The Rally About Nothing

This rally hasn’t been much fun. Stocks are breaking out, but then going nowhere. It’s good to see a stock break out on nice volume (except for LULU, a discussion for later), meeting all or most of your criteria for buying. What isn’t fun is then seeing that stock go nowhere. It enticed you, showed interest in moving higher, then nothing. It’s kind of like that girl (or guy) who shows interest in you, gives you her (his) number and then doesn’t call back or commit to going out, but doesn’t tell you they aren’t interested.


Often the opposite sex won’t tell you they aren’t interested, leaving you to wriggle, but the stock market, like people, does allow you to move on to greener pastures. Stocks will also tell you if they aren’t interested by dropping below their buy points. This has been rare. It’s also been difficult to just jump into a different stock.

This is why I haven’t put up too many posts lately. Not much to report. Most of my watch stocks are still there. Some continue to work on bases, some bases are melting down, and others have broken out to mostly just sit there after breaking out. Only GMCR from my watch list has really moved higher, but not much (again, I’m not going to talk about LULU for now… it broke out on no volume, only to cruise higher after an earnings beat).

Keep watching, but also keep your stocks on a short leash. The market has flashed a number of sell days in a short period of time.

What I'm Watching Now

Ok, time to get down to business and look at some of the best stocks in the stock market.
Our current rally, which began March 1, as pronounced by IBD, hasn’t seen any real screamers, or “rockets” as IBD referred to them. These are stocks that break out and then go on an immediate tear, making you wish you had jumped in.

Instead, many stocks broke out, then consolidated gains by essentially going sideways in quiet trade.

While we’d prefer our stocks to take off, this has been constructive action. The market’s action the past two days is also showing us there is some serious buying going on, so hurry up and pick some good looking stocks and go with them.

I’ve said it before and it’s still the case: there aren’t dozens of great stocks in nice consolidation patterns to have to choose from. This makes sense as we are coming out of a severe recession.

If you run some stock screens or look through IBD’s IBD 100, you’ll see a number of stocks that have good ratings, but their recent sales and EPS growth is questionable. The most common problem is that sales are lagging, while EPS looks ok. Be careful: many of these stocks have great looking EPS growth because they’ve been cost-cutting and are also coming up on easy comparisons to last year.

When trolling for stocks, look for those with both solid EPS and sales growth that also have good projections. If you are deciding between two stocks with similar sales and EPS in the most recent quarter but one stock shows projections for flat EPS or negative comparisons and the other has projections for over 25% growth, go with the latter. These true growth stocks usually give you the best chance of nailing a big winner.

Here is a list of such stocks:

AIXG (double bottom with handle)
AMZN (cup with handle)
ASIA (cup with handle)
ATHR (cup with high handle, broke out, still in buy range)
CTRP (cup with high handle)
GMCR (flat base break out; slightly extended now)
MELI (cup with handle)
MRVL (cup with handle, just broke out, 1% above buy point)
PCLN (cup with high handle, broke out, still in buy range)
RUE (cup with high handle break out; slightly extended now)
The stocks above are all showing over 25% growth in their recent quarters with the normal strong fundamentals I want to see. They aren’t all perfect. For example, some don’t have the 17% return on equity (ROE) you’d like to see, but you often have to accept that not everything is perfect.

The stocks represent my favorite (not in an emotional, but rather in a rules-based way) stocks that are near buy points or are buyable right now.

Stocks that I also like but I’m not necessarily going to pull the trigger on are:

AAPL (cup base, broke out, slightly extended)
LULU (cup base, broke out on light volume, up 9%)
FIRE (cup with handle)
LFT (maybe double bottom? Needs time, may kick from list)
VIT (broke out of “V” shaped base, almost triggered 8% sell rule)

So why do I have these lists broken down this way? I run stock screens using IBD’s Daily Graphs service (Custom Screen Wizard) and come up with the top stocks from a fundamental perspective. I then go through each one, looking at their charts to see if they are anywhere near a buy point, then I check out their projections for the next two quarters.

After I have a short list of candidates, I start conducting serious, in-depth research on the ones I like best initially and move down the line.

Picking among the best is difficult, admittedly. For example, why didn’t I buy AAPL? It’s up about 6% from the buy point, looking just fine. I demurred because I just don’t see AAPL doubling in the next 90 days. No, I don’t expect this from my stock buys, but I would like this possibility. AAPL is a huge stock, it takes a lot of money to move it and it’s not exactly an undiscovered company. 903 funds own the stock. Where is the new money coming from? It will likely go higher; I just don’t think it will scream higher like other stocks could. Also, its break out was on above average volume, but not the 50% higher indicative of big money flowing. I would consider AAPL if other stocks weren’t really moving or showing signs of moving, hence it’s still on my watch list. I see utility in it.

LULU was a difficult one also. Young company, great growth, nice chart. But it broke out on average volume. None other than Bill O’Neil himself talked this stock up last week when I saw him speak. He seemed to like it (I have no idea if he personally owns it or not, he was simply talking it up), but volume didn’t come in until March 12 – 6 days after its break out, and up over 5% from the break out. Tough one. Volume hasn’t been seen since either. But it’s absolutely worth watching.

Meanwhile, the first list above has some stocks that either broke out on volume or are setting up rather nicely. And, a handful of them are young by stock market standards (these include AIXG, ATHR, CTRP, MELI and RUE). History shows stocks often make their big moves in the first 8 years of going public.

I continue to update my watch list. Every day I have looked for new ones, and as this rally progresses, I’m certain we’ll see a few more gems emerge.

The Past 7 Trading Days

I went silent for the past 7 trading days, largely because nothing was happening. A few stocks broke out and then consolidated their gains immediately. The market leaders were largely quiet, so there was not much to discuss.
And that’s good, because during that time, I had the opportunity to visit an E-Trade stock seminar held at the Renaissance Hotel in Hollywood last week. The big draw was Bill O’Neil.

O’Neil was the lead-off hitter of the event as he opened with a discussion on his CANSLIM approach to stocks. I have to say, it was pretty cool to see him in person for the first time after reading about him for years and using his approach successfully.

To see him still going at it himself, giving a morning lecture and selling his CANSLIM approach (and the IBD), was interesting. You’d think he’d be sipping exotic drinks on a tropical beach somewhere by now.

His routine was exactly the same as what I’ve heard on radio and online interviews. It’s his book boiled down to a 30 minute or so lecture, which is good: it’s consistent.

It was also interesting to see people huddle around him afterwards, asking for him to autograph a copy of his book – many of whom had never even read it.

I’ve known a lot of people who read the IBD regularly and have tried many approaches to buying stocks, but still haven’t grasped all that is involved in buying stocks on break outs. And this crowd demonstrated why. People don’t do their research. They don’t read books. They don’t have rules for buying and selling.

Ignore Noise: Look at Market Action

I’ve made it a habit to ignore the many pundits out there who throw their opinion around about where the market is going to go. Looking at the market’s recent action, what does it tell you? Stocks surged the past couple of days. Last Friday, which was a distribution day (lower in higher volume), came on quadruple witching.


This options-expiration-driven selling is not unusual and doesn’t upset the market’s general ascent. A down day here and there on volume is tolerable, so long as they don’t ad up to too many, too fast.

So when I happened to visit CNBC.com to check on a couple stocks’ EPS projections, I couldn’t help but notice a big scary article about how a few market pundits thought we were “due” for a 5% pullback or so.

The markets instead have promptly moved higher. And they are doing this despite some negative news out there. This is a classic sign of a healthy market. Healthy markets blow off the negative news and cruise higher on the good news. Bad markets do just the opposite.

As far as deciding when and how much to get in goes, let the market’s current action tell you and decide accordingly. All you can do is play probabilities because no one has a crystal ball – and this is true for anything in life: starting a business, meeting a girl/guy, planning a vacation or seeing a movie. You never know what will happen, but you can go into the venture knowing you did your homework and that you stand a good chance of seeing your decision work out positively.

I can tell you what I am doing: I’m getting in. I dipped my toe in the market with some GMCR, it worked out and I bought more. I also picked up some PCLN. These are two excellent stocks with knock-out fundamentals and terrific charts that tell us the story: big money is flowing into them.

Will they absolutely work out? Who knows. But I do know that given their fundamentals, their story and their technical action, they are in good company as they match up well with great stocks that have come before them. All I can do is play the probabilities, cut my losses if I’m wrong, and ride the winner(s) if I’m right.

Watch List Getting Stronger; No Real Casualties Either

The watch list I posted yesterday is holding strong with many of them quickly moving higher as if to challenge their recent highs. This is exactly what you want to see. Ideally, these stocks will rise on stronger volume, indicating the big players are snapping up shares.
Some stocks on the list are too extended. SXCI is one such stock.

Others are offering buying opportunities after having broken out. I like IBD’s method of allowing 5% room after a breakout to buy the stock – but try to buy as close to the buy point as possible. One stock that offered a chance to pick it up at a discount from its recent break out is VIT. It’s Chinese, so it has the tendency to zip one direction or the other in short order. It sits about 2.5% above its buy point after today’s pullback. However, it pulled back in heightened volume, which isn’t a positive occurrence, but then again, being a volatile Chinese stock, it could just as easily reverse and pounce higher. I’ve seen it happen many times before with Chinese stocks. Nonetheless, it’s a negative, and it only reinforces my caution since it broke out from a “V” shape base.

“V” shaped bases are less desirable because they potentially didn’t spend enough time at the consolidation’s bottom shaking weaker holders of the stock out. Consequently, when it breaks out at a higher level, it will have more of a tendency to peter out as these weak holders sell to get quick profits.

I continue to search for stocks to ad to my watch list. You never know when a stock you really like fails suddenly, leaving you in a position to recommit your capital to another top prospect.

Currently, I’m in GMCR and PCLN. Perhaps ATHR tomorrow? I liked today’s behavior, and I like the movement of the industry as a whole.

Stocks Under $10

A discussion with a friend of mine over the historic pricing of stocks prompted me to run a screen for quality stocks under $10. Usually, this is an oxymoron. I generally don’t buy stocks under $10 because they are usually garbage stocks. What I have noticed, however, is that some stocks I have bought out of consolidations rose up out of the single digit range to then form a basing pattern over $10.

After running my screen of the entire stock market, I came back with 6 stocks. I’m not going to list all of them because at least 4 of them I wouldn’t consider buying. But one did stand out as worth looking at.

Why bother? I have to admit, sometimes they shoot up quickly to over $10 where people with real money (hedge funds, mutual funds, insurance companies, etc.) start paying attention to them. But single-digit stocks tend to be highly speculative in nature, so you really have to do your homework.

The one stock I liked on the screen I ran is CHOP. I haven’t done a complete research package on it, but take a look for yourself. It’s a Chinese steel producer, so there is that potential Chinese octane. It has the highest possible 99 EPS rating and is showing strong EPS growth and strong recent sales growth.

Two major flaws I can find with it right off the bat are 1) it is estimated to make less money per share in 2010 than it did in 2009 and 2) only one major fund is listed as owning shares in it. This second aspect may have changed recently since it is a very new stock.

One thing I do like very much about stocks under $10 is that they often have small market capitalizations and fewer shares outstanding. This makes it vulnerable to price swings as it doesn’t take much money to push the price down – or up very quickly. This is a double-edged sword, however. At only $315Million market capitalization, it’s difficult for real stock market players (who control three out of four dollars invested) to push money into the stock. So for now, the smaller investor will have to do the heavy lifting if it’s to take off.

Off To the Races: My Quickly Evolving Watch List

After running several different screens for stocks and trolling for those I may have missed in screens, I’ve developed a lengthy watch list. The list does not include stocks that are extended from break outs, of which there are a few. I will later post a list of high quality stocks that are off to the races and should be followed in case they pull back to their 50 day moving average, which would offer a secondary buy point.


Many stocks have come out of the wood work with their recent earnings reports. Not too many high quality stocks were available only a few months ago. With the world economy improving, we’re seeing it in the bottom line of stock exchange listed stocks. One particular statistic that has been lacking of late is the recent sales growth number. So very few stocks exhibited 25% or higher sales growth in the most recent quarter, let alone in the past three quarters.

While still anemic, we are seeing this figure more often. In fact, all the stocks listed below except one have over 25% EPS and sales growth in the most recent quarter. The one exception is VIT, a Chinese tech outsourcing firm that grew its earnings only 21% last Q and sales 44%. However, it is projected to have 45% sales growth next Q and 40% EPS growth.

In healthy bull markets in stronger economic climates, I would certainly insist on seeing three quarters in a row of 25% EPS and sales growth year over year (and accelerating at that), but in the situation we find ourselves in, that’s a tall order. So, while I favor stocks that do have this quality, I will accept a stock that does not so long as the current quarter shows 25% EPS and sales growth or very close to it, and it must show projected EPS and sales growth over 25% for the next quarter. Typically, if I do jump in on a stock like this, I want it to have much higher than 25% growth ahead of it – I’d look first for those triple digit growers and favor them.

For now, the idea is I can accept that even some of the better companies hit a slow patch in the down economy, but the exceptional stocks should begin showing tremendous growth going forward. I favor growth: the higher the better.

Of the stocks listed below, I’ve done recent comprehensive research packages on ATHR, CTRP, FIRE, GMCR, LULU, PCLN and VIT. I focused in on these stocks because they were closer to breaking out than the others for the most part. I will next focus on MRVL, NTAP, POWI, RUE, SXCI and WCRX because they are the next closest (a couple have already broken out, so I’ll need to move fast). Keeping up with the market is a difficult challenge as it moves quickly, and I never like to buy a stock without fully investigating it.

The list below describes the type of consolidation the stocks are going through and the buy point (BP). I will only own a few stocks at a time, so whittling the choices down isn't always easy. At the moment I prefer GMCR, PCLN and ATHR, but have my doubts about ATHR, and am eyeing a few others like RUE, FIRE & DBRN.  I have brief notes on each for my quick reference, but my actual research packages are full of information and notes. The buy points of the stocks can easily change as the consolidation continues. For example, MRVL is in a cup formation, but it could also have formed a handle. If it shot above the high of the handle on over 50% volume, I’d consider buying it. The cup with handle is the most powerful formation.

I only buy a stock on a break out if the volume on the day of trading is 50% or higher than the average daily volume. LULU did not break out on 50% or higher volume, therefore, I did not pull the trigger on it. It could go on to form a high handle, but I’m doubting that at the moment.

My watch list (changes daily):
AAPL BP: $215.69 Broke Out Cup, near buy point

AMZN BP: $146.01 Basing - cup

ASIA BP: $32.55 Basing – cup. RS only 73, needs accumulation.

ATHR BP: $37.93 Broke Out Cup with high handle, near buy point. Keep an eye on: hovering for days around its buy point.

CTRP BP: $39.92 eased above, then reversed; improper action. Might remove from hot list.

DBRN BP: $26.81 Broke Out Cup, within 4% of BP.

FIRE BP: $28.10; could form handle with $27.29 BP

GMCR BP: $86.95 Broke Out Flat Base, near buy point

HITK BP: $29.99 Basing – cup. Needs accumulation; projections beyond next Q weak

LFT BP: $41.87 Basing – cup. RS line only 65 for now. Needs more accumulation. Chinese stock, smoother than many other Chinese stock charts out there.

LULU BP: $33.05 Eased above buy point on average volume; improper action. Will remove from watch list unless it starts forming high handle Wednesday.

MELI BP: $55.85 Basing – cup. Base needs a lot of work.

MRVL BP: $21.86 Basing – cup. Is that a handle forming? If so, BP: $20.93 and could blast off any day.

NTAP BP: $35.09 Basing – cup. RS only 76 and consolidation needs more accumulation.

PCLN BP: $235.90 Broke Out Cup with high handle, still near buy point. Keep eye on.

POWI BP: $37.25 Broke Out Cup. Still near BP, but only 70RS rating.

RUE BP: $31.62 Broke Out Double Bottom base. Big daily swings, only 58RS rating, quite low. Brand new stock.

SXCI BP: $56.30 Broke Out Cup all in one move. Over 6% extended, but pulled out past two days, may offer chance to buy with another dip.

VIT BP: $21.93 Broke Out “V” Shaped Cup. 6.7% over BP, but has gone up 12 days in a row: could easily pull back and offer chance to buy if desired. Chinese.

WCRX BP: $29.34 Basing – cup. Prefer seeing more accumulation.

Like A Popcorn Machine

Last post addressed looking for confirmation that the current rally is sustainable and worth jumping into. Last week’s action was unclear, until Friday when we saw definitive upward movement and more quality stocks breaking out. Today, while the market was quiet, we saw more top quality stocks break out – it’s like a popcorn machine, seeing these stocks pop on their daily charts.


This kind of action should enhearten you. When many stocks form consolidations then break out above resistance levels on significant volume, it’s indicative that big money is moving into stocks. You will notice in a good uptrend that stocks of all caliber break out and move higher. Stocks don’t all have to be top rated with over 25% EPS and sales growth to break out – when you see stocks with even just good fundamentals and slightly above average numbers breaking out, like 26% EPS growth and 15% sales growth in the most recent quarter, it’s a great sign.

The best stocks, those stocks that climb the highest the fastest, will generally sport the best numbers. So while above average stocks begin breaking out all over the place, I focus in on the truly exceptional. The more growth the stock has, the better. The more unique and new the stock’s product, the better. And if it’s a young stock with these qualities, all the better still.

A list of notable breakouts will be posted shortly.

The Good, The Bad & The Ugly

I just posted before this under “Market Hesitating” that you should wait until we see some clarity. One exceedingly helpful way of looking for more clues as to the nature and health, or lack thereof, of the market is to investigate how the market’s leaders are doing.


Many pundits out there (think CNBC) may consider the big, established, well-known industry behemoths such as McDonald’s, General Electric or Microsoft are the market leaders.

Not so. Those big stocks don’t have that much upside anymore because they’ve matured. Their big growth days are behind them and stability (and dividends) are in front of them (or are they? Big leaders are also prone to failure in down markets, if our recent bear market did not remind you of that already, but that’s for a different posting).

The real market leaders that you want to key in on are the usually younger companies that have tremendous growth potential in front of them. I’ll focus in on five market leaders to give us a representation of the nature of market we are seeing right now.

These stocks are, FFIV, PCLN, GMCR, ATHR & WDC. These stocks can be known as The Good, The Bad and The Ugly. FFIV, PCLN and GMCR are The Good, while ATHR and WDC represent The Bad and The Ugly, respectively.

Let’s start with The Good. FFIV is one of the better moving stocks right now. The last three days of technical action just give me butterflies. Up each day, finishing at the top of the range and on increasing volume each day. This stock would have been a little tough to spot if you did a search since the sales only show a 15% increase in the most recent quarter, but its ratings are terrific, its balance sheet sound and its projections show great growth ahead. It deserves more research – but it’s now extended almost 9% from it’s $56.29 buy point, too far up to chase unless you get lucky with a pull-back while the market is in a rally still.

PCLN and GMCR aren’t faring so well, but can still be considered among The Good since their action post break out is acceptable, if not great. Each stock has top-notch fundamentals and have led the market this year in technical action. PCLN is acting only slightly better. It broke out on good volume, but its next two days show hesitancy, just like the stock market as a whole. GMCR broke out on nice volume, but the next day’s action, as you can see on the chart, is a pull-back in softer trade. This is OK, but not great. You really want to see a nice follow-on day after a convincing break out.

ATHR, currently the role of The Bad, broke out on nice volume, but rose, then immediately fell the next day on big volume. From a technical point of view, the movement is an engulfing action as the day’s range is more than the break out day’s – this will give some technical chart readers a heart attack. If you are buying growth stocks on break outs, it’s not enough to panic, but it really calls for serious watching. It could reverse course, as I’ve certainly seen happen before, but for now, it’s bad action and really disappointing as it is a great stock in a hot, hot, hot industry group which has led this market (other stocks in the group include CREE, SNDK & VLTR).

WDC represents The Bad. It’s just bad because rather than rising in price and approaching its recent high, it is initiating a new leg down on heavy volume (just look at its weekly chart; bad down movement last week) and its relative strength line is sagging. It could eventually shape a double bottom base, but for now, the action is uninspiring.

The stocks mentioned here are a good snapshot of the market. They show some initial positive movement, then immediate stalling, just like the overall market. This process helps confirm what we see in the bigger picture and can help guide our decisions. For now, keep an eye out. Sure, some stocks like FFIV will succeed, but it looks like the odds are slightly against that kind of immediate strong action as they are few and far between even among stock market leaders. Things can change quickly, however, so keep developing your watch list as I am.

Market Hesitating: Direction Unclear

So far the market has lived up to expectations: indecisive. I noted when the market staged a follow-through as called by the Investor’s Business Daily that there were mixed signals. True to form, so far in the 3-day old rally, we don’t very well know if we are going up or down.

You can just see it on the chart I’ve posted here. Note Monday’s action is the beginning of the rally. See how the market has behaved the past two days. On the day after the rally began, Tuesday, the market went higher, then faded and closed near session lows. This wasn’t ideal. Then on Wednesday, the market moved higher again, only to end at the bottom of its range, actually down a tick on the NASDAQ.
This kind of action is clear hesitation, which is clearly nothing. That’s just the way you have to look at it. No real reason to commit a lot of capital right now, but no reason to be scared that the market will tank. It’s just indecisive. Therefore, stay focused and let the market indicate which way it will start going and act accordingly. I still have my test option in GMCR until I see more reason to ad to the position or liquidate.

Testing the Market: An Option in GMCR

I wanted to post a few charts online today, but the service I use for my premium charts is Daily Graphs, which is provided through Investor's Business Daily, wasn't working today. This happens sometimes, unfortunately. Their product is indispensible, and the only other charting service I use is a program provided by Tradeguider, which allows investors to draw any number of trend lines and other tools on their charts. Unfortunately I'm having a technological calamity at the moment, and my Tradeguider software is locked away in a hard drive for my main trading computer, which failed.

So we move on today without charts. Try trading without a working chart program - how did they ever do it in the old days? Jesse Livermore actually hired a staff who charted quotes from the ticker tape onto a chalk board. But I digress.

Even without my charting programs, I dipped my toe in the market by purchasing an option in GMCR that was in the money. GMCR broke out of a flat base today on very strong volume. Buying a small option rather than the actual stock is sometimes my way of testing the market to decide if it is worth jumping into.

Rather than tie up some money in a stock, an option allows for tremendous leverage, and depending on your tolerance, without offering up too much risk. So if you use a small (by your own standards) option order that you don’t mind losing a substantial amount of, but see strong potential for upside, the option allows you to have some meaningful skin in the game, which is important for keeping your interest and focus up.

IBD suggests as a way to test the market buying a smaller portion of your regular position in a stock, such as a half or third, and if it goes higher and the market proves itself over the next several days, buy more. One problem with this approach is that in reality good stocks often just gallop away from you and your decision time is a very tight window. Buying a stock and waiting to see if it goes higher can happen over a few hours rather than a few days. Buying an option at least allows decent profits if the stock does go higher quickly when you haven’t fully committed to the market.

Assuming this position is a winner, one can then keep an eye on other stocks that are looking ready to break higher to the path of least resistance. If it’s a real rally, there will be time to find some good stocks even though oftentimes many of the best lead the way from the outset.

Market Stages Follow Through: Rally Technically Under Way

What does that mean? It’s the Investor’s Business Daily (IBD) proprietary indicator that the market is technically in an uptrend now. My instincts were that the market has shown some positive action, but has also shown some negative action, equaling a cautious view.


That’s what the IBD states in their Big Picture column on their website tonight. They note, however, that high quality stocks have broken out in the past few days on good volume, ahead of the break out. I had noticed this as well (Priceline was indicated here, which went on to form a high handle that it broke out of Monday), and I know it is not unusual for some stocks to break out ahead of or right on the day of confirmation that the market is in a rally mode.

Other prognosticators and market pundits have their own models to determining when the market is generally predisposed to go higher or lower, but I find IBD’s is quite accurate and provides a good timing mechanism for buying break-out stocks.

One interesting note, all three major US indexes have formed a cup with handle pattern. The NASDAQ moved above it’s handle’s high on volume today, while the S&P 500 moved above in lower volume and the DJIA didn’t move above its. The indexes do not act the same way as individual stocks and it is not important that they exhibit the same chart patterns we look for in a stock, but it helps explain why we are seeing so many cup with handles in individual stocks. Many stocks follow the market’s direction and their charts often reflect the overall market.

I’d have to look this up, but I recall once the IBD showed the stock market indexes forming a cup with handle break out which kicked off a previous market years ago. Just something to think about.

At any rate, I often give a market rally time to prove itself unless I am really excited by the follow-through day and previous market action. I may wait a few days or a week or so. A couple times in the past, I’ve jumped right in. Right now I’m on the fence and would like to see some more positive action. However, if I see a stock that shows really nice movement, I may dip my toe in right away.