October 7th, 2009
Life used to be so simple 9 months ago. All stocks were on sale for rock bottom prices and hundreds, if not thousands, were in the starting gates waiting for the starting gun (if you remember the analogy. All we had to do was find stocks that had formed clear reversal patterns, pick the ones with the highest volatility and buy a bask full of them and we would make a huge profit with little risk.
But finding stocks with momentum or a potential for momentum is harder now. Few stocks are still forming reversal patterns and the risk is that they breakout just as the broader market or, more correctly, the stocks that have been driving the market up to now, start running out of steam. [See yesterday’s report on media stocks.]
Alternatively, we could hitch a ride on the stocks that have had huge runs over the past four or five months and hope they aren’t the ones who’ll run out of steam first. Remember, for example, Diedrich Coffee, Vanda Pharmaceuticals or Dendreon?
As a true chartist, I much prefer looking among stocks making new highs and the more significant the new high the better (for example, all-time new high is better than 2-year which is better than 1-year new high). Here are several that meet the criteria:
But I give you these with a word of caution. Keep your thumb on the market’s pulse and make your own assessment as to its health and strength. Any guesses in which life cycle stage the market is in now?
I think the market is transitioning from the accumulation to the mark-up stage. That transition will be completed and the exciting mark-up stage will be launched after the consolidation correction we will have to contend with, probably most of next year (see “Two Market Consolidation Models: 2004 and 1933-35“). Or in which emotional stage it’s in?
I feel we’ve just experienced a huge relief rally, are waiting for a test to see whether “it’s for real” and then the market will move into the “optimism” state.
Since the easy pickings are over, the easy money has been made, market timing is again going to be important. If you buy stocks today, even if they’re breaking out to all-time new highs, don’t get wedded to them. The market has to mature and it’s about to experience some turmoil as it evolves into the next stage.