CANSLIM.net News
"A Vital Source for the CANSLIM Investor" 

Wednesday, October 1st, 2003 | 8:56 PM
OCTOBER 2003
Volume 6, Issue 10
 

Volatility Reigns as Q3 Ends By Dee Hendon
I could make some earth shattering assertions concerning the market, but for the sake of brevity let’s keep it simple, shall we? The charts will tell you most of the story anyway.  I’ll fill in some of the blanks and outline the bullish and bearish scenarios, as it all relates to the fourth quarter of ’03. 

The S&P 500 opened the quarter at 983 and closed at 995.  During the 3^rd quarter the bellwether index went as low as 960 and as high as 1,040.  The Dow Jones Industrials began the month of July at 9,065 and on September 30^th finished at 9,275.  Its lows fell to 8,964 and at the high it spiked up to 9,719.  The Nasdaq started Q3 at 1,642 and ended at 1,787, it’s range was between a low of 1,598 and high of 1,914.

All in all we saw the first back-to-back positive quarters in a long time for both the S&P 500 and Dow. The Nasdaq finished with it’s fourth straight advancing quarter.  September ended a six-month winning streak for the major indices, but the quarter still saw good progress in them all.

Does this bode well for the rest of the year or will we see retreating stock prices and more profit taking?  That is what all inquiring minds want to know.

As the month of September came to a close it seemed as if institutional and fund managers felt the pressure to lock in profits.  However, “in the know” corporate executives were dumping stock throughout the quarter, with the highest levels of insider selling since 1998-1999. We also saw the most 52-week highs since the bubble burst.  It was reported that the big brokerage houses were selling inventory to their retail clients and not doing much buying. What do they know that we don’t?  Are they waiting for something to happen?  Perhaps.  Focusing on the charts gives us some helpful hints.

The DJI, Nasdaq and the S&P moved back above their trend lines today (October 1, 2003) and closed back above their 50 day moving averages with a blow out performance.  Market indicators such as the VIX and put/call ratio seem to point to a short-term oversold condition, which is bullish and means stocks should move higher.

But there are some hints of short-term trouble, in the form of a weakening dollar, increasing oil prices, and an unstable employment environment.  These economic indicators get more play when the market is extended it recently was.  More troubling to me is the up volume versus down volume. Pay careful attention to volume bars on the charts of the indexes and you will see a distinct divergence between up days and down days.  This tells us that distribution is taking place.

We will be watching to see if this trend changes in the next few days. If it doesn’t, expect another retracement.  The move today and over the remainder of this week could be a fake-out that later takes the markets very low, and in a very short period of time.  BUT let me stress that this should be a short-term scenario due to amount of liquidity being flushed through the market.  The fourth quarter should be as spectacular as the previous two.  In the end, volume says it all.  (Speaking about the impact of volume, William O’Neil pointed out that an elephant makes a big splash in a bathtub.  It cannot hide. The market will not move higher without more buyers, and it is as simple as that.)

Considering all of the volatility and the increased daily trading range, your good discipline will save you heartache and money. Purchase quality stocks at the correct price, not more than 5% above their break out point, sell at least a portion of extended positions that have moved up 25% - 30% or more over a short period of time, wait for pull backs on lighter volume, and always sell losers quickly at a small loss.  Jesse Livermore put it best when he said, “you don’t always have to be in the market”.  This may be one of those times you don’t have to be.

A recent article from Registered Representative magazine about William O’Neil both acknowledged and elaborated on some things that I have observed repeatedly through many years of advocating his CANSLIM method of stock selection. Most clearly, it showed that there are both avid fans and vocal skeptics of the stock selection strategies O’Neil continually recommends for investors through his books and the Investor’s Business Daily newspaper. O’Neil’s guidelines have been an immense help to my career and beneficial to many investors I have met and assisted along the way. However, in the stock market we’ve often heard it said that for every determined buyer there is a willing seller on the opposing side of the transaction, so maybe that view helps to explain why some folks take an opposing view to what I believe. 

Because the CANSLIM system of stock selection focuses on buying stocks that are trading at, or near their highs, certainly there are some great risks. But don’t let the fact that a stock may have doubled or tripled in the previous year be a reason to avoid a high-ranked leader. Strong stocks tend to stay strong. Still, it is better to get on board at a breakout from an early stage base, and you always need to have a sell strategy that limits your losses. Even after all of the lessons we’ve been taught over the past few years it is surprisingly easy to underestimate how quickly prices can be slashed!

"...we’ve often heard it said that for every determined buyer there is a willing seller..."

Watch out for the extremes for you must realize that companies that have seen their share prices rise six, eight, or tenfold in less than a year are obviously past their most ideal buy points. I’m not going to list names, but you should be able to figure out what stocks I’m talking about. Those high-flying scenarios can be particularly dangerous.

In recent weeks, many investors have been hurt and frustrated by the sharp declines in many high-ranked leaders. They could quickly blame the methodology, lose faith in its principles, and start discounting the importance of the CANSLIM criteria. I’ve even heard from folks who suggest that the rankings in IBD are misleading them, complaining that they were never given any warning signals when their A or A+ rated stocks were beginning to fail. Thankfully, the cases where there are sudden surprises are rather rare and most of the time a stock will flash several warning signals before breaking down badly. These warning signals might include a reversal day (where a stock begins the day sprinting to new highs only to turn down and close the session at its lows with a loss on huge volume), gap down (where a big load of selling at the open causes a stock to open much lower than the prior day’s close), or a violation of a prior support level, upward trend line, or moving average.

Keep it Simple

Several people I’ve spoken with recently were upset that they didn’t sell certain winning issues that dropped rather quickly. Part of their reason for continuing to hold was that they had written covered calls against their position. If this has been a problem for you then I would not advise continuing with your strategy of buying stocks and writing covered calls. The increased complexity added to the matter by using this options strategy (which limits your upside, increases your commission expenses, and makes it harder to exit a position) adds to the problems you might have with employing proper sell discipline.
 

Editor's note: The article Ken refers to in the column above appeared in the September 2003 issue of Registered Representative magazine, a publication intended for stockbrokers and other investment professionals.  If you are curious about it, you may still be able to read it online here. 

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 1-888-237-8399 or emailing to kgruneisen@sourcegrp.com 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. Further information is always available upon request. If you know anyone that may have an interest in receiving this or any of our other reports, please call our office locally at (954) 785-1990 or (888) 237-8399 or email kgruneisen@sourcegrp.com

Once again, we strongly advise practicing strict selling discipline to protect yourself from losses greater than 7-8%.

Financials, Stock Talk, News, Chart , SEC, Zacks Reports

Profile: Aeropostale is a mall-based specialty retailer of casual apparel and accessories that targets both young women and men aged 11 to 20.  As of February 1, 2003, the Company operated 367 stores in 35 states.  Its industry group is in the top 23% of IBD's 197 Industry Groups and has been moving between 33 and 39 over the past three months.

What to Look For and Look Out For: The risk/reward looks favorable here and the next two year PEG ratios at 0.47 and 0.78 indicate the stock’s price has much room to grow.  Funds hold 18% of the stock; quality fund ownership has increased to 72 over the past four quarters; both earnings and revenues are increasing impressively. Near term, the price increasing beyond $29.50 is likely to be followed quickly by clearing its August high ($30.25). Clearing these highs on increasing volume validates the play for further price movement into the $40 range.  Of course that would be very bullish and it assumes that the market will quickly weather any Sept/Oct seasonality downturn.  Meanwhile, a critical break below its 50-day line on increased volume would be a cause for concern.  Further, price falling below its recent low (see green line) of $24.30 (9/10), especially, on greater than average volume would be a smart exit point, as price could fall to the $20 level before reaching support.

Technical Analysis: In this recent market pullback, the stock has pulled back on lower volume near its 50-day moving average line that has been supportive several times since being crossed above in March.  Further, it has recently completed a multi-year cup (6/02 to 8/03) and has now been trading in a range-bound handle over the past month.

LISTEN CAREFULLY. What I have to say will impact your performance if you don't listen. Very simply, THINGS HAVE CHANGED...and if you don't roll with the changes, you get cooked. Anyone who did not roll with the changes in March 2000...well, let's not go there. No, I am not saying we are in for a 2000-like top. I am just letting you know that everything that had been working has now stopped...and if you force the issue, you will be snowed under. Here are my thoughts.

It's a big negative that the S&P 500 has now failed its breakout at 1010-1015 and has broken the all-important 50 day average.

It's a negative that many FINANCIALS (which just broke out)...failed for the most part.

It's a huge negative that so many leading names TOPPED in the past couple of days.

Here are some of those stocks...SINA, SOHU, NTES, APPX, SSYS, GPRO, AVID, ASKJ, CMTL, ERES, DRIV, UNTD, IRF...just to name a few.

Some of these names may entice you by bouncing up a few dollars. I would suggest if you catch them right, trade them. I will be looking to short the bounces.

It's a negative that I have zero breakouts to buy tonight.

It's a negative that over 800 stocks broke the 50 day average in the past 3 days. 

Lastly, recent breakouts have failed. That's how I know to stop the buying and why I sold a ton in the past couple of days. Failed breakouts do tell a tale.

So, what to do. I don't know how low we go, how long the correction/drop lasts. I just know to get more defensive here for the coming weeks.

Another trend I believe is going to occur is that the small-cap area will now underperform. Take a gander at some of the small-cap proxies and you will see what I mean. 

This is happening because of how far and extended they are as well as how frothy things have become.

If you have BIOCRAPS, low-priced junk or anything small-cap that is very extended...this is a warning shot. I believe many of the low-quality stuff could be in big trouble. There are plenty of no-revenue companies that have doubled and tripled on suspect announcements and hype.

Very short-term, we may get a bounce only because we had a mini-bungee jump in the NASDAQ the last 3 days and end-of- quarter window dressing. If we do bounce, I doubt it will be long-lasting. I believe the NASDAQ will have serious problems trying to get back above 1830...check out the chart.

Please understand that anything can happen. Osama or Saddam can be caught and the market get jacked up...BUT IT WILL BE A SELLABLE JUMP. Odds favor an intermediate top has been put in and I would not force the issue.

You must also remember that sentiment stinks. All my indicators are off the map bullish...while froth and speculation have been rampant. When things change back to positive, I will let you know. And don't forget to watch the SEMIS. Once again, they have been a great indicator for the market. As they topped, the market topped. Some names like AMAT look horrid at this juncture. As I mentioned in past reports, the SOX has tremendous support at 410...it's last breakout.

Editor's note: Gary wrote this article prior to today's action.  Nonetheless, his expert opinion is highly regarded by everyone at CANSLIM.net and you can and should still take his words of caution to heart. 

Gary Kaltbaum is an investment advisor with over $100 million under management. For over 18 years he has specialized in identifying and trading growth stocks in the intermediate-term time frame. He can be heard nightly on his nationally syndicated radio show "Investors Edge" on over 50 radio stations and at the Investors Edge website. Listen to live or archived shows here. He has been featured on the FOX News Channel and is regularly quoted by by CNBC, the Wall Street Journal, Dow Jones News, Reuters, and Bloomberg.

Though the Markets May Have Paused - We Are Still on The Move

     September has indeed been busy here at CANSLIM.net. As we continue to grow, there is always a need for improvement. First, we have hired a full-time editor because I have been moved up to the position of Chief Operations Officer. Andrew Hansen has recently joined us to help create and coordinate all the necessary content so we can keep up with the stream of timely and quality research for our subscribers. Andrew has many years experience with publishing - both in print and on the web. He has been the editor of three different magazines and was the editor of an award-winning website based in Charleston, SC. He also has a solid background as in investor. I have worked with him in the past and I am confident in his abilities. Look for some additions to our regular content as he starts to contribute more directly.

     The next improvement will be with the daily BreakOuts Report. We are creating a specific daily BreakOuts Report just for our CANSLIM.net News subscribers. This report will be easier to read and contain more information. We are stripping out all of the marketing content and expanding the notes section on the actual breakouts table. We will be adding a news and commentary feature that will highlight a stock or overall market direction. As is our editorial policy we will only release the information as it is necessary - our experts will see to that.

     Speaking of experts, we've added another to our staff. Richard Miller will be looking at stocks from the scientist's eye. He has professional experience in statistics and it shows in his analysis. He has years of experience as a trader and analyst. Already, Richard has provided us with two excellent stock ideas - featured in this very newsletter.

     Several of our staff received warm welcomes at the Investor's Business Daily Meetups that were held at the end of September. These were meetings of IBD subscribers who are very enthusiastic about the CANSLIM method of investing. The meetings we attended were generally successful, with lots of interesting questions and ideas coming up. The Meetups are held every month, with the next one on Wednesday, October 22 at 7PM. For more information (including locations), check the IBD Meetup website http://ibd.meetup.com. We will be at the next meetings in South Florida and in Greenville, South Carolina, offering insight and helping out whenever possible.

      We have planned a free seminar for the South Florida area to be held on October 13, 7PM to 9PM at the Healthy Bites Grill, 21300 St. Andrews Blvd in Boca Raton. This seminar will present an overview of the CANSLIM method of investing and answer any questions that participants might have.

     While historically the markets have sometimes been treacherous in October, there are always stock trading opportunities.  As always, we'll be working hard to keep you informed, and help you follow the CANSLIM method.

As always, best wishes for your financial success.

James F. Taulman
Editor-in-Chief, COO
CANSLIM.net News
CANSLIM.net, Inc.