Twitter has been all a-twitter about when this four- month rally will find an end. The wall of worry heats up while bullishness also gains steam. Both sentiments will eventually have to reconcile. However, except in the case of a market-wide panic, there are always stocks trending or forming new bases while others grow fatigued.
What can new breakouts tell us about the health of the current cycle?
CORRECTIONS
During corrections, there are some stocks that may have not taken part in the previous uptrend, but are now quietly building bases in preparation for the next.
By October, just as the fall correction began to build momentum, a few names started to breakout. Three that we covered on our blog and tweets were PHM, DF and YHOO. New breakouts often fail during a market-wide correction, and PHM and DF failed in their initial attempts to breakout. However, YHOO became an early leader, and, as the market gained confidence, more breakouts continued and were successful. By December, those breaking out, e.g. the autos, semi-conductors and finance, gained ground, fueling the strength of the uptrend.
AS THE UPTREND STALLS
Conversely, fresh breakouts and those stocks trying to re-build from stalling uptrends offer real-time clues as to the health of a rally. Just as new breakouts begin to emerge in stages during the beginning of an uptrend and a market follow-thru, fresh breakouts fail in similar stages as an uptrend weakens. In the fall, one by one, leaders like GOOG and APPL began to break down while many new breakouts, like PHM and DF (mentioned above) failed at early attempts of their breakouts.
WHO HAS BROKEN OUT?
CSCO recently broke out of a fresh multi-week flat base and above its 2012 high last week. HPQ, which broke out of a first base at the New Year, is just hitting a stride after recently recovering its 10/50 weekly moving average. AMGN is also a relatively fresh breakout, after breaking out from a months-long base.
KEY TAKEAWAY
A sign that this uptrend is near an end will be when new breakouts fail to gain momentum and instead breakdown.
In the meantime, paying attention to the behavior of trending stocks or new breakouts is one way to block out the daily noise that prevents us from seeing what the market is doing now.
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