“Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
— Sir Winston Churchill
To put the liquidation into perspective, shares’ decline over the past 10 sessions has been the harshest since March ’09, but nowhere close to late ’08. The Nasdaq has shed 11% vs. the 14% of March ’09 and 25% in October ’08.
The average stock fares worse than the large, blue-chip averages.
As for the backdrop, the burning issue is whether the US economy goes into recession.
It is during market dislocations such as we are currently witnessing that leadership is most likely to change, both from a broad sector/narrow group standpoint and also an individual leader standpoint. This is because corrections and bear markets produce mindset changes on the part of large participants. This then results in portfolio changes on a broad scale, which can create new leadership segments.
The best buying opportunities emanate from corrections and bear markets. Therefore, it is not a time to throw your charts up in the air in disgust and walk away from it all. We learned this lesson in ’90. Then, we stopped looking at charts from the start of the bear market in July ’90 until three months after it ended in October ’90. Those first three months of the next bull market produced the telltale signs of accumulation in some dynamic leaders, such as Costco, Home Depot, Fifty-Off, Microsoft, Wal-Mart, and US Surgical. It was a textbook curtain-raiser to a brand new bull market, though at the time we found it hard to believe.
And the textbook was O’Neil’s.
Lesson learned. No matter how bleak the backdrop may look, the potential for a great opportunity can be just around the corner. Because this strategy is trend-following in nature, we will let a trend develop before playing the game again. In the meantime, we will let others play the guessing game.
Otherwise, it is a good idea to use some latitude in narrowing down potential leadership candidates for the next advance in the general market. It is not necessarily the title that has dropped just 4% from its high that will be the big winner in the next advance. It is entirely possible that a stock that has dropped more, say 10% or 15%, may be one of the next burners. As an example, Cisco Systems came off a good amount in the ’90 bear market, 35% to be exact. However, it bounced back fast, hitting new-high ground in only nine days, whereas the S&P took four months to reach a new high, by which time Cisco had tripled off its low.
Among the names, Baidu (BIDU) and Apple (AAPL) are the two liquid glamours that we are paying the most attention to in terms of sentiment clues. BIDU is 15% off its high as it bounced off its 50-day on Friday.
Apple, not shown here, following its impressive mid-July breakout, is off 8% from its high. There is nothing to deduce from these two, at this early juncture.
Priceline.com (PCLN) is one of the most interesting liquid glamours, gapping up 11% on Friday, before meeting up with sellers.
Green Mountain Coffee Roasters (GMCR) is another. The stock has benefitted from increasing fund sponsorship over the past two quarters and enjoys attractive earnings stability for such a fast grower.
Other glamours that are worth watching include Arcos Dorados (ARCO), Chipotle Mexican Grill (CMG), Accretive Health (AH), Crocs (CROX), Sodastream (SODA), Athenahealth (ATHN), Herbalife (HLF), and Questcor Pharmaceutical (QCOR).
In summation, there is little to talk about at this juncture. We remain in cash until the storm blows over and the clouds part. This will be apparent by large participants putting money to work. In the meantime, the correction should be viewed as an opportunity for the next set of dynamic market burners to show their credentials via the formation of constructive basing patterns.