I ask once again: where are the leading stocks to fuel this rally? By leading stocks I mean the stocks of young, innovative companies that are growing as though there’s no tomorrow and that are breaking out of sound bases which scream like a banshee: “Buy me!” These are the stocks Jim Roppel calls “basketballs under water,” stocks that have been pressured by a down market but that will, once the pressure abates, be the first to take off and, ultimately, lead the market higher. They simply don’t exist right now. Sure, there are a few decent-looking charts out there but nothing to write home about. Ideally, when the news is this bad and negativity abounds, you’d like to see more than just a handful of CANSLIM-quality stocks setting up (what’s obvious rarely works on Wall Street). It would be nice to see, say, twenty or so showing a little promise, as it’s a clue that the market really might be gearing up for something. It may well shape up, don’t get me wrong, yet as it stands now this follow-through has yet to impress me, what with the lack of fear, the eternal, almost neurotic talk of a bottom and the fact that stocks in the bottom 20% of industry groups are so far leading the way.

And this notion that the market is “cheap” is laughable. Whether it’s Warren Buffet, Chairman Bernanke or President Obama pushing this moronic idea, it holds no water with me. There is a rather storied history of our “best and brightest” being somewhat less than accurate in these matters, if not downright dishonest: http://www.gold-eagle.com/editorials_01/seymour062001.html. If this is your view, however, please do me a favor: compare the present P/E of the S&P 500 to its P/E at past bottoms, such as in ‘82, ‘74, ’49 and ’32. Those P/E’s were all in the single digits. And, yes, I’m more than aware of the arguments against applying trough P/E multiples to trough earnings. My point is merely this: just because the S&P’s P/E is below the historical average doesn’t mean it’s at “market bottom” levels. Do you believe then that earnings have hit bottom and will improve from here on out? If so, Doctor Johnson’s quote regarding remarriage comes to mind: “…the triumph of hope over experience.”

Second guess the market at your peril.

So should we neglect our watchlists? Not on your life. The current environment can no doubt improve. You’ll want to be prepared should it do so. However, as a trader you want to focus on what is probable, not on what is merely possible. Play the odds. To jump into stocks here just because there’s been a follow-through day and you’re itching to get long betrays an almost carnival immaturity. At least start small. If this follow-through actually pans out, there will be plenty of time to get very long. If CANSLIM-quality stocks finally begin to shape up and breakout, there will be ample opportunity to make some money, even if you exercise some caution now and miss out on a few.

Just about the best example of this is AMGN back in 1990. When William J. O’Neil started buying Amgen in November of that year, at around fifty dollars a share, it was the established leader in the Medical-Biomed/Biotech industry, which at the time was a leading industry in the market. By the time he sold the last of his shares in early 1992, AMGN had climbed over 600%. The funny thing is O’Neil would tell you that it was a far from perfectly executed trade. This is because he missed the double bottom pattern that it broke out of earlier in the year, back in March; however, as the stock ramped up to the tune of about 70% in just eight months, he continued to watch it. He was willing to wait for it to set up again. Just how many would have had the same discipline?

So as the market rallies, don’t delude yourself into thinking that you have to start plunging into stocks here or run the risk of getting left behind. That’s traditional Wall Street’s big fib. If this rally is for real (and that’s a big if) it will offer plenty of opportunities to get long leading stocks. Even if you miss a breakout, don’t sweat it. Either the stock will base and give you another shot or it won’t. If it’s the monster stock that you suspect it to be and the market is really ready to run then it will set up again at some point. Just don’t jump the gun. Garner some of that O’Neil discipline and be smart.

amgn1.jpg

That double bottom O’Neil missed, by the way, it had a couple of interesting characteristics. First, one could have gotten an early start in the stock as something rare occurred: a plus-three buy point. On 2/8 AMGN shot through $26.54 (3 points above the low of the first bottom) on big volume. That would have given an investor a nice cushion right away. Plus-threes don’t happen all that often, but when they do the nimble investor would be wise to capitalize on it. The second rarity was that a short handle formed, offering investors another alternate buy point to the middle of the “W.” Once again, AMGN passed the pivot ($27.25, the high of the handle plus ten cents) on an impressive surge in volume on 2/15, closing at the highs of the session. It ultimately rose above the buy point in the middle of the “W” ($27.97) on another surge in volume on 2/21.

amgn2.jpg

(Something else of note: after that 2/15 breakout, the stock tested though never traded below the high of the handle: $27.15. Incredibly, it touched that exact price four times over the span of five sessions yet held it. That’s what a clue that the big boys are at work looks like.)

John Ward

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