Caution Required

This week was a week of distribution after the recent breakout failed. Notice how the down days are accompanied by hi volume spikes. These are clearly distribution days and can be expected after the run up we have seen since the follow through day on September 1st. Of course the question now becomes are we at a market top and is it time to take some big profits? As I always remind you nobody knows and don’t let people fool you into thinking they do. All we can do is apply money management and risk control as always and the rest will take care of itself. We don’t need to guess what the market will do next since that would be a fool’s game.

The Dow Jones Index shown in the graph below courtesy of http://www.bigcharts.com/ clearly shows that we have had quite a run up with very little in the way of pull backs. The index has moved well above its 50 day moving average indicating it is oversold and needed to pull back at some stage. In a market trending up it is not unusual to trace back to the 50 day moving average before moving higher again. A touch of the 50 day moving average by the index often indicates a break down or bounce back is likely. Bad news is when the index cuts down through the moving average on volume, which we haven’t seen yet. In fact it has bounced off the moving average back up so all is not yet lost, we need to watch the action around these levels.

At this point we need to see the index pick up in volume as it moves higher. If it moves higher on low volume that is not good news and we can expect another test of the moving average.

Coming back to the money management and risk control now is not the time to be buying new stock positions until the trend has reaffirmed itself if indeed it does. The plan should be to start tightening up on your sell stops to lock in some of those profits and as always follow the progress of the individual stocks you own. If you have a stock that has consolidated sideways and breaks out on high volume again then by all means buy more of that stock but do not initiate new positions at this point in time on new companies.

Breakout – LULU EXLS LFT AFSI

This week was quite interesting with lots of news such as elections, the Federal Reserve meeting and employment numbers. Clearly any one of these items can move the stock market in a big way. The most interesting news of the week was the Federal Reserve stated intention to buy back yet more bonds. The idea behind this is to “artificially” force down interest rates to lower the value of the dollar and so improve our export market. This in turn would spur investment as our factories increase manufacturing and so start hiring people. It is already very clear with the low interest rates that almost all commodities are increasing in price and have been for some time. Currently these increased commodity prices are not being seen at the retail level but it is only a matter of time before it affects you and I. This bond purchase program is a wonderful idea to stave off deflation but is also a very risky idea on a number of fronts. The inflationary nature of this tactic can sometimes be hard to control. We have to hope that as inflation starts picking up the Fed will be able to control it. The Fed by creating yet another bubble (housing and now bonds) does not inspire people with confidence down the road. The other issue is that as the dollar starts sinking due to lower interest rates the other world currencies all things being equal will go up in value on a relative basis. This will not be welcomed by the foreign powers and could start a currency war.

However this is all in the future and we can speculate forever. As investors all we care about is price and volume. After 2-3 weeks of market consolidation the stock indexes have broken out into new high ground on increased volume suggesting accumulation. This bodes well for the stock market but of course does not guarantee a continued bull market. Clearly odds favor more accumulation of stocks going forward and until we see a downturn on increased volume then the order of the day is still to accumulate stock.

The chart below of Dow Jones Industrial Average shows quite nicely the recent breakout and accompanied high volume, courtesy of http://www.bigcharts.com/

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

LULU - $48.15

EXLS - $20.29

LFT - $41.84

AFSI - $16.50