Where We Stand Today

On October 28th the market logged a follow-through day which indicates a potential change in direction. Is this the eagerly awaited bottom or just another head fake? An important secondary, but often ignored, indicator for a change in market direction is that leading stocks start breaking out of sound bases. Right now only a handful of leading stocks have managed to breakout and many of their group mates have struggled which means caution is still advised.

The medical sector, especially home health care, is trying to lead the way but only a few stocks have managed to make any progress while their group mates struggle. Consider the following:

1. Almost Family (AFAM) scored a strong break out on October 30th and has gained nearly 20% in that period. Contrast this with group mate Amedisys (AMED) whose stock is struggling to build the right side an erratic loose base. Normally strong group moves yield a vibrant crop of breakouts. Think oil stocks this past spring and solars a year earlier.
2. Biotech stocks, lead by Emergent Biosolutions (EBS), is another source of potential leaders but group mate Celgene (CELG) has its own challenges. Celgene’s 50 day moving average recently crossed under its 200 day moving average which is a particularly bearish signal.

What actionable information does this mean right now for investors? First and foremost, the dearth of breakouts and the subsequent struggles of their group mates mean go slow and exercise patience. If you find a stock you like make a small purchase and only add follow-on buys if the price advances. Cut your losses quickly if the stock declines more than 7-8% from its purchase price. We are still in a bear market so treat follow through days and stocks as guilty until proven innocent.