself to become victim of a most common problem. I let my native optimism overtake discipline.’

You also had a chart of a huge double top of the S&P with an additional 50% retracment to 450’s.

Not many fundamentals have changed since then for the better, only worse. Analysis has to be technicals + fundamentals + common sense.

With all due respect (and much appreciation for your blog) I strongly respectfully disagree with your optimisim (sic) at this time.”

Being confronted with this observation forced me to clarify my position to all who may see a contradiction – and to myself. I do see us teetering on a fence from which we could fall either on the side of a bull market or on the side of further declines. But I just can’t tell and won’t predict which side will ultimately win out. Anyone who claims they can is either lying or naive; their advice should be ignored and avoided like a plague.

I’ll wait for the market through the transactions of individual investors, the institutional investor herd and fellow bloggers (but definitely not the “talking heads” on CNBC) to tell me which way the market will turn and to guide how I should prepare for that eventuality.

I did see the market making a double-top and from which, I believe, we haven’t yet satisfactorily avoided. That’s why I identified 8 hurdles that have to be cleared and anything less means that significant risks still remain.

But I also see some really great looking charts and action in individual stocks. The charts mirror the market’s action with one major difference – many have cleared more of their hurdles than has the market as a whole. It’s not to say that their prices couldn’t reverse and cross back below those boundaries in response to a new unforeseen disaster (like a major earthquake) and the market deteriorates, crossing below that double-top neckline.

But since I don’t know and can’t predict, I have started cautiously moving towards the middle of the road with about 35% invested and 65% still in cash. The spreadsheet that I present last week has grown to 200 individual stocks (to access the spreadsheet, click here). Let me summarize the list for you:

  • The first cut is stocks that look like they have or are in the process of building some sort of basing reversal pattern since the October lows.
  • The upper boundary trendline of what appears to be a basing reversal pattern represents the trigger point. Stock that cross above trendlines like these on increased volume (confirming that the trendline was drawn correctly) often:
    • pause and then retreat back to test the trendline as support and
    • if the test is successful, bounce off the top of the trendline and begin extended upside moves
    • the extent of the upside move can be measured according to technical analysis standards (like a move equal to the height of the base formation).
  • 77 of the 200 stocks have already crossed above those trendlines; some are now beginning to decline to test the trendline as support. The remaining 123 are at various stages of base completion.
  • Other indicators for measuring the basing and turnaround capacity of these stocks is through Moving Averages, a primary momentum indicator:
    • 178 of 200 have crossed above the 90-day MA
    • 79 have crossed above the 180-day MA
    • 34 have crossed above the 300-day MA and
    • 26 have “Golden Crosses” (where both the price and 90-day are above the 180-day)
  • Finally, 10% of these 200 stocks represent 20% of the IBD 100 list of leading stocks.

So, reader, I welcome the question because it helps to keep my enthusiasm in check. But when the more and more stocks continue to be added to the list and where the the momentum of their price movements begin to grow (as measured by the Moving Averages, for example), I can’t help buy my confidence continues to grow.

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