The major averages enjoyed their largest third quarter rally in over a decade as the massive worldwide stimulus packages from 2008 took effect in full force. The current rally was confirmed with a follow-through day on March 12, 2009, and is 30 weeks old. This rally has been one of the strongest 6-month sprints in history! The rally helped the major averages rebound above important multi-year downward trendlines (resistance) late last quarter and sent a slew of stocks higher. 

Since early March, the small cap Russell 2000 Index has emerged as the standout winner, surging a whopping +80%! The tech-heavy Nasdaq Composite is a close second, having vaulted +69%. Meanwhile, the S&P 500 Index has raced +59% higher, and the Dow Jones Industrial Average rose +50%. It is important to note that the vast majority of stocks that helped the major averages rally were beaten down low-ranked stocks that bounced from egregiously oversold levels. Stocks such as Citigroup (C) which bounced from $0.97 to $5.43, or Bank of America (BAC) which rose from $2.53 to $18.25 a share, helped send the major averages soaring. Normally, one would like to see a fresh batch of high-ranked leadership soar, and in the latter half of the third quarter we have seen more of what we like. Recently, there have been a few high-ranked stocks that triggered technical buy signals and have went on to enjoy large gains. The vast majority of these leaders are domiciled in China or have introduced an in-demand new product or service like Green Mountain Coffee (GMCR). The major averages are currently trading above their long multi-year downward trendlines which means the short, intermediate and long-term outlook for the major averages is bullish.

Political Data: B+

The Obama administration has been in power for the past 9 months, trying to tackle strong issues on both the foreign and domestic front. The market languished during Obama's first three months in power but bottomed in March 2009 and rallied smartly since. This is a very strong vote of confidence for Obama's administration and suggests Wall Street is happy with his performance so far. The primary catalyst for this massive rally is the strong coordinated global economic stimulus package that injected hundreds of billions of dollars into the system. As long as the market and the economy continue to react positively to the package and Obama's administration, investors have confidence the current rally will be able to continue. Obama has tackled a wide array of issues since taking office. He has pushed forward a large economic plan, pulled troops from Iraq, visited the Middle East, addressed Iran's election and nuclear initiatives, and addressed his first real geopolitical threat from Kim Jong II, the leader of North Korea. Looking forward we are beginning to see the long-term ramifications of the current stimulus package vis-a-vis the weakening US dollar. However, so far, inflation remains in check which is a net positive for this rally. The US dollar fell sharply over the past quarter, which sent stocks and a slew of commodities higher.

Earnings Season: Coming Up

Earnings season will officially begin in early October when Alcoa (AA) will be the first company in the Dow Jones Industrial Average to release third-quarter earnings. As always, expect that earnings seasons will play a pivotal role in the near term action of for the major averages. So far, earnings have been better-than-expected across the board but remain weak. The fact that they exceeded the Street's estimates were enough to send stocks higher. Therefore, it will be very important to closely watch your stocks and see how they react to their earnings. That said, analysts expect earnings in the S&P 500 to fall -22% on average in the third quarter before rebounding +63% in the final three months of the year, according to the latest data from Bloomberg.com. The benchmark S&P 500 enjoyed its largest quarterly gain since 1998 and the average companies' price-earnings ratio surged to the highest level since 2004. 

Economic Data: B

The theme for the first three quarters of 2009 is that "not so bad" is the new "good." The major averages continue to rally in the face of questionable economic data. At the beginning of September, the Labor Department announced that US employers cut a lower-than-expected -216,000 jobs, which was better than the Street's forecast for a decline of -276,000. The report showed that the unemployment rate jumped to +9.7%. So far, the recession has claimed over +6 million jobs which makes it the largest decline of any recession going back to the Great Depression. Instead of falling, the market actually rallied since then, which clearly shows that investors believe that real GDP will be positive in the latter half of the year and the unemployment rate will decline.

Market Action (Price, Volume & Leadership): A-

The underlying health of the major averages has improved markedly in recent months and remains strong. High quality leadership has begun to emerge as this rally continues to push higher regardless of any external event. The only concern at this point is that high quality leadership remains relatively light. The vast majority of the recent move was dominated by low-ranked stocks bouncing from egregiously oversold levels. History shows us that healthy bull markets begin when a new batch of high quality leaders break out powerfully from sound bases. Currently, leadership is beginning to expand, as evidenced by the IBD 100 Index (a great proxy for leading stocks) beginning to out pace the major averages in recent weeks.

The US dollar began a new leg lower last quarter which sent stocks, commodities and bonds higher. While hope spread that the brunt of the recession is over, crude oil stalled after trading above $75 a barrel last month.  However, other commodities, mainly gold, fared well. Gold topped the psychologically important $1,000 an ounce level which has served as formidable resistance over the past 18 months. Finally, after remaining perched below that level, Gold blasted above that threshold before pulling back and closing below that important level. In today's world of 24 hour news and instant information, it is imperative to follow markets outside of US equities for a complete investment outlook.

The debate rages on whether or not this is a new bull market or a bear market rally. We do not care about the labels and shall let other people spend their time and energy arguing over the semantics. Instead of arguing we shall focus on what we do best: protecting and growing our portfolios during all market conditions. There is no question that the market is very strong right now which means there is money to be made on the long side. How long that lasts is anyone's guess but, again, we are not here to guess. Instead, we shall react intelligently to how the market unfolds. If you see leading stocks break out of sound bases then one would be wise to err on the bullish side and be a buyer with a close protective stop slightly below their purchase price. Conversely, if leadership does not emerge, do not force any trades. Remaining patient and flexible has served us extremely well over the years. As always, we will continue to objectively analyze price and volume to better understand the market's underlying health.  Never argue with the tape, and always keep your losses small.

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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.

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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.

Color Codes Explained :
Y - Yellow - Better candidates highlighted by our staff of experts.
G - Green - Previously featured in past reports as yellow but may no longer be buyable under the guidelines.
W - White designates that the stock has been dropped over the course of the month.  Refer to the associated notes for that stock for further explanation.

Quote details are snapshots of price/volume detail captured at the time the note was taken. 

Symbol/Exchange Company Name Industry Group	Last	Chg.	Vol % DAV	Date  Featured	Price Featured	Latest Pivot Point Featured
						Latest Max Buy Price
ARO - NYSE Aeropostale Inc RETAIL - Apparel Stores	$43.47	-0.10	2,057,263 76% DAV 2,708,300	8/21/2009 (Date Featured)	$39.21 (Price Featured)	PP = $38.84
						MB = $40.78
Most Recent Note - 9/30/2009 4:34:03 PM G - Small loss today on light volume for this high-ranked leader in the Retail - Clothing/shoe group. It is quietly consolidating, but extended from a sound base andnot buyable under the investment system guidelines now. Support to watch is at prior highs in the $38 area. It was featured in yellow in the 8/21/09 Mid-Day BreakOuts Report (read here). >>> The latest Featured Stock Update with an annotated graph appeared on 9/18/2009. click here.
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ARST - NASDAQ Arcsight Inc COMPUTER SOFTWARE & SERVICES - Business Software & Services	$24.07	+0.12	480,751 67% DAV 720,700	9/1/2009 (Date Featured)	$19.91 (Price Featured)	PP = $20.90
						MB = $21.95
Most Recent Note - 9/30/2009 4:35:42 PM G - Gain today on light volume for a new highclose, getting further extended from its latest sound base. Prior chart highs in the $20 area are important support to watch on pullbacks. >>> The latest Featured Stock Update with an annotated graph appeared on 9/17/2009. click here.
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BIDU - NASDAQ Baidu.Com Inc Ads INTERNET - Internet Information Providers	$391.05	-3.37	1,809,242 104% DAV 1,738,700	9/8/2009 (Date Featured)	$351.80 (Price Featured)	PP = $368.59
						MB = $387.02
Most Recent Note - 9/30/2009 4:39:12 PM G -Consolidating in a tight trading range (percentage-wise) for the past couple of weeks, mostly trading above its "max buy" level, with occasional intra-day dips below it. BIDU was featured in yellow in the 9/08/09 Mid-Day BreakOuts Report (read here). >>> The latest Featured Stock Update with an annotated graph appeared on 9/21/2009. click here.
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CACC - NASDAQ Credit Acceptance Corp FINANCIAL SERVICES - Credit Services	$32.19	-0.68	105,714 264% DAV 40,000	9/29/2009 (Date Featured)	$33.48 (Price Featured)	PP = $32.60
						MB = $34.23
Most Recent Note - 9/30/2009 5:14:45 PM Y - Gapped down for a loss on heavier volume, encountering some distributional pressure today. It closedback under its pivot point, but still above August'shigh closes.It gapped on the 2 prior sessions and triggering a technical buy signal as it spiked to a new 52-week high with more than 2 times average volume. It rose from a 6-week base after consolidating and finding support near its 50 DMA line. The Finance - Consumer/Commercial Loans firm has maintained a great track record of annual and quarterly sales revenues and earnings increases. It was featured on 9/29/09 in yellow in the mid-day report (read here). >>> The latest Featured Stock Update with an annotated graph appeared on 9/29/2009. click here.
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CPLA - NASDAQ Capella Education Co DIVERSIFIED SERVICES - Education and Training Services	$60.52	-1.67	166,299 N/A	7/9/2009 (Date Featured)	$59.69 (Price Featured)	PP = $62.06
						MB = $65.16
Most Recent Note - 9/14/2009 It is still just -8% from its 52-week high, but further deterioration below its 50 DMA line today, its general lack of progress, and its waning Relative Strength rank (now down to 46) are increasing concerns. It also closed below its 2/17/09 high close, fully negating its July breakout, so it will be dropped from the Featured Stocks list tonight. Its small supply of only 13.9 million shares in the float could contribute to greater price volatility in the event of institutional accumulation or distribution. The number of top-rated funds owning an interest rose from 91 in Sept '08, to 138 as of June '09, which is reassuring with respect to the I criteria. It has a very good earnings history that satisfies the C & A criteria. >>> The latest Featured Stock Update with an annotated graph appeared on 9/3/2009. click here.
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CRM - NYSE Salesforce.com Inc INTERNET - Internet Software & Services	$56.93	-0.23	1,772,343 86% DAV 2,057,400	8/16/2009 (Date Featured)	$47.12 (Price Featured)	PP = $45.59
						MB = $47.87
Most Recent Note - 9/30/2009 5:18:48 PM G -Consolidating in a tight range in recent weeks just above prior highs in the $55 area, an intial support level well above additional support at its upward trendline and 50 DMA line. It is extended from a sound base now andnot buyable under the guidelines. >>> The latest Featured Stock Update with an annotated graph appeared on 9/15/2009. click here.
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EBIX - NASDAQ Ebix Inc COMPUTER SOFTWARE & SERVICES - Business Software & Services	$55.36	+1.35	404,810 270% DAV 150,000	8/28/2009 (Date Featured)	$45.86 (Price Featured)	PP = $45.35
						MB = $47.62
Most Recent Note - 9/30/2009 5:20:14 PM G - Hit a new all-time high today as itposted a3rd consecutive big gains on heavy volume. It has not formed a new sound base, andyet it has overcome heavy distributional pressure which recently led to a pullback near support at early-August chart highs and its 50 DMA line in the $45 area. >>> The latest Featured Stock Update with an annotated graph appeared on 9/24/2009. click here.
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GMCR - NASDAQ Green Mountain Coffee Roasters FOOD & BEVERAGE - Processed & Packaged Goods	$73.84	+0.95	1,250,869 83% DAV 1,507,200	7/17/2009 (Date Featured)	$60.15 (Price Featured)	PP = $63.79
						MB = $66.98
Most Recent Note - 9/30/2009 5:23:07 PM G - Small gaintoday on light volume for a new high close.Its 9/28/09 gain with 2 times average volumehelped it clear a cup-with-handle type base (during which it completed an additional share offering on 8/07/09). As previously noted, "Its 3-day pullback of about -9% tested support near its 50 DMA, and although the latest action is bullish, a new pivot point and max buy level were not cited because guidelines call for a cup-with-handle pattern to form over at least 8 weeks, the handle usually lasts at least a week and drifts downward by 10-15% in normal markets. Also, the Relative Strength line should lead or at least closely follow a stock's price into new high ground, but in this case its RS line is still under its July highs." >>> The latest Featured Stock Update with an annotated graph appeared on 9/23/2009. click here.
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LFT - NYSE Longtop Financl Tech Ads COMPUTER SOFTWARE & SERVICES - Business Software & Services	$24.96	+0.79	616,641 N/A	8/10/2009 (Date Featured)	$31.49 (Price Featured)	PP = $30.57
						MB = $32.10
Most Recent Note - 9/2/2009 Closed near its session high today with a gain on lighter than average volume. On 8/31/09 it was noted when "violating a multi-month upward trendline connecting February, July, and August chart lows, raising more serious concerns and triggering additional technical sell signals." Volume behind recent gains has been very light since previously noted "substantial losses on heavy volume indicative of distributional pressure." It would need to rally back above its 50 DMA and recent chart highs for its outlook to improve. Based on weak action it will be dropped from the Featured Stocks list tonight. >>> The latest Featured Stock Update with an annotated graph appeared on 8/25/2009. click here.
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NTES - NASDAQ Netease.com Inc INTERNET - Internet Information Providers	$45.68	+0.30	1,302,956 63% DAV 2,072,300	9/23/2009 (Date Featured)	$47.11 (Price Featured)	PP = $47.04
						MB = $49.39
Most Recent Note - 9/30/2009 5:29:48 PM G- Holding its groundwith light volume gainsthis week after testing important support is at its 50 DMA line and upward trendline. Deterioration below those levels would raise more serious concerns and trigger technical sell signals. Color code is changed to green based onpromptly negatingits latest breakout and then trading more than -7% belowits pivot point. This may also be considered a riskier late-stage base. >>> The latest Featured Stock Update with an annotated graph appeared on 9/25/2009. click here.
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NVEC - NASDAQ Nve Corp ELECTRONICS - Semiconductor - Specialized	$53.16	-0.28	58,373 62% DAV 94,300	8/26/2009 (Date Featured)	$55.32 (Price Featured)	PP = $57.60
						MB = $60.48
Most Recent Note - 9/30/2009 5:33:00 PM G - Loss again today on lighter volume, but slumping further below its 50 DMA line which hasnow acted as a resistance level. Despite some encouraging signs of support arriving after recent distributional pressure, at best it needs more time to form a new sound base. >>> The latest Featured Stock Update with an annotated graph appeared on 9/30/2009. click here.
C A N S L I M | StockTalk | News | Chart | SEC View all notes Alert me of new notes CANSLIM.net Company Profile ZACKS
PEGA - NASDAQ Pegasystems Inc COMPUTER SOFTWARE & SERVICES - Business Software & Services	$34.53	-0.20	213,662 55% DAV 391,100	9/9/2009 (Date Featured)	$31.14 (Price Featured)	PP = $33.35
						MB = $35.02
Most Recent Note - 9/30/2009 5:42:28 PM Y - Small loss today on lighter volume, still perched nearall-time highs. Since 9/16/09 volume has been below average, or average, behind recent gains and losses for this high-ranked Computer Software - Financial firm. An upward trendline connecting its July-September chart lows may be considered an initial support level above its 50 DMA line. >>> The latest Featured Stock Update with an annotated graph appeared on 9/22/2009. click here.
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SWI - NYSE Solarwinds Inc COMPUTER SOFTWARE & SERVICES - Application Software	$23.29	+0.87	313,335 67% DAV 466,800	(Date Featured)	$0.00 (Price Featured)	PP = $0.00
						MB = $0.00
Most Recent Note - 9/18/2009 1:21:14 PM Gains with above average volume this week helped it rally to new highs from a choppy 5-week base above its 50 DMA line. Up considerably from its $13 IPO on 5/20/09. It has earned high ranks based on its solid earnings history and great relative strength. Patience may allow shares to be accumulated on pullbacks toward prior chart highs without chasing the stock more than +5% above its $21.62 high from 8/04/09. >>> The latest Featured Stock Update with an annotated graph appeared on 9/30/2009. click here.
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WNS - NYSE W N S Holdings Ltd Ads DIVERSIFIED SERVICES - Business/Management Services	$15.98	-0.02	104,720 208% DAV 50,300	9/28/2009 (Date Featured)	$15.28 (Price Featured)	PP = $16.10
						MB = $16.91
Most Recent Note - 9/30/2009 5:43:40 PM Y - Traded up as high as $16.50for the second day in a row, yet itreversed into the red. On the prior session it encountered resistance in the $16 area and closed just under its pivot point while still posting a considerable gain for a new 52-week high and new high close with volume 11 times its daily average volume. It formed an orderly flat base for at least 5-weeks, and it was featured in yellow in the 9/28/09 mid-day report (read here). Quarterly earnings have been above the +25% guideline and its annual earnings history has been great, satisfying the C & A criteria. However, sales revenues growth has decelerated. >>> The latest Featured Stock Update with an annotated graph appeared on 9/28/2009. click here.
C A N S L I M | StockTalk | News | Chart | SEC View all notes Alert me of new notes CANSLIM.net Company Profile ZACKS

Two of the more common questions we receive at CANSLIM.net from new members is “How do I best use your service?” and “How do I use the information during times like we are experiencing now?”. A quick study of the past market performance and the advice given to our CANSLIM.net members may best help to explain this. As has been expressed many times, “One either needs to study history or relive it.” This is one of the strengths of the investment system we support, as its principals have been developed by studying past winners (and losers) to understand what attributes to look for in stocks (and the market) in making individual investment decisions.

These past several quarters have proven to be a tough market for investors, with a lot of negative financial news along with an extreme level of volatility experienced in the markets. CANSLIM.net members who read the reports and correctly utilized the information presented were able to avert much of the negative market results as CANSLIM.net had been warning its members for most of the downturn on the “Negative Bias” to the market (the M criteria). There are a number of specific instances that can be cited, including the June, 9, 2008 commentary pointing out the failure of the Nasdaq Composite Index as it undercut its May 23rd low, ending its March-May rally attempt last year (read here). Regular readers were aware of the market's technical signals suggesting a downward trending market. Then, commentaries suggested that investors seek safety in cash as they locked in gains and limited losses while they were small. Prior to that, earlier reports had advised extreme caution in late 2007, and throughout January of 2008. Even with the recent upturn, CANSLIM.net recommended exercising great caution as members begin re-entering the market. While some may feel concern about “missing the opportunity”, the system emphasizes retaining your working capital during tough market times to be able to take full advantage when the market conditions are more positive.

I point this out as evidence why each CANSLIM.net member should monitor the daily reports in order to keep updated on the market conditions and how they impact current market opportunities. We provide reports and summaries, but each investor has to make their own intelligent investment decisions as to when to enter and exit the market and which stocks to buy and hold when they are in the market. We provide information and a reading of what the markets are telling us concerning market conditions and opportunities to consider when market conditions warrant consideration of the current leading issues. In markets like we have and are still experiencing, our goal at CANSLIM.net is to help you protect your capital so that you are positioned to enter the market when the market conditions are conducive to investing your hard-earned capital profitably.

The Q3 CANSLIM.net Webcast was the most successful ever! We had great attendance for this Webcast and Adam Sarhan, Contributing Writer for CANSLIM.net and Vice President of Investments for Source Capital did an outstanding of capturing recent market activity in a way to make viewers understand “What Happened” and how this might project into the future for investors that utilize the investment system we support. I would suggest you look for the announcement of the Q4, 2009 Webcast and sign up at the special pricing offered members as soon as it becomes available as another means to keep up-to-date with the markets.

Every “Bear Market” in the past has been followed by great opportunities to invest and recognize significant gains. The question is “When” and “Which” stocks to buy. In order to ensure you are positioned to take advantage when the market confirms a follow through day, CANSLIM.net will continue to research and report on the market and advise members when the market has confirmed ideal buying opportunities. We look forward to helping members pinpoint new buy candidates as the upturn continues.