On Demand

Stocks: Pick Your Spots Don’t Chase


The market continues to act just fine. Don't let the naysayers get you down.
Do major averages look extended and overbought? Absolutely, but with everyone seemingly calling for a market pullback at this point, stocks could keep right on going.

It's hard to believe, but the Dow could drop 558 points from Thursday's close to its 50-day simple moving average (SMA) and it would only be a pullback of 4% or so -- fairly tame considering the blue-chip index is up 11% since hitting a low of 12,471 in mid-November. A pullback of 3.7% for the S&P 500 would take it down to its 50-day line. For the Nasdaq Composite, only 3%.

It would take a daunting headline or two for major averages to come down to their respective 50-day lines but it's certainly not out of the question. And it wouldn't be a bad thing, either, because it would give leading stocks a chance to catch their breath after big run-ups. A market pullback in generally light volume would be more preferable to one in heavy volume.

Indeed, extended stocks outnumber those still within buying range by a wide margin. There's nothing wrong with being on the offensive during a market uptrend, but be careful not to force the issue now by buying too late.

Many high-quality growth names have moved a lot already. The market served up a bunch of technical breakouts on January 2 when indices surged in heavy volume. Instead of looking for stocks poised to break out from consolidation areas, focus on stocks showing bullish price and volume action post-breakout. Names like Celgene (NYSE: CELG) and HCA Holdings (NYSE: HCA) continue to show great action after recent breakouts. Both continue to trade tightly, a sign of strength and support.

The financials still look good here, particularly asset managers like Blackrock (NYSE: BLK) and Raymond James Financial (NYSE: RJF). Goldman Sachs (NYSE: GS) and J.P. Morgan Chase (NYSE: JPM) continue to show relative strength, but the common bond among all four stocks is that they're too far extended past proper buy points.

Don't chase them here. A better strategy would be to wait for a market pullback. When it happens, each stock will likely pay a visit to its 10-week moving average. During market uptrends, the strongest stocks tend to find support at their 10-week lines.

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EanMendelsohn: Great article... I totally agree and expect there to be a pull-back at some point. The question is WHEN. But as you pointed out, it wouldn't be a bad thing. These stocks need to catch their breath! Thanks for the helpful info. I'll look into the 10-week moving averages.

About the Author

Ken Shreve got his start in the financial markets with Investor’s Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its Web site Investors.com.  He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. Shreve continues to provide market commentary on national radio and has appeared on CNBC.

He now writes Ultimate Growth Stocks, a weekly newsletter at TFNN and hosts Breakout Investing, Monday through Friday from 3-4 PT. Learn more at www.kenshreve.com.

Ken has also contributed to TheStreet, Realmoney.com and Realmoneypro.com and has been a regular contributor to Jim Cramer’s “Off the Charts” segment on Mad Money.

For more information about his growth stock newsletter and model portfolio, e-mail him at ken.shreve@yahoo.com

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