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INM Oct '09 - An Encouraging Shift, And Why We Always Care About Fundamentals
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
CANSLIM.net


The high-ranked indexes have recently done some catching up by outperforming the major averages, which is viewed as a welcome improvement in market conditions (the M criteria) that bodes well.  Last month's INM discussed the evidence that the newspaper's high-ranked stock indexes were lagging relative to the commonly watched major indices such as the Dow Jones Industrial Average and Nasdaq Composite Index.  Since then, there has been a positive shift in the market with respect to the area where we put our focus on finding great growth stocks.  

Investors still need to be disciplined and selective about their buy decisions, and they must continue staying tuned to the market. Disciplined investors always have their defensive game plan ready to be implemented in the event of a more substantial market correction.  We know that eventually any rally will falter, but there is no point in guessing when that might happen.  We only need to recognize if or when it does happen, and then have the appropriate sell reflexes. 

Odds have improved for fans of this investment system in recent weeks.  Providing fact-based proof for that point, below are the annotated charts which illustrate it for you.  Pay particular notice to the recent improvement in the Relative Strength line for the small-cap and mid-cap indices, meanwhile the big-caps have seen their relative strength starting to sink.

PICTURED 1: The Russell 2000 Index has seen its relative strength recently improving.  It has some room to rally, however the upward trendline connecting its multi-month chart highs defines a chart resistance level which may limit the upside in any subsequent rally efforts.  Meanwhile, the upward trendline drawn connecting its prior lows only connects 2 points.  In the event of any future correction below its 50-day moving average line (the red line), perhaps it will come into play and establish a third point, making a more definitive "trend".

PICTURED: The S&P 400 Mid-Cap Index also has seen its relative strength recently improving.  But there has been a surge of distribution in the past couple of weeks, followed by the latest gains with less volume than we saw during the streak of gains after Labor Day that had helped its RS line improve.  In the event of more distributional action leading to any future 50 DMA line violation, the upward trendline connecting just two prior chart lows helps define the chart support level which may become a firmly established "trend".

  

PICTURED 3: The Dow Jones Industrial Average has seen its relative strength recently slipping, instead of playing catch up with the small caps. An upward trendline connecting several of its multi-month chart highs clearly defines the chart resistance level which may limit the upside for the stodgy blue chip index in subsequent rally efforts.

WHY WE CARE ABOUT THE FUNDAMENTALS
I had not looked at Neutral Tandem Inc (TNDM) in a several weeks since it was dropped, but when noticing that the former leader has technically broken down below its 200 DMA line, I pointed out this week to one of my associates that its fundamentals (earnings and sales) still appear to be strong.  Of course, we have studied many prior examples where the weak technical action in a stock foreshadowed deteriorating fundamentals which came to light later. My point was that TNDM looked like possibly another one of those examples in the making. 

My friend then began to vent, "Fundamentals don't mean anything in this market. Honestly, the stocks that had the biggest percentage gains have been the companies with the worst fundamentals, and the companies that sport strong fundamentals have been getting whacked or barely making progress."

I have heard those kinds of remarks from others, and I have seen it before.  But it is an anomaly that will not last forever. If we truly have a sustained rally due to liquidity (i.e. policymakers' stimulus), and powerful forces are driving the world markets higher, it could be expected that all stocks "good" and "bad" fundamentally will generally rise.  Those with superior fundamentals and technicals historically have the best odds of producing above average gains.  So, I see one course of action that we can never go too "wrong" with, and that is to stay strict by the rules.

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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