February 26th, 2010

Looking For Next Phase And Assembling A Watchlist

In “Financial Stocks are Laggards” of March 20, 2009, I included a graphic depicting the various stages in a market’s life cycle guessing at that early date that the market was then moving into the accumulation phase:

Moving from Relief to Optimism” of July 27 included a similar schematic about the typical market cycle, this one depicting the the phases of market emotions:

In that post, I wrote:

When the upcoming “traders’ remorse” correction starts winding down, market sentiment will be moving from Relieve to Optimism; the market life cycle will transition from Accumulation to Mark-up. You can almost begin to hear the siren call of the talking heads calling you to their favorite hot sector or stock (Cramer even sounded off tonight about what sounded like the second coming of the 1990’s tech bubble).

The question we’ve been asking is whether this hiatus will turn out to be reversal or, as we expect, a consolidation? Even though the market has moved laterally, we may have been in that post-breakout traders’ remorse correction since late September. If that turns out to be the case, whether measured in terms of either chart, where is the market currently in its life-cycle? My guess is that the interminable pause since last fall represents the transition from 1) accumulation into mark-up phase and 2) Optimism to Excitement.

Using another analogy, this market cycle is struggling its way through its adolescence into young adulthood. Once it arrives, the mark-up phase could be very exciting. Once it begins, the conversation could shift to whether and when the market will break into all-time new highs.

While traveling this week, I realized that the one thing we can and should do while the market makes up its mind is to assemble a watchlist of stocks with good prospects and low risks to buy when that time arrives. But what criteria do I use to find stocks for the watchlist? Understanding the risk of your acting prematurely, I decided to start assembling a list of stocks meeting some broad criteria.

The first of the stocks are stocks making all-time new highs [because of system limitations, I define “all-time new high” as stocks that are at their highest level over the previous five years]. Of 5030 stocks in the Telechart database after excluding ETFs, closed funds and inactive stocks, only 49, less than 1%, are making all-time new highs. While some associate stocks on the new high list as riskier, I see stocks with demonstrated momentum. Some of the more interesting of the list (click here for the complete list) include:

  • EZPW (ExCorp)
  • EL (Estee Lauder)
  • PRGO (Perrigo)
  • NETL (Netlogic)

To reiterate, I’m not absolutely clear as to which direction the market will ultimately move next, but I feel it’s important to begin planning ahead by assembling a list of stocks for when sufficiently strong market momentum starts to kick in [By policy based on previous bad results, I only play down markets through moving to the safety of cash and, on a small basis, shorting market index ETFs).

Over the next several days I’ll offer spreadsheets and charts of stocks that look like interesting candidates for your watchlist based on the following additional criteria:

  • Stocks in consolidation patterns after clear and convincing breakouts
  • “Stocks on the Move” (based on fundamental and technical indicators)
  • Stocks with strong Relative Strength
  • Stocks with clearly bullish momentum indicators (e.g., all moving averages favorably aligned and pointing up)
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  • Anonymous

    Guru,can you advise which sector performed the best coming out of the 1973–75 bear market?Also do you have any Biotech stocks on your radar now?

  • Joe

    Having moved beyond the Accumulation phase and entering (I believe) into the Mark-up phase, the focus shifts from best industry groups "coming out of the 1973-75 bear market". As they say on CNBC, this is going to become a "stock pickers' market".

    I can see many biotech stocks that might look good going into the mark-up phase. Specific names you might take a look at might include: VPHM, LIFE, BMRN, INCY, EXAS, HSKA, CYTX, ARIA, VVUS, QGEN and ILMN.

    Telechart categorizes 160 stocks in the group so there's much to pick from. I would also look at Medical Research and Drug Related Products.

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