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INM Jun '09 - Leadership Expansion Needed To Fuel A Healthy Summer Rally
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
CANSLIM.net


A perfect demonstration arguing that small cap stocks can deliver more volatility and potentially greater bang for investors' bucks is provided by a quick study of the percentage gains thus far in the major averages as they have rallied up from their Bear Market lows.  The Small Cap Russell 2000 Index's +46% rally certainly beats the blue chip Dow Jones Industrial Average's (DJIA) +31% rally!  The RUT fell -60% from Jul '07 to Mar '09, versus the DJIA falling -54% from Oct '07 to Mar '09. You should already know that small-cap stocks with exceptionally strong earnings growth are the primary focus of the investment system used by our team in Lighthouse Point. 

While the major averages spent the latter half of May consolidating near their respective 200-day moving average (DMA) lines, the technical challenge that lies immediately ahead is whether or not each of the major indices can muster the strength to rally above their respective 200 DMA lines. The Nasdaq Composite Index is the only one of the three major averages currently trading above that important long-term average. The S&P 500 Index is the next index that appears capable of rallying above its 200 DMA, meanwhile the DJIA has more work to do to get there.  As a general rule, at least 2 of the 3 major averages should be trading above their 200 DMA lines for the overall market (the M criteria) to be considered "healthy", and leadership (stocks making new highs) needs to expand.  Another important indicator for the market's health includes the Advance/Decline lines.  For the Nasdaq exchange and even more so for the NYSE, have been showing encouraging signs since mentioned in the April INM article (read here). 

Watching the major indices' action with respect to their 200 DMA lines has provided a most useful read on the market's health in the past. During the current decade's first Bear Market that trimmed about 50% off the benchmark S&P 500 Index, in mid-2001, military action against the Taliban was among the concerns on the landscape that made it difficult for investors to place great confidence in stocks. There was also an energy crisis effecting California, with power blackouts causing multi-billion dollar losses.  Technical glitches occasionally disrupted trading on the exchanges, including a week long shutdown of the markets following the tragic events of 9/11/01.  Comments from President Bush occasionally stirred buying interest in the equities market, such as when he urged Congress to pass an economic stimulus package.  And the Fed was in the middle of its most aggressive rate-cutting campaign ever, which caused the occasional "buying panic."  Regardless of the headlines, or the efforts of all the king's horses and all the king's men, there was not a very healthy market environment for investors to work with until much later on, when the major averages were finally making headway above their 200 DMA lines.

Ultimately, investors will need to muster a lot of courage to buy when the situations may merit doing so.  Companies must have the ability to perform in the earnings departments -where it counts the most!  Doubt still lingers as to whether any sustainable upward move and Bull Market is possible.  Until more leadership is evident, patience will be needed. Caution and discipline are also critical. Meanwhile, any subsequent distributional pressure showing up in the major indices may soon give rise to questions about the possibility of equities retesting further into territory near the lows set in March. 

While some top rated stocks have already managed to break out, many of the best potential leaders are still in the process of building out their bases. Over the next several weeks one might expect more definitive leadership to emerge. Much of the risk has been wrung out of the market through a horrible Bear Market, yet it is still very important to remain disciplined and be selective. Our aim is to be ready to grab the best stocks as they break out of sound bases, but before they are over-extended from support and due for pullbacks. Bargain hunting is discouraged, because history has shown that odds of success are greater when sticking with high-ranked leaders.  Rather than looking to pick up beaten down companies in the “damaged goods” category, keep a watch on companies that are able to sustain and extend their recent gains.

About Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net :
Kenneth J. Gruneisen has successfully completed the CAN SLIM® Certification Program.  Mr. Gruneisen became a Registered Representative in 1987 and his career includes experience offering personalized assistance to investors with more than a decade of experience as a Registered Principal managing a branch office.

The recommendations made by CAN SLIM® certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil & Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil & Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals.


Comments contained in the body of this report are technical opinions only and are not necessarily those of Gruneisen Growth Corp. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities.

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The recommendations made by CAN SLIM® Certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil + Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil + Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals.

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