John V.'s  Instablog

Today the stock market had what is called a "follow-thru day" which interprets the price and volume action of the main Indexes to conclude that big Institutional Investors are now looking to accumulate shares rather than distribute (sell) them.
 

There has been and probably will continue to be more bad news regarding Greece, Spain, etc. in the future, but what one needs to do is look at investors are actually doing and not thinking about what might happen.  This is especially relevant in light of all the bad economic news coming out of Europe.
 

Markets could always fall apart as nothing is certain, so you shouldn't stop being cautious with your trades nor should you think that your stock is going to skyrocket higher tomorrow.  Instead, look for stocks that meet your criteria and see if big Institutional Investors are buying as shown by big-volume up days.
 

In down markets strong stocks don't go up much as instead they tend to hang in there and go sideways, while weak stocks are the ones that go down a lot.  This is flipped around completely in good markets as strong stocks tend to go up during those periods while weak stocks tend to go sideways.  Strong stocks that are moving up on big institutional demand are the best chances for making money on the long side and surprise, many are on my watch-list too.  Yay for me!
 

Below is a chart of the Nasdaq so you can see the big volume that traded today.  Sometimes that's all you need to know...simple really is better (grin).

This week's results from my Super Stock Screener.  This screen is fairly wide (EPS>=45%, Sales>=25%, ROE>=10, RS>=88, Price within 20% of High) and I do have tighter screens as well.  Screening is an excellent starting point for finding winning stocks.

My thoughts:  As expected the screening results for this week showed a drop in the number of stocks from 56 down to 52.  This decrease occurs as some stocks trade below either the required percentage requirements from their peaks, the required Relative Strength (RS) rating, or some other criteria of the screen that is not being met.

Fewer stocks in the screening results means that stocks are weakening and thus thus possibly the market is weakening as well, but there is a positive outcome as well as fewer stocks on the list makes it easier to spot future winners.

The stocks that manage to stay in the screening results are usually stronger performers overall, and the history of the screen indicates that, in general, almost every big-winning stock has been listed in the results during their runs.  This is why screening is the backbone of my system and why I consider it to be such a valuable tool for finding winning stocks.


Some of the names that dropped off had potential such as Alexion Pharmaceuticals (NASDAQ: ALXN) and Illumina (NASDAQ: ILMN).  Seaspan Corporation (NYSE: SSW) fell off as well and I find this ironic because a bullish article just came out on them in Investors Business Daily.  Not the best timing as the stock appears to be weakening.


Only two new stocks appeared this week and both have been on before so we'll see if they stick around this time.  They are Veriphone Systems (NYSE: PAY) and Titan Machinery (NASDAQ: TITN), and both have interesting stories going for them so we'll see what happens.

A shrinking list of names on the screen usually means that the stocks in the market are getting weaker so that is a signal to be on your guard.  There may be bad times ahead and the list may shrink further but only time will tell if that happens.  It will definitely pay to be cautious going forward.

As always this is not a buy list but rather a starting point for doing more research.  Stocks that are new are underlined and have an Asterisk (*) next to their company name.

Stock that fell off the Super Stock Screener results from May 21st are below:

Note: to keep the screen results manageable I removed Industry Groups that I either do not believe in (Financial) or are so Commodity that I have no idea how to pick one from another (Oil&Gas).

Today long-time leader Lululemon Athletica (NASDAQ: LULU) triggered a sell signal per my rules as the stock broke below it's 50-Day Moving Average on heavy sell-volume.

LULU has been a leader in the market since breaking out in September of 2010, where it began a long upwards move which began at $40 per share and over an eight-month run moved to a recent high of $102 which is an excellent performance.

One of my 'Sell' rules is to sell a stock if it goes below the 50-Day Average 'on heavy volume'.  The reason is because big institutions have a tendency to support stocks at this area, and if institutions aren't going to buy the stock at that point or price-level then why should I want to buy it either?  Heavy down-volume tells me that big investors are looking to get out of the stock and not into it.

It is considered normal behavior for big winning stocks to test the 50-Day Moving Average at least a couple of times during an uptrend, and what you want to see happen is high-volume support for the stock at that level.  Soon after this, the stock should push back above the 50-day and resume it's upward trend.  Many times one will sell thinking a run is over only to buy back-in, but this usually can't be helped unless you have a higher level of conviction in the future of the company.  In other cases the stock never does come back so it is always a bit tricky when this situation occurs.

For LULU, the stock had been continuously above its 50-Day Moving Average for the last eight months which reflects solid institutional support/demand for the stock.  It came close to breaking below the line in May but managed to hold on and move to new highs afterwards.  Thus I think it is very significant that the stock has broken what couldn't be broken over the past eight months.  Something has changed.

LULU could make a comeback and move higher, but until it actually does this I think it is best to heed the Sell-rule and watch from the sidelines.  Another long-time leader moves off of my lists until big institutions prove that they still want it.  See the chart for more comments as well: