Market Notes (11/29/09)

• Posted by Joe Fahmy
• on November 29th, 2009

It's important to keep an open mind when it comes to the market. It doesn't make sense to always be Bullish or Bearish because the market is not always in an uptrend or a downtrend. Just do your homework, look objectively at both the positive and negative signs, and invest accordingly. That being said, let’s review the market's recent action.

Positive signs: 1) Big caps are still holding up well. Many of them are building bases and pulling back on light volume. 2) The major indexes are still above their 50-day moving averages. 3) I'm noticing some "tightness" in the Weekly charts of many stocks. This is positive because it shows that institutions are not dumping shares of certain stocks. These stocks (mentioned below) are likely to continue higher if the market cooperates.

Negative signs: 1) Narrowing leadership. This can be seen in the recent divergence between the NASDAQ Composite and the Russell 2000. The NASDAQ is holding up well due to its over-weight in Big Cap technology, while the Russell is lagging due to many recent leaders breaking down. 2) Low volume. Since 11/3/09, the past 18 trading days have occurred on below-average volume, a sign that institutions are lacking conviction. 3) Dubai uncertainty. I'm guessing the markets will absorb the news over the weekend and we will find out soon enough if this is an isolated/containable problem, or if it will have widespread damage on the world markets.

Conclusion: It's definitely worth being cautious and keeping trading positions light until we see better health in the market. Big upside volume combined with more stocks breaking out of sound technical patterns would make me more confident. Any major breakdown in the Big Caps would make me more cautious. As always, I recommend keeping your winners and cutting your losers, thus ensuring a focused portfolio of your strongest performing stocks.

Here are the sectors I see holding up well:

1) Big Caps: $AAPL $PCLN $ISRG $GOOG $BIDU $AMZN. I believe these stocks will continue higher into year-end. Any major breakdown in these names would make me more cautious.

2) Gold: $GOLD $IAG $JAG $TCK and $GLD (the gold-ETF). As I mentioned in early October, Gold could break $1000/ounce and quickly run to $1100-1200. I am not only amazed by how quickly it made this run, but also by how well it is holding up. If you have a profit in some of these stocks, I recommend sitting tight and letting a possible bigger move to $1500 or higher play out. If you don't have any gold exposure, I would look to buy these stocks on pullbacks to logical support areas such as their 20-day or 10-week moving averages.

3) China Water/Infrastructure stocks: $RINO $TRIT $DGW. If you read my Relative Strength article (click here to read), you know that I love to look for stocks holding up well, especially on down market days. On Friday, all three of these stocks finished POSITIVE while the general market aggressively sold off. Technically, that is a strong sign. Fundamentally, China plans to more than double its spending on environmental protection in the five years from 2011-2015. They plan to invest $454 billion during this period, compared with the $205 billion allocated for the five years between 2006-2010. I expect this increase in spending to benefit these stocks and I look for continued announcements of government contracts to help their strong earnings and sales growth.

4) Miscellaneous ideas: $CAAS $ABV $IMA (all showing "three-weeks-tight" patterns), $WX (on Goldman's Conviction Buy List), $MELI $HGSI $CTRP $WCRX $CREE (all holding up well).

Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

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Tickers: AAPL, ABV, AMZN, BIDU, CAAS, CREE, CTRP, DGW, GLD, GOLD, GOOG, HGSI, IAG, IMA, IRSG, JAG, MELI, PCLN, RINO, TCK, TRIT, WCRX, WX

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