espite the powerful gains in the major averages last week many investors are still on the sidelines and Moneyshow's Tom Aspray has four strong sector stocks that are ripe for new investment as we head into 2013.
The stock market may face its first real test of the New Year this week as the short-term overbought technical readings and general skepticism over last week's rally makes a correction likely.
The powerful readings from the weekly NYSE A/D line that I discussed in last week's Scaling the Wall of Worry indicates that the intermediate trend for the stock market is clearly positive. Therefore, stocks have the potential to rally quite a bit higher in the first quarter of 2013.
The market tracking ETFs like the Spyder Trust (SPY) were higher in December as SPY gained almost 3%, but some sectors did much better with the Select Sector SPDR Financial (XLF) up over 8%. Many stocks in the financial sector did even better as Bank of America (BAC) was up well over 22%.
Concentrating on the market leading sectors and more importantly the stocks in these sectors should allow you to be well-positioned for a first quarter rally in stocks. These four stocks have significant upside potential and should be bought on a pullback.
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Chart Analysis: Roper Industries Inc. (ROP) is a $11.3 billion machinery company that is part of the industrial sector. The stock broke through weekly resistance in the $113.25-$113.42 area last week.
- The long-term weekly uptrend, line a, was tested Monday as the low was just above $108.
- The weekly relative performance has shown a pattern of higher highs since it bottomed in the latter part of 2011.
- The RS line has turned up from its rising WMA after making new highs in November.
- The weekly OBV broke through resistance, line c, last summer which was a very positive sign.
- The OBV has been leading prices higher for the past few weeks.
- There is near-term support at $112.60-$113.20 with much stronger in the $110-$111 area.
- The currently quarterly pivot is at $109.25.
- The move through resistance at line g, completes of the continuation pattern with the next upside targets in the $95-$97 area.
- The relative performance analysis also shows a major breakout to new highs as resistance at line e, was overcome.
- The uptrend in the RS (line f) is consistent with a long term outperforming stock as it has gained almost 150% more that the Spyder Trust (SPY) since 2009.
- The on-balance-volume moved through major resistance, line g, in December and has turned up sharply.
- The pullback in late December was on low volume.
- There is initial support now at $85.50 with stronger in the $84 -$84.50 area.
- KSU is trading well above the quarterly pivot at $109.25, which is consistent with a positive outlook for the first quarter.
Pall Corp. (PLL) is a $6.9 billion manufacturer of a wide range of filtration equipment and is part of the industrial sector. The close last week was just above the quarterly pivot at $61.32.
- The weekly chart shows a broad continuation pattern, lines a and b.
- A close above $66.20 gives a 127.2% Fibonacci target at $68.15 with further targets from the flag formation in the $74-76 area.
- The weekly relative performance is rising but still below its WMA and resistance at line c. The daily RS line is above its WMA.
- The weekly on-balance volume (OBV) made higher highs last fall, line d, and is now testing its WMA.
- The daily OBV shows a bullish pattern and has confirmed the upside breakout.
- There is good support now in the $60.50-$61 area and then at $59.50.
- The longer-term uptrend, line b, is now at $55.43.
- As I noted at the time, the weekly chart had completed of a long-term reverse head and shoulder bottom formation.
- GVA has been trading above the quarterly pivot at $31.91 with the breakout level at $30.99.
- The price action was confirmed by the relative performance as it broke through major resistance, line g, at the end of November.
- The volume pattern was also consistent with a reverse H&S bottom formation and the OBV shows a breakout above resistance at line h.
- The OBV shows a solid uptrend, line I, and has turned up sharply.
- There is initial support now at $32.80-$33.40 with stronger in the $31.40-$32 area.
What it Means: The futures are down slightly in early trading and there is no important economic data out today, though earnings start after the close on Tuesday.
The first sign of a deeper market correction will be signaled by a drop in the Spyder Trust (SPY) below $144.70 and 1450 in the March S&P futures.
With the industrials just emerging last month as a market leading sector, these stocks should lead the market higher in the first quarter.
How to Profit: For Roper Industries Inc. (ROP), go 50% long at $113.68 and 50% long at $111.82, with a stop at $107.28 (risk of approx. 4.8%).
For Kansas City Southern (KSU), go 50% long at $85.18 and 50% long at $84.32 with a stop at $79.43 (risk of approx. 4.8%).
For Pall Corp. (PLL) , go 50% long at $61.62 and 50% long at $60.66, with a stop at $57.48 (risk of approx. 6.0%).
For Granite Construction Inc. (GVA), go 50% long at $33.54 and 50% long at $32.06, with a stop at $30.83 (risk of approx. 6%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.