Earnings were the focus this past month with companies hitting their profit targets largely by cost-cutting, and very few of them saying that they can see evidence of a serious turnaround. Realize that a lot of companies have met or have beaten REDUCED estimates. The key is whether companies are offering upbeat expectations for upcoming quarters. Until we get some sort of upside surprise like that, the markets may not advance much.

In the eventuality that our markets are headed for their October lows, one area that could stand to do even better would be gold stocks. With the price of gold bullion recently in the $370 per ounce range, the earnings outlook for gold producers is likely to remain favorable. When gold prices were under $300/oz. or lower, the cost of extracting it didn’t leave much if any room for profit. Even if gold prices were to drop now, or simply hold steady, the mining companies are in a better position for profits than they have seen in decades.

Gold companies don’t have a place in the traditional "growth" sector, but are obviously benefiting from a weaker US dollar and global tensions, specifically the outlook for war. It is not necessarily a safe assumption that upon seeing the visuals of bombs flying on television the prices of gold and oil will begin a sustained and major advance. Historically, in fact, shortly after the military action begins there has been tremendous strength and confidence in America. These two areas, which have usually risen a long way (just as they have in today’s scenario) have had a history of peaking out right as the US starts taking care of business. So, from an investment standpoint, more stalling by Iraq and delayed action from the UN will keep the cloud of uncertainty hanging over us, and that could continue to help the defensive areas.

Oversold conditions as well as a positive divergence finally halted the market's slide.

Here is what I wrote on Monday:

Very simply, the Nasdaq did not confirm the S&P and Dow's breaking of support. Look at this chart and notice how it held the 1320 support to the penny.

Now what? I am not expecting much. First off, the major indices are now in an area of congestion that could be tough to get through. Secondly, I see this rally/bounce as nothing more than a working off of near-term oversold conditions. Markets can't go straight down forever and the markets were heading straight down over an eight-day period. Third, sentiment remains worrisome for the bullish crowd. On the first bounce day, put/call figures went from over 1.0 down to .62...meaning complacency continues to show up on any rally. These are not the makings of a market that can go too far.

But I did not want to leave you with only negatives today. One of my main technical tools is knowing that it is easiest to isolate strength when the market is at its weakest. The following are a bunch of charts where the stocks refuse to buckle under very bad conditions. You may want to keep these names on a watchlist, as they could lead if the market decides to ever have a good leg up.

The inventor of the Barometer is Yale Hirsch who publishes the Stock Trader's Almanac. Here's what he says in the Almanac: "Since 1937 the January Barometer has a perfect record predicting market direction in odd-numbered years. Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, or a flat market". Unfortunately, this is a an odd year. We're holding out hope for a flat year, which is the outlook we predicted at the start of the year. We don't mean to make too much of this one indicator. But anything with that kind of track record can't be ignored. The three major errors took place in 1966, 1968, and 1982. The first two may have been effected by the Vietnam war. All three mistakes, however, were in even years.

CHART 1

NO JANUARY EFFECT THIS YEAR... The January Effect calls for smallcap stocks to outperform large stocks at the start of the new year. That often continues well into the spring. The next chart shows the S&P 600 Small Cap Index from the start of last year. The green line along the bottom plots its relative strength against the S&P 500 Large Cap Index. The rising relative strength line at the start of last year (first green area) is what's supposed to happen -- as small caps outperform large caps. That effect can often last into the spring as it did last year. The January Effect often starts as early as November, which it seemed to be doing this year. {See second green area]. However, it disappeared during January. Chart 2 provides a closer look at this year's action since October. Although small caps have been doing a little better during the second half of January, they underperformed for the entire month. [Since the January Effect didn't work this year, maybe the January Barometer won't either].

CHART 2

CHART 3

MONEY MANAGEMENT UPDATE... We invite you read through the January 31, 2003 MurphyMorris Decision Model Update. That can be viewed by clicking on the Money Management tab at the upper right of the MM home page. The update shows the status of some of the technical indicators that we use in making money management decisions. Chart 1 shows that the NYSE is still outperforming the Nasdaq market -- on a relative strength basis. NYSE dominance over the Nasdaq is usually associated with increased market volatility. That's also when most "bad" market events happen. The update also shows deterioration in a couple of our market breadth indicators. To quote from the update: "Overall, equity funds are not performing well, and we continue to recommend only a limited exposure...market risk remains high and any investments should have a stop-loss exit for protection. Balance safety with return and do not allow for large losses." That pretty much sums up our views here as well.

O’Neil followers know that you can do everything else right, but if the dreaded M (market) is not headed in the right direction it is difficult to make any headway. Some of you may be trying to work too hard at this, while not stopping to realize often enough that there is a time to participate and a time to observe.

As I have previously stated in this column, sometimes the best way to get ahead is to simply avoid being set back. There is something to be said for sitting in the money market earning a measly rate while waiting for a better environment. At least then you are out of harm’s way, preserving your capital. When it is time to get off the bench and back into the game, I believe it behooves all of us to understand the CANSLIM method and to be ready to plunge into the strongest leaders headfirst.

Yes, you could also argue that OTHER STRATEGIES HAVE outperformed CANSLIM during much of this bear market. Rather than changing strategies (which is always an option) I plan on sticking to what has enabled me to do very well over the past 11 years since I first became an advocate of O’Neil’s system. What inspires me to stay patient and not abandon this approach? Having seen times (not only in 1999) where within a few months folks were able to double, triple or more dramatically multiply their accounts by concentrating their investments in just a few good CANSLIM stocks at the right time.

I am convinced that we must all remain patient and cautiously optimistic. Even if you have to wait until 2004 or longer, wouldn’t it still be worth it to have your account suddenly multiply several-fold in a few months? That is entirely possible when you are using this approach. So, until the environment is right, do not whittle away too much of your asset base by trying to force profits from an uncooperative market.

By now you have probably come to realize that ALL stocks are risky! And whether they are "cheap" or "expensive" stocks, you always need to have a selling discipline that will limit your losses. It is a better time to be building your watch list, and sorting out some of the better purchase candidates (like those you’ll see featured in the "Stocks to Watch in This New Market" section.

Tactics for Entering a Position
If you intend to implement investing tactics based on CANSLIM, you normally should choose to purchase stocks on strength, such as when a stock gives a "buy signal" by breaking out of a base on heavy volume. Or you might choose to buy an ideal candidate after you’ve seen a pullback and successful test of prior support. Sometimes I’ll buy a smaller position when there is a chance to buy a recent breakout on a normal dip or pullback. Then I can keep a tight stop-loss on it, and if it eventually takes off again to close above its previous high closes, I might buy more shares and add to the position that is working out as I had anticipated. It is more dangerous to buy an extended breakout and then add more to average your cost down when the stock is not working out as you had anticipated. When you’ve missed a great breakout, keep watching it, and think about buying a little when it dips back to a logical support level on lighter volume.

Studying up on technical analysis, recognizing double and triple bottoms, and knowing the signs of a key trend reversal are very important trading skills. Knowledge in these matters will pay off for you even more so when the overwhelming current in the market is finally working in your favor. Don’t get wrapped up in the technical analysis and forget about the equally important fundamentals either.

NBTY, Inc.
One of very few ideas I have found to be compelling enough to buy and hang onto in the past month is NBTY, Inc. This leading maker and marketer of nutritional supplements such as vitamins and minerals was featured last month. While it made the break above $19 we were looking for, it has since suffered a couple of declines on high volume. One of those came after the company announced a 41% earnings increase in the latest quarter versus the year earlier period. It has thus far made a respectable stand at its 50-day moving average line, but a break below it could lead to a retest of support at $16.50 (where it closed on 12/09/02).

Taking clues from the overall market action, capital preservation is Rule #1 right now, and it may not be worth putting up with any further deterioration and holding on. For now this is one I am watching with great concern. In reality, if it will ultimately work out to be the big double or triple all investors hope for, NBTY will first need to break above the $20 high where it previously ran into resistance. I may end up selling, only to buy it back once there is again proof that heavy buying demand is coming from institutional investors. Small losses are something an investor should always be willing to take, and missing out on a couple of dollars in the context of a major winner won’t hurt. Arguing with the market, however, can be very painful.

Considering the conditions in the overall market, we were impressed with a couple of standouts CANSLIM.net News mentioned in the past year:

Immucor Inc. (Nasdaq-BLUD) Featured January 2002 at $7.98 (split adjusted), by January 2003 it reached $25.91, a 224% increase.

Neoware Systems Inc. (Nasdaq-NWRE) Featured July 2002 at $11.34 and by the end of August it reached $19.50, a 72% increase. It retested prior resistance (new support) near $11 in October and the rallied to $22 by the end of November.

Both of the stocks mentioned above broke out of a base on much larger than average volume, a key signal institutional buying was driving them up. Watching the "I" made it easy for CANSLIM followers to know it was wise to enter a position.

What really is institutional sponsorship? It is when the shares of a company’s stock are owned by institutions like Mutual Funds, Pension Funds, Insurance Companies, Hedge Funds, Bank Trust Departments, and State, Charitable and Educational Institutions.

According to William J. O’Neil’s book "How To Make Money In Stocks", a stock should have at least ten Institutional Sponsors. Remember, it takes a lot of buying to facilitate a respectable amount of price appreciation.

It is important to know how many institutions hold positions in a company’s stock and if the number of institutions purchasing the stock now and in recent quarters is increasing. Keep in mind that the quality and good performance record of the institutional portfolio managers who are buying a company’s stock is also very important. Since large funds that take new positions will usually add to that same position, they often provide support by buying more shares when the stock’s price dips near its 50-day moving average or a prior support level. Thus, they are the critical factor behind a normal, steady increase in many companies’ share prices.

So how does one find stocks with increasing quality institutional sponsorship? IBD rates stocks that have quality institutional sponsors from A (best) to E (worst). Selecting stocks with Sponsorship Ratings of "A" will increase your chances of landing a stock that is poised to increase in price substantially due to the buying power of Institutional Investors.

To put it in simple terms think about a stock being like a pool full of water, with the water level being the price of the stock. Big Elephants represent Institutional Investors with lots of money. If Elephants start jumping into the pool (or buying the stock) the water level (the price of that stock) will go up very quickly! But if the Elephants start getting out of that pool (or selling the stock), then the water level (price of the stock) will go down very quickly. Look at what happened to a lot of the tech stocks in 2000 and 2001. When you study the charts of these companies you will notice that the large declines in price were accompanied by an immense amount of volume, which led to the harsh breaking of upward trend lines and key moving averages. Companies like Cisco, America Online, Yahoo and others had an excessive amount of Institutional Sponsorship (over owned) and that made them easy targets for a collapse. Investors saw their fortunes dwindle when they did not sell while the big Institutions were selling. The Big Elephants were tired of hanging out in those pools and decided to jump out (fund managers were moving into cash or looking for other pools.) The main reason why investors lost money is because they did not focus on the volume while their stock’s price was declining, gapping down, and breaking important points on their charts. They didn’t recognize or understand the importance of the distributional action (selling) by the large Institutions.

While searching for stocks to purchase for your portfolio it is important to understand that without the buying power of quality Institutional Investors a stock is not likely to significantly appreciate in price and be fruitful for you.

2. Always have a Stop Loss Order in place.

3. Know when you are going to make your exit before you enter the trade. Keep a journal of all your trades and the reason(s) for buying and selling. Review it frequently.

4. Don't try to hit home runs. Take the singles and try to steal a base now and then. The doubles and homers will come on their own. Recognize them when they do come.

5. Make your own decisions. Stay out of chat rooms and message boards; the people there know less than you do.

6. Never trade with money you can't afford to lose; wait until your finances improve. In the meantime, study and learn as much as you can. This is a lifelong process.

7. Never trade on Margin. Never! It only benefits the brokers.

8. Do not over-trade. Four or five stocks at a time is all you can expect to maintain.

9. Make sure you trade only stocks with average Volume in excess of 175,000 shares per day.

10. Finally, and most important, keep your trading in perspective with the rest of your life. Don't let it come between you and those you love.

If you’ve been buying stocks appearing in the CANSLIM.net BreakOuts Report, you are likely to be feeling very frustrated. This is completely understandable, as market conditions have not been cooperative.

Still, I could refer to stocks like Rollins Inc (NYSE-ROL $29.29) that first appeared in the BreakOuts Report on 10/18/02 at $20.91, which now stands 40% higher. Or Quality Systems Inc (Nasdaq QSII $24.95), up 24% from when CANSLIM.net News subscribers saw it featured at $20.08 in a special 10/23/02 bonus report we called "Stocks to Watch in This New Market" (which has become a new monthly feature providing an expanded list of the most promising prospects under our guidelines). Numerous other issues appearing in these reports have done even better in less time. Still, finding great winners in a market environment like we’ve had has been like finding a needle in a haystack.