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"A Vital Source for the CANSLIM Investor" 

Sunday,  May 2nd, 2004 | 6:39 PM
May 2004
Volume 7, Issue 5
 

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Late Innings of the Bull Move or Early Innings of a Bear Move
We are big believers in one very important credo when it comes to the market...ANYTHING CAN HAPPEN. Knowing that, our job is to interpret market conditions at all times. We read the market because we believe fear and greed will always be prevalent no matter what decade we are in. The bottom line is to make sure you are not fearful when you should be greedy and more importantly, greedy when you should be fearful. Unfortunately, the masses always get it wrong at at the extremes. Cases in point...all the giddiness during the late 1999 and early 2000 period and the paralyzing fear at the Oct '02 and March '03 lows. That is why we have tunnel vision. We do only what the market tells us to do. Yes, we believe the market talks...and it does so with its chart patterns...and if you do not listen, you will ultimately pay a stiff price.

Bringing this all up right now is appropriate because over the past 3 months we've been walking through the process of topping in the market...AND UNTIL SOMETHING CHANGES, we are going to continue to look at things that way. As I have previously said, the market never rings a bell at the lows...and more importantly, at the tops. Tops take time...and when the market ultimately caves, it is only because the average stock has already been clonked. During this time, money flows into bigger cap names, masking the more serious deterioration underneath the surface. BUT...ultimately, by force, the market can't hold up under the weight of deteriorating internals. Most people are scratching their heads at this point because ALL THE NEWS IS GOOD. That leads me to another point. MARKETS DO NOT TOP ON BAD NEWS. THEY TOP WHILE ALL THE NEWS CONTINUES TO BE POSITIVE.

During the past three months, all the earnings reports have been fantastic. All of the economic numbers show the economy is sizzling. Mergers are prevalent again. Bonuses on Wall Street are up. Analysts have smiles on their faces. Get the hint!

In the past 3 months, we have identified SEMICONDUCTORS, REITS, MORTGAGE-RELATED, INTEREST-RATE SENSITIVE, HOMEBUILDERS, GOLD, COMMODITIES, BOND FUNDS, BONDS and sundry other areas as topping out. They have obliged us. But the major indices have hardly budged. Maybe...just maybe, that will change. We also told you to get off margin, raise the bar, raise some cash and be more defensive. We also told you we are in the late innings of this bull move.

My headlights do not go far out. The only thing I know right now is that this market, if it wanted to, can cave very easily. On Wednesday, major indices broke their shorter-term 50 day moving averages...again. Of note, these moving averages are now on the decline, not incline. Time to look at support levels, that if broken, will tell us, in fact, things are getting worse.

The DOW at 10,250...no support after that until 10,007.

The S&P 500...1,116 and then more importantly, 1,087

The NASDAQ at 1,973 and more importantly at 1,897.

The SOX has already broke the longer-term 200 day average with next support at 453. It does feel like the SOX may bounce here.

It is imperative that these support areas hold. A break of them and no longer will we be saying we are in the late innings of the bull move...but the early innings of a bear move. Yes, I said that.

None of this changes your game plan. Keep your eye on the ball. Any stocks that have tried to break out, have failed. Until that changes, you must respect the market...or I promise, it will bite. I believe the next few days will tell a big tale. At the very least, this game is going to remain quite challenging.

- Gary Kaltbaum

Editor's Note:  We appreciate Gary Kaltbaum (who is not a daily contributor to CANSLIM.net's coverage of the markets) for providing our cover story this month.  CANSLIM.net strongly encourages its members to listen online to Gary Kaltbaum's "Investor's Edge" radio program live 5-7PM EST, or download from the archive of recent shows.

*CANSLIM.net's most timely buy candidates are analyzed by our experts in great detail in the "Stocks to Watch in This New Market "section.   

Note: Links above (in Leaders column) refer to write-ups on previously featured stocks.

- CANSLIM.net News Staff

First look into the mindset of investors when they know they should be selling and they still don’t.  Do they embrace the often ill-conceived notion that holding a losing position over a longer haul will improve their chances of an eventual rebound?  Small losses are inclined to get even bigger, and they do so very quickly in a market as volatile as the present one.   Successful investors need to have very quick reflexes and sound discipline. For many, stop loss orders are a means to assure the proper action is taken when it comes to selling time.

Not every reader who might stumble across this monthly column is familiar with the proper guidelines and correct discipline necessary for CANSLIM investors to be the most successful.  Recognize that there is a difference between intentionally holding when a position you’ve taken is down beyond a 7%, 8% or 10% threshold, and otherwise strictly selling to protect your interest.  The difference is often critical to your results at the end of the month, quarter, or year.  It is a good time to reevaluate and determine what you are doing wrong whenever you find that your losses are getting out of control and growing far beyond those guidelines,.  Don’t make the same mistakes again and again!  Fix the problem and you are on the road to being a much more successful investor.

People either intentionally or inadvertently make mistakes in buying and selling.  I feel bad when an unsuspecting investor is so shackled by fear that they fail to react with the proper instincts, and they later realize where the fateful choice to bend the rules or ignore the correct discipline cost them.  I also feel bad when I see investors buy at the wrong times - either when a stock is breaking down technically, or after it has already risen more than 5-10% above the high of an ideal base pattern at least six weeks in duration.   Those kind of mistakes happen quite a lot, and they should always be learned from.

A common misconception grows out of the assumption that a stock that is a good buy at $30 it is a fabulous buy at $20.  This is an example of a not-so-imaginary conversation like dozens I’ve had before -

Perplexed Investor:  “I saw an old copy of your newsletter that featured XYZ Stock at $30.  At the time I was looking at it, I was able to actually pick it up at closer to $20, so of course I thought it was a good buy at that price.  Now it is around $15 and I am losing, and I’m wondering what you think of it.”

Me: “It looks like a very sick stock now, and it gave several pretty clear warning signals as it broke down.  See the high volume decline on X date, and the gap down as it dropped under its 50-day moving average line later.  The market overall isn’t helping matters, so what are you doing going out and buying damaged goods in the first place?  Why are you still holding it when you’re down more than 8-10%?

Perplexed Investor:  “Well, it seems like a good company and I was wondering if you think it will go back up.  Should I buy more?"

Me: Probably not.  Have you ever read O’Neil’s book, “How to Make Money in Stocks”?

Perplexed Investor:  “Yeah, I have it, but it has been a while since I picked it up.”

Me: “I can tell.  It sounds like you need to go back and work on the basics.”

Another misconception grows out of the belief that no price is too high for a company with an exciting new product or service that has tons of potential.  Here is another example of a conversation that wouldn’t surprise me –

Perplexed Investor:  “I bought TASR at $50 (that is after the latest split), do you think I should hold?”

Me: “We always say to buy when you can get a breakout within 5% from the high of a base at least 6-weeks in duration.  There was no reasonable base of support anywhere near $50.  What is the justification for your timing?”

Perplexed Investor:  “They are a leader, and I think their product has a lot of potential for law enforcement and personal use.”

Me: “Their product zaps bad guys, but their stock is zapping your money.  You should work on improving your buy timing and be more disciplined not to chase extended stocks.  Bending the rules and buying late often leads to bending the rules again and holding while losses are magnified.”

Perplexed Investor:  “You’ve got a point.  I guess we’ll see.”

Me: “We sure will.  Good luck.”

Kenneth J. Gruneisen - A Registered Investment Advisor & Registered Principal, Ken manages a Source Capital Group (Member NASD,SIPC) branch office and offers personalized assistance. Investors with a significant financial interest in equities may inquire about opening an account by calling the office locally at (954) 785-1990 or 1-888-237-8399 or emailing to kgruneisen@sourcegrp.com  Further information is always available upon request. Contact us if you know anyone that may have an interest in receiving this or any of our other reports. Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. 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. Source Capital Group, Inc. is a NASD/SIPC member firm.

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Profile: Helen of Troy is the leader in the personal care products market through innovative design, worldwide marketing, and consolidation of fragmented market segments. HELE designs, produces and markets brand-name personal care electrical products which include hair dryers, curling irons, hair setters, women's shavers, home hair clippers, depilatories and paraffin baths as well as comfort products such as foot baths and body massagers sold primarily through mass merchandisers, drug chains, warehouse clubs and grocery stores.  Company growth strategy is driven by licensing opportunities with world-respected trade names, including Vidal Sassoon®, Revlon®, Dr. Scholl's® and Sunbeam®.  It maintains a very high EPS rank, and earnings per share increases in the past four financial reports were up over the year earlier by +38%, +91%, +40% and 37% in Feb, May, Aug, Nov '03 respectively. Insiders hold 28% of shares outstanding, keeping them motivated to look after shareholder value. Confirming strength from other high ranked leaders in the IBD Cosmetics / Personal Care group now ranked in the top 4% of IBD's list of 197 Industry Groups includes mostly nutritional supplement companies (NUTR, NUS, NAII), while strength in many consumer staples (ie. Soap & Cleaning Preparations) also provides a nice reassurance the stock is among a leadership area in the market. IMPORTANT NOTE: Often companies making acquisitions see their share price drop on the news, however on news Friday April 30, 2004 that it would to acquire Oxo International, the maker of Good Grips kitchen tools, for $275 million, HELE actually broke out.  (See story here).

What to Look For and Look Out For:  In the past we've seen the stock promptly reverse (study the March 1-2 action) and then spend many weeks consolidating. In this case it reversed in the other way, and could spend many more weeks advancing.  Deterioration back into the prior base would be a concern, but there seems to be a great deal of support built above the 50-day moving average line.  Another violation of that short-term moving average line would be cause for concern, and considered a technical sell signal especially if volume rises on such a breakdown.

Technical Analysis: On Friday HELE powerfully reversed and repaired the Thursday violation of its 50-day moving average line, ending the day with gains on exceptionally high volume.  It gapped open +$2.17 to reach new highs and break out from a better than 15 week base, and in doing so its trading volume rose to almost 5 times normal.  The Relative Strength line is confirming its news highs.

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Profile: Founded in 1902, Fisher Scientific International Inc. is a leading provider of equipment, supplies, and services for the clinical laboratory and global scientific research markets. Through broad product offering, electronic-commerce capabilities, integrated global logistics network, and manufacturing facilities, they provide more than 600,000 products to over 350,000 customers in 145 countries. It is a high ranked leader in the Medical - Systems/Equipment group now ranked in the top 6% of IBD's list of 197 Industry Groups. It has a great annual earnings history, and exceptionally high EPS rank as earnings per share increases in the past four financial reports were up over the year earlier by +36%, +31%, +31% and 25% in Jun '03, Sep '03, Dec '03, Mar '04 respectively. Insiders hold 10% of shares outstanding, keeping them committed to shareholder value.

What to Look For and Look Out For:   Market action overall is probably the biggest concern, and likely will be the determining factor, as with a favorable market environment it would seem likely for FSH to remain in an upward trend.  If resistance near $60 proves insurmountable for a little while, that would be no harm.  However, look out for any violation of recent lows in the $56 range, and of course any dip under the 50-day moving average would be a concern as always.  A close under the 50 DMA with a loss on high volume would lead towards a test of the next support level at prior lows in the $51 area. 

Technical Analysis: On January 20th it cleared a 5-month base, then quickly rallied better than 32% in less than a month's time thereafter.  It built a better than 6-week base, then hit new highs in early-April, but it has at least twice met resistance near the $59-60 range.  During its consolidation it has stayed well above its 50-day moving average line (the blue line). 

Building on the Future—the Heavy Construction Industry
One of the best ways for investors to succeed is by recognizing new economic trends and capitalizing on emerging industry leaders.  With every business cycle, certain sectors of the market will outperform others. This provides opportunities for investing in stocks with the potential for long-term growth.  Right now, they may want to look at the Heavy Construction industry.

Construction may not be as flashy as the technology sector, but it performs well during periods of economic expansion.  Heavy construction is the industry of building bridges and roads, pipelines, stadiums, and dams.  It is the industry that creates infrastructure and public buildings that we depend upon everyday.

Our country largely ignored these projects during the decade of the nineties, adding to the current demand for the sector. A Northwestern University study done in 1997 found that prior administrations lacked an appreciation for infrastructure’s importance to our country’s economy.  As a result, the federal policy of the nineties led to inadequate spending on infrastructure repair.

See for yourself.  Look at the chart below of the Heavy Construction Industry as compared to the S&P 500.  You can see that the 2000-2003 downturn in the stock market followed the 1996-1998 decline in the construction industry.  However, in 2003, the construction ball started swinging in a new direction.  The lagging industry started to show a promising new uptrend.

In the first three quarters of 2003, the industry registered a positive growth of 1.1% compared with –8.1% in the corresponding period in 1999.  For the coming year, the industry has been projected to grow by at least 5%, pointing to a further rebound.  Based on new funding by the government, this trend is expected to continue for the current decade.

One year ago, the senate passed an amendment resolution to increase funding for the Federal Highway and Transit Programs.  Under the new agreement during the next six years, the highway program will increase spending to $255 billion.  The transit program will increase by $56 billion, all during the next six years.  This increased funding will help to address the nation’s staggering transportation needs while decreasing traffic congestion, improving public safety and security, and helping to create jobs to further stimulate the economy.

Investors looking for stocks with multi-year growth potential should take a look at the construction sector.  One example is Perini Corp (PCR). The chart below shows the company in a new uptrend, above its 50-week moving average.  Also, the 50-week moving average has crossed above the 200-week moving average, a bullish pattern.  The company has recorded record earnings this past year.

Building projects can no longer be ignored.  We have witnessed the fall of the dotcom companies, which existed in cyberspace.  Now, more tangible businesses are starting up or expanding, requiring new buildings and new infrastructure. The current spending on maintenance and construction will be a boon to the economy.

As various sectors rotate in and out of favor, the question is not solely whether to invest in the stock market, but also where to put your capital for a solid return on investment.  Take a look at the construction sector.  Will Heavy Construction be a leading sector in the economic recovery?  We shall see; but the economic climate and the chart analysis leads me to believe that the construction industry is worth building into your portfolio.

- Dr. Charles Schaap and Christina Schaap ( StockMarketStore.com)

Magazine Covers & Other Contrary Indicators Which Need Your Attention - Soraya Nasrallah, Registered Representative, Source Capital Group, Inc. Members NASD/SIPC 
It is a known fact that there are a variety of contrary indicators which may be used as a guide as to where the overall market and stocks are headed. As we all know, the major averages have escalated quite nicely yet they are now showing weakness even though our economy seems to have come out of its depressed state. Sure interest rates may continue to slowly rise; but that type of event is a more desirable one in comparison to living within the claws of the bear and the hopeless environment it tends to bring. During these sudden trying times it may be imperative for investors to keep an eye on what surrounds them on a daily basis.

Before I mention a few of the variety of contrary indicators that are out there for you to spy on; I must mention to you an interesting event that I recently experienced during a dinner meeting with the founder of Canslim.net: About a month ago, while savoring a seafood pizza in a beautiful and brand new Italian restaurant (and yes, I had my cappuccino), I overheard a large group of men and women who were sitting quite close to us go on and on for at least one hour about the market, their brokers and their positions. I sadly looked at Mr. Gruneisen as I said to him “I think the market is going to go down.”

Let me give you some great information about contrary indicators. Also, please have a copy of IBD’s paper dated April 28, 2004 in front of you and have it open to page number B1.

 Samples of contrary indicators are the following:

1.   Put/call ratio: This is where the amount of investors buying puts is greater than the amount of investors buying calls. When investors purchase puts they are betting against the market or believe that the market will decline. When investors purchase calls they are betting the market is headed up. A high ratio is bullish and a low ratio is bearish. According to IBD’s article featured in Tuesday’s April 26, 2004 paper, a spike in the puts bought versus calls bought is an indication that the markets may be turning around. Also check their April 5, 2004 article about put/call ratios as a contrarian indicator. As of 04/30/04 the ratio stands at .85.

2.   Short sellers in the market: The amount of investors that have short positions in the market. According to this contrary indicator; the higher the amount of short positions the higher the chances are that the market has hit a bottom and is ready to turn around due to the fact that the majority of investors are usually wrong at market extremes. Note that a very low ratio signals a lack of pessimisms.  For more information on this subject check out IBD dated April 26, 2004 on page B7. The article states: “The ratio hit an 8 year low of 3.40 in March 2000, when the NASDAQ topped”. As of 04/30/04 this ratio stands at 5.01.

3.   Magazine covers: Yes! This is a great contrary indicator. During the coming of the end of a bear market things have been so depressed overall that you will start noticing that financial related magazines and even non-financial related magazines have the Big Bad Bear or negative market headlines coupled with a depressing picture on their covers! Watching for these is quite easy because truly all you have to do is to check out the covers pictures they present and the corresponding gloomy or ecstatic cover title. Lately I have seen that these types of magazine covers have been popping up here and there.

I would prefer to see more of them in order to say that we are doomed for some time. I don’t think it has reached a point where there is complete pessimism. This is probably because the economy is improving and in some shape or form President Bush would like for this market to keep chugging along before the election is over. Bottom line is that these bullish covers have been appearing for the past month or so. Check out IBD’s article on April 6, 2004, page B1. This article states that “By the time a company’s CEO or a big feature story about the market’s rally makes the cover of a magazine, the end of their run is often near”.  I believe that presenting bulls or bears on covers are also quite a contrarian indicator. The market is experiencing some interesting volatility at the moment so only time will tell what kind of bottom we might reach.

Here are some samples:

·     AAII’s cover for April 2004 shows a raging bull with a very positive heading “Emerging markets re-emerge and funds get hot again”. This is an excellent publication, but for some reason the bull received the honor of appearing on the cover.

·     Ticker’s February 2004 cover presents a pack of bulls running fiercely toward the eye of the viewer. Heading is not as extreme.

·     Forbes Special Issue for December 8, 2003 features a green background with a large dollar bill. It is titled “2004 Investment Guide”. Sure we have done well in the markets throughout that time, but why offer at first glance such a nice positive outlook when the correct time to invest was back in March of 2003 just like IBD mentioned in its publication. Sure, one must read the content, but the packaging (cover & headline) offers investors and individuals a feel for what magazines are “telling” them to do.

·     The Economist June 8^th-14^th 2002. This publication, from what I saw, does not tend to preview pictures that relate to the market, but on this issue the cover was quite interesting. A big green street sign that reads “The Wickedness Of Wall St” appears on the cover just a few months shy of our market bottom in October of that year. Investors or average individuals probably stayed far away from investing their dollars for quite some time even though they should have been preparing themselves for the great opportunity that was waiting for them just around the corner.

·     For those of you born before 1929, Fortune Magazine’s first issue cover for September of 1929 presents a beautiful gazelle sprinting and escaping flying spears. The roaring 20’s where roaring fiercely yet those who excitedly saw this alluring cover with its grandiose name and then decided to jump on the bandwagon found themselves just a month later jobless while waiting in line for a meal to ease their hunger.

Final Note: Statistically it has been found that the following holds true: “Sell in May and walk away.”

Soraya Nasrallah, obtained her Series 7 license in 1992, and has served in the capacity of Sales Assistant, Head of Operations Department, and Stockbroker.  Contact Soraya Nasrallah via email at snasrallah@sourcegrp.com or by phone at (954)785-1990 for assistance you with your portfolio. She will be pleased to offer ideas that suit your investment needs, and she can help you achieve the gains you have been searching for.  Miss Nasrallah has just introduced a new educational program called InvestorWiz! specifically created for teenagers and novice investors, incorporating stock market basics with CANSLIM in a colorful and picturesque format. It is the perfect gift for those who just don’t know much about the world of stocks and investing! Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. 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. Source Capital Group, Inc. is a NASD/SIPC member firm.

No Investor Is An Island
It’s not always easy to know when to sell a stock. In April, the market may have made that decision for you.  If you got stopped out of any stocks, don’t feel bad, you’re not alone. Remember, bad market conditions can easily stop you out of a good CANSLIM stock. 

During these times, I like to remind investors about the importance of not becoming too isolated in their trading.  Sometimes we beat up ourselves instead of staying the course.  One way to talk with other CANSLIM investors is to join a chat group or participate in a message board. You can find them online at places like yahoo (http://groups.yahoo.com/).  My personal recommendation is to sign up for TCNet (TCNet.com) and talk live in a club that uses the CANSLIM method of trading stocks.

TCNet is the live version of TC2000, the charting software from Worden Brothers.  I use TCNet every day and I love it. It’s easy to take my list of CANSLIM.net Leaders and put them into a watchlist; then I am able to sort the list by my favorite technical parameters to give me a heads-up on when I should look to buy.  I confirm a breakout by watching the chart setup. The better the entry, the less the chance of being stopped-out.

It’s helpful and fun to talk with other investors who follow CANSLIM.net stocks.  With the click of a mouse, we share and exchange watchlists, chart patterns, and alert one another when a stock is breaking out.  In addition, the clubs post reports about various aspects of trading, everything from successful strategies to sound money management.  The goal is to learn from each other.

TCNet is a real-time learning tool.  Often, a CANSLIM stock is starting to break out and it is announced in the club.  Someone says, “I see an hourly breakout of the cup and handle.”  “OK, entry at $25.10, stop-loss at $23.95,” someone else says… “the target is $32.”  You can actually watch the volume increasing as the stock rockets up through a key resistance level.  At the end of the day, we talk about what worked and what didn’t, and we support one another.  We even hold educational sessions on weekends. 

When you get right down to it, trading involves three basic questions:  what to buy, when to buy it, and when to sell it.  CANSLIM.net provides me the “what” to trade, and TCNet gives me the “when.”  As far as “when” to sell, try to make that decision before the market makes it for you.  If you need help, or feel you’re getting too isolated, join TCNet, and stop by to chat in the TraderDoc or CANSLIM club.

Best of Luck in Your Trading Decisions,

Dr. Charles Bradshaw Schaap (for questions about TCNet, feel free to email me at traderdoc@stockmarketstore.com, or visit www.stockmarketstore.com)

CAN SLIM (written here as "CANSLIM" or "Canslim:) is a registered trademark of William O'Neil + Co. CANSLIM.net is not owned nor affiliated with William O'Neil + Co. or any of their subsidiaries including The Investor's Business Daily newspaper.