New leaders emerge, old leaders fade

S&P500 daily @ 2:24 EDT

MARKET SENTIMENT

Stocks are holding around the 1400 level and volume continues to be below average.  But while many will say low volume shows a lack of buying by institutional investors, the thing to remember is buying and selling is symmetrical, ie for every buyer you must have a seller.  Using that logic, we can flip the previous statement on its head and say that the low volume also indicates not many institutions are interested in selling at these levels either.  The lack of selling at these high levels means holders of stocks are not cashing in.  The low volume also shows bears and swing trades have exhausted themselves because they have nothing left to sell and are unable to lean on the market.  So while many are leery of the light volume, I think it is very bullish.

MARKET BEHAVIOR

This tight trade after a rally is uncharacteristic of previous pullbacks that corrected rather abruptly once they ran out of buyers.  The 1400 price level is holding up well even when buying is slowing down, as indicated by low volume.  Again another change in character from this summer’s pattern.  All this indicates to me we are leaving the volatile swing trading and moving on to something else, so trading strategies that worked over the summer won’t work going into the fall.

TRADING OPPORTUNITIES

The market is holding up nicely and everything is indicating it is safe to buy high quality CAN SLIM stocks breaking out of proper bases.  There are several breakouts in today’s Stocks on the Move section of Investors.com.  Many of these are smaller and unfamiliar names.  Always do your background research before blindly buying a breakout just because it has a high composite rating from IBD.

MNST daily @ 2:26 EDT

INDIVIDUAL STOCKS

While we are seeing a lot of new names pop up in IBD’s screens, we are also seeing some of the old favorites stumble.  PCLN yesterday, MNST today, LULU this summer.  These old leaders are showing cracks and for many former leaders, these cracks will turn fatal.  We need to be looking out for the next leaders, not chasing the old ones.  Remember WON’s quote, “All stocks are bad unless they go up.”  Don’t let a cheap price or an attractive pullback tempt you into jumping in an old and tired leader.  IBD’s research show the average leaders correct 73% after their run is over, meaning there is a lot more room on the downside no matter how cheap they seem.  A few of these leaders will recover, but wait for the company to form a new base and have a valid breakout before buying.  As I said yesterday, a pullback because of a downgrade can bounce back pretty quickly, but slowing fundamentals is far more terminal for a high P/E stock.

Stay safe