There have been a lot of stocks in 2012 caught up in some group rotation (esp. technology) or simply buoyed by the big early move in January and sort of hanging around. For most of 2012 – until the past few weeks – all corrections have been 3 days or less, not allowing us to see where the real strength is. These are the names a technician wants to focus on, go forward, especially if the market shall be more bumpier than it was the first 8-10 weeks of the year.
I like to make lists of certain strength characteristics and this far into into a correction (roughly 5% on the major indexes, with some individual names falling that much today alone) some good characteristics would be stocks that have held both their 20 day daily moving average AND their 10 week moving average. Even better if earnings are already behind them, so no "bipolar action" risk in the near term. Even (even!) better if the fundamentals also line up. I am excluding the slow growth "hideout" stocks – i.e. cigarettes, consumers staples… as those are natural places of strength during a correction.
Please note – this doesn't mean other stocks won't jump higher when the next turn in the market upward happens – but those names will have fallen farther and if you buy them too early in the correction you could be facing serious losses. Or if nothing else be catching a falling knife that triggers a stop loss much quicker than a stronger name. Hence in this type of tougher market we'd prefer to find names with growth characteristics but some extra margin of safety, combined into one.
Just throwing out a handful names impressing me in that regard (also accounting for good liquidity i.e. daily volume, and not tiny small caps) we have:
- Sherwin Williams (SHW)
- O'Reilly Automotive (ORLY)
- Avalon Bay (AVB)
- Penske Automotive (PAG)
- Intuitive Surgical (ISRG)
- Herbalife (HLF)
- Tractor Supply (TSCO)
- Dollar Tree Stores (DLTR)
- Polaris (PII)
Again this doesn't mean they won't get caught up in a market swoon (i.e. "waterfall" selling when everything gets crushed one morning), or are names a speculator would want to buy today if one believes the correction has farther to go – but days like this are excellent times to review your screens and make lists of names that might be of interest when the bullets stop raining down.
p.s. Our last leadership group of Chipotle, Apple, and Priceline have broken their 20 day moving averages and are currently visiting or on their way to visiting their 50 day moving averages. That's not to say they won't be leaders on the next move up, but these were so extended from any serious support that when the market turned there were huge areas on their charts with no support.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog