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.