from: Hornstein Capital Partners
date: Sun, Apr 11, 2010 at 8:12 PM
subject: April 11, 2010 Market Update
Last time I wrote, I discussed how the market began a new uptrend on February 11, and had a secondary follow-through day on March 1. I concluded my thoughts by stating:
In summation, keep focusing on the leading stocks of this rally (AAPL, BIDU, CREE, GMCR, PCLN, AMZN, ISRG, PRGO, CLF, NETL, DECK, AKAM) which, for the most part, are the same leaders I continually outlined in 2009. Remember that most growth leaders have a life cycle of 18-24 months before they top, so it is not surprising that the same growth leaders that emerged in March 2009 continue to lead only one year later. Until these stocks show severe distribution on their weekly charts, or enter into climatic runs, the market likely will remain in bull form.
In the past two weeks, the bull market has gained further strength. While the pundits and pontificating talking heads keep clamoring about impending pullbacks, the market has continued to truck higher, with pullbacks lasting a day or two at best. The leading stocks I noted above have continued to lead as AAPL, BIDU, CREE, PCLN, DECK, and AMZN, have all pushed into new closing high ground for the rally. Other leading stocks have progressed as well such as NFLX, CMG, and WYNN. The weekly charts of these leaders show extremely constructive action as they have pulled back (if at all), in a nice tight constructive fashion with low volume, and ramped further on heavy volume. Some of these stocks have shown extreme accumulative behavior, running up for five, six, seven, or more weeks in a row. When a leading stock runs up for this many weeks in a row, it is a tell-tale sign of institutions clamoring to get stock in that leader. Therefore, when we see a bunch of these leaders I outlined exhibiting this behavior, we know with certainty that there is an ample amount of institutional accumulation in the broad market.
I generally do not bother with various popular measures of market demand out there -- such as MACDs, A-D lines, or various oscillators measuring overbought or oversold levels, or any other measure of supply and demand. I have tried most everything, and have concluded that keeping it simple and focusing on mere price and volume of the major indices and leading stocks is the best and most effective method of making money in the stock market. As William O'Neil states in HOW TO MAKE MONEY IN STOCKS:
"At best, the advance-decline line is a secondary indicator of limited value. If you hear commentators or TV market strategists extolling its virtues bullishly or bearishly, they probably haven't done their homework. No secondary measurements can be as accurate as the major market indexes, so you don't want to get confused and overemphasize the vast array of other technical measures that most people use, usually with lackluster results .... Needless to say, I rarely pay attention to overbought/oversold indicators. What you learn from years of experience is usually more important than the opinions and theories of experts using their many different favorite indicators."
However, all bull markets will exhibit corrective behavior from time to time. As I have constantly underscored, trying to guess or time such a pullback is sheer nonsense, and will cause one to lose positioning in a leading stock only to see it go higher. In fact, I tend to ignore any short-term corrective work the market exhibits, unless a plethora of distribution days show up and leading stocks show clear unequivocal topping signs.
I would suggest that given the strength of leaders, and the fact that we are less than two months removed from the follow-through day, that any short-term 3-5 percent corrections that could occur would simply be a buying opportunity in any leaders as they pull back into support.
With earnings season kicking off this week, we now watch the reaction of the leaders I outlined to their earnings reports for further clues of the rally's duration. One stock that reports this week that I would like to discuss is ISRG.
For almost ten months, I have noted in my reports how this stock has exhibited all the characteristics of a market leader. On July 23, 2009, ISRG gapped up out of a base on earnings (with heavy volume), and this began a major bull move for the stock. Those that bought this leader at that time could have easily held this stock throughout the past nine months -- even through the early 2010 correction -- as the stock never broke its ten-week moving average.
This week the stock broke that line (for one single day), as it dropped below there on heavy volume. Contrary to popular opinion, a break of a ten-week moving average is not an automatic sell signal (if only the market were that easy!) Studies of market leaders of yesteryear tell us that leading stocks can live under their ten-week moving averages for 3-4 weeks and this can act as a mere shakeout of the week hands. Leader BIDU exemplifies this principle, as the stock never lived below its ten-week moving average for more than three weeks since the bull market began. It had some hard shakes under that line from time to time, but always managed to regain that important line after quickly dropping below it from time to time.
Those that bought ISRG correctly months ago could have easily withstood the downside action for a few days to see how the stock finished the week. Indeed, the stock reversed on volume later in the week, and formed an extremely bullish shakeout reversal bar on its weekly chart, which also finished a pattern of three out of four weeks tight. This stock looks ready to take off for another big move, and earnings this Thursday will dictate whether it does or not. Anything can and will happen on earnings, but the action at this point is extremely bullish. A gap down on volume on earnings would obviously change that, but until that happens the stock remains a market leader and looks ready to move higher once again.
Finally, for those that missed it, here is the link to my appearance last Thursday on the Investor's Edge Radio Show.
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