July 24th was the pivotal reversal day, where the market began the day by sinking to new lows, and then bounced back to end the session with nice gains. When losers outnumber winners by a two or three to one ratio, that obviously makes picking winners harder to do!  Sentiment in the market is never more obvious than when you have breadth tilted heavily in a certain direction, and on July 23rd decliners outpaced advancers 5-1 on the NYSE and 3-1 on Nasdaq.  Noticing the number of stocks making new highs and new lows also gives you a feel for the overall action. As the indices were hitting their lows, on the NYSE there were 10 new 52-week highs and 951 new lows. On Nasdaq there were 7 new 52-week highs and 553 new lows.

Bear markets have a way of wringing out all of the sellers! You might expect the number of issues making new lows to start drying up as the market improves. A sustainable rally from here is possible, but should not be assumed.  There is still a lot of work to be done for this market to be "healthy". While the market most assuredly saw a good percentage of its recent strength come from short covering, genuine buyers also appeared to be moving in aggressively.  Note that the drops of late were very drastic as all buyers sat paralyzed on the sidelines and no one was willing to take up the selling coming in. History has shown that when the market turns up and the sellers have all been wrung out, the opposite scenario may also unfold.  When sellers are nowhere to be found, very drastic price advances can also take place. 

Unfortunately, a lot of beaten down stocks have been responsible for much of the recent gains. Not many issues with high ranks have been moving up on heavy volume or nearing new highs, but in the days and weeks ahead that is what to be watching for.  The most important thing is to be preserving your capital and studying the market watching for areas of leadership, not trying to force a profit from an uncooperative market.

A few weeks ago market technicians were concerned that the Dow chart was forming the very bearish "head and shoulders" chart pattern, and based on that suggested that it could be headed much lower. At this point, however, the market managed to make a stand, and its chart resembles a bullish "double bottom" pattern with the lows behind us. This recent turnaround seems to have a lot of investors anxious to get back into the market, as many are looking to make up for recent losses. We, as CANSLIMers, should be waiting for more market confirmation and not be worried about missing out.

As the adage goes, "a rising tide will lift all boats", and if you were fortunate enough to just happen to get into the market at its low on July 24th, you could have bought just about anything and at this point be in a positive position. The Dow is now up well over 1,000 points in just a week. Being a fan of CANSLIM though, you shouldn’t be concerned with catching the bottom or buying the so-called "fallen angels". These companies have a large amount of stock outstanding and most of it is owned by people at a much higher price than it is currently trading at. They’ve been praying for the stock to bounce back just so they can get out and (maybe at the least) break-even.

You should instead be studying, waiting, and preserving your cash until the major indices prove themselves with confirming follow through action. If the recent market turnaround becomes sustainable, questions in the mind of a CANSLIMer should be, "Where is the leadership in this new bull market?" and "What groups are going to lead this market higher?" At this moment there does not seem to be a real standout group.

What areas are leading? Groups with the highest percentage of stocks making new highs have included: Steel – Fabrication, Medical – HMOs, Cosmetics/personal care, Finance – Mortgage & related services, Banks, Utility – electric power, Energy, Metal – ores gold/silver, Electronics – measuring instruments, Internet – e-commerce & security solutions, Retail – super/mini markets.

Wait for the market to confirm and trade in an upward trend, which would be better if at least 2 of the major averages (DOW, NASDAQ or S&P 500) were above their 50-day moving average lines with a good up days and a good follow through days on higher volume. (see graphic) Check the CANSLIM.net Morning Market Commentary, posted after each trading day by about 5PM, and if it shows the number of new lows on the NYSE is below 30 then we are in a good market. If they are below 20, we have a strong market and it should be safer to enter a long position

Find stocks that are:

- Fundamentally strong with improving annual earnings and quarterly earnings. It should have an EPS rank of no less than 80 from IBD.

- Breaking to a new 52-week high on better than average volume out of a bullish chart pattern such as a flat base, cup & handle, saucer, double bottom. The more volume on the up day the better.

- In a leading group. If you choose a leading company in a sector that is leading the market, your odds of success are the best.

Hopefully, the recent bear market has changed some investing behaviors for the better. I am sure that more people now believe it is particularly important to have a discipline to protect all positions in their investment portfolio from serious losses. A lot of people are questioning the "buy and hold" doctrine that long-term investors have stood by for years. Saying, "Oh, but it’s a good company, it’ll come back", along with, "Everything’s down, the whole market dropped", might make you feel better about sitting with a loss. Unfortunately, the painful truth is that sooner or later all companies are "bad". Some are fortunate enough to go through phases of great earnings growth, and that is what investors always need to be looking out for. That is where the potential for nice profits will usually be found.

Only the major indices’ sharp upturn in the final days of July gave investors an encouraging sign that a shift may be taking place in the market’s psychology. Unfortunately, to start waving flags and saying that a new bull market has begun would seem premature, even after a sharp 4-day 15% rise in the S&P 500 and Dow Industrials. Very few solid looking companies with strong earnings growth and sound looking bases are breaking out just yet. At the start of most sustainable rallies, groups of companies in certain sectors will often show widespread strength. That gives investors a signal there is conviction behind the moves, and leadership in certain areas that are worthy of closer consideration.

Television’s investment experts have been doing a lot of preaching about improvements in the economy. But, in a recent appearance on CNBC’s Kudlow & Cramer talk show, the obvious lack of more significant leadership in the market was cited by IBD founder Bill O’Neil as one of the present problems we are still facing. In the weeks ahead, study the new highs list and be watching for sector trends to develop a clear group of stocks that are in favor.

Many people I hear from are looking for something they can take action on immediately, however, I feel it is better to err on the side of caution and wait to see that the market provides us more convincing reassurances that the trading bias has turned positive.

In keeping with O’Neil’s CANSLIM strategy, it is a very important time to be looking for stocks now trading at or near all-time highs. They don’t have "overhead supply" or much resistance to work through, while badly beaten down issues’ gains are inclined to be less impressive. Why? Because plenty of willing sellers are there every step of the way as those issues climb back up and people feel relieved to get out of a "dog". Issues at their highs are not held back by that selling pressure, and because they are unhindered, they have greater potential to rise up much more significantly.

Ambitiously and anxiously, I look forward to continuing on this path I have chosen, despite the occasional setbacks. In the end, I feel confident and proud of the fact that I can look back and say that I’ve made a positive impact on the financial position of many people. If you are reading this, I hope you are one of them.

Be sure to have a defensive sell strategy and be disciplined if you decide to buy any stocks at this time. The Dow, Nasdaq and the S&P 500 are all below their 200-day moving averages. Before you get very aggressive about making new purchases, the major indices need to provide a convincing signal that we are in a sustainable rally.

Weight Watcher’s International, Inc. (NYSE –WTW $43.15)
A leading provider and operator of weight-loss services and control programs in 30 countries around the world. Its programs help people lose weight and maintain their weight loss, thus improving their health and enhancing their lifestyles and building self-confidence. Each week, more than one million members attend approximately 39,000 Weight Watchers meetings, which are run by over 14,000 classroom leaders. Company-owned operations account for approximately 65% of total worldwide attendance in the fiscal year ended December 29, 2001, and it also franchises operations.

Earnings increased 70% over the year earlier in the quarter ended March of 2002, and it has very high ranks from IBD. Results reflect an increase in meeting fees attributable to an increase in member attendance and the absence of write-off charges. The number of mutual funds owning an interest rose from 75 to 95 between December of 2001 and June of 2002. 23.2 million shares are in the public float. The industry group (Cosmetics/Personal Care) has been strong and has produced a number of other leaders. On 7/29/02 it gapped up over its 50-day moving average line, and it is within 3% of its high, working on the right side of a 12-week base.

Sales revenues and earnings per share increases over the prior year comparisons have been particularly strong in the past three quarters. According to the company’s reports, this reflects an increase in upfront license contract signings and software deliveries and the absence of a $5 million investment asset impairment charge.

This is a tiny company by comparison to the one above (WTW), in terms of shares (7.6 million in float) and revenues. Exceptional price strength relative to the market, especially since May, makes the company a true standout. Smaller capitalization stocks and lower priced issues tend to be more volatile and more failure prone, so use caution and have a sell side discipline (stop loss) to not allow for a major loss in the event it doesn’t follow through. Its 50-day moving average line (near $14.50) should be watched as an important support point, and a violation of that point on high volume would be a warning flag.

Based on my observations, many investors are having a hard time letting go of the lifestyles that they had become accustomed to. For many, the gains from the Bull market have been completely washed out and their initial investments are also disappearing! So what is one to do?

In hard times like these I recommend that you refer to last month’s newsletter (July 2002 "Up In Smoke! Where Is Your Stash Going?") and re-evaluate all of your expenses, swallow your pride and be willing to live below your means. There is no other way to obtain the freedom and peace of mind that YOU deserve!

This may seem drastic but it works. While you are thinking about surviving and not keeping up with the Joneses, you will be amazed at the amount of money you will be able to save. By becoming a penny pincher you will be able to gain the freedom and peace of mind that we all deserve. At the same time, study and prepare for the next bull market!

You might be saying, "What bull market? I will never invest again!" Remember that bear markets are typically shorter than bull markets, and this bear market has already been longer than most. One of the signs that I have been watching for are the covers of major magazines and financial papers. It is a known fact that many publications can actually serve as reliable contrary indicators. Lately, I have seen the following:

Time Magazine’s cover: "Will you ever be able to retire, with stocks plummeting?" The cover shows an old lady serving food to some kids ordering from a 50’s style drive through.

Barron’s: The cover shows a bear watching the bull plunging to the bottom of the ocean while the bull is tied up and its feet are covered with concrete! I wonder if the Godfather is in it with the bear?

Personal Finance: "Profiting in a sluggish market". To that heading I will say "If by now you have not profited from shorting, chances are that you could be risking a lot if you decide to try it now!"

Business Week: "The Angry Market". A real bear with its mouth wide-open graces the cover. Business Week’s cover of February 14, 2000 brought us in BIG GREEN banker style lettering the word "THE BOOM"; I must add that it did offer some good information about the possibility of a market collapse.

Most articles within the pages of these financial publications are quite educational! But the fact is that many of us get hooked on the dramatic and colorful scenes depicted on the covers, and unconsciously they influence us the wrong way.

A vintage example of this phenomenon is the September 1929 issue of Fortune Magazine. It is shocking to see Volume One Number O of this financial publication (carrying such a powerful name!) with a sprinting gazelle escaping the spears of death. It appeared right before the worst crash the market and the American economy have ever experienced!

While you are cutting back on expenses and conserving your money for the opportunities that are bound to emerge in the market, you must remember that the exciting, shocking, and colorful covers that grab your attention could lead you down the wrong path, and consequently, toward more serious hemorrhaging.

Here are some more tips on what I have been advising very troubled investors to do:
- Re-finance or move to a less expensive home, preferably while renting out the one you currently own. The rental income could put a big dent in your bills, especially if you move to a considerably less expensive place!

- Take advantage of those great 0% credit card offers by consolidating your credit card bills, reducing or eliminating interest lingering debts, and helping you get rid of debt! Extinguish it once and for all!

- Have a garage sale or take the time to go through everything you have that can be sold and place an ad in the local classifieds or on E-Bay.

- Brown bag it and take your lunch to work. (I can’t stress this one enough).

- Reduce or eliminate your wants and concentrate on your needs.