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March 27, 2012, 12:01 a.m. EDT
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Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is principal of Marder Investment Advisors Corp. and a contributor to The Gilmo Report. Previously, he served as chief market strategist for Ladenburg Thalmann Co. and developed institutional fixed-income risk management software for Capital Management Sciences.
By Kevin Marder
The risk-on trade returned with a vengeance Monday, after Federal Reserve Chairman Ben Bernanke made it clear that easy money was in no danger of going the way of the dinosaur. Volume was Monday-light, but Nasdaq and smaller-capitalization issues outperformed, and price went out on its high.
Meanwhile, with heads held high, the speculative growth glamours pranced all over the tape, continuing a monthslong parade.
The 50,000-foot view is that shares went through a mild bear market that began May 2 and ended Oct. 4. This dropped the S&P 500 /quotes/zigman/3870025 SPX +1.39% by 21.6% on an intraday basis, while the Nasdaq /quotes/zigman/123127 COMP +1.78% gave back 20.4%, also intraday.
And because it is usually the first year or two of a new bull market that experiences the biggest gains, it is not off-base for this market to be staging such a unidirectional move. This occurs as shares recover from a period of relentless selling in the prior bear. What gets stretched in one direction tends to snap back in the other direction. (At present, shares are cruising toward their best quarter since '98.)
As Bill O'Neil says, " let the general market tell its own story ." The story that is being told is one of an economy getting stronger with inflation and interest rates at historically low levels. Banks' balance sheets are on the mend, and it appears that the foundering housing market is closer to some sort of recovery than another major leg down.
All of this occurs after prices were depressed during the mild, bear of '11, leaving valuations of many stocks at reasonable levels.
Granted, there are serious problems with the government's finances, principally in the area of entitlement spending. This could in the future cause renewed weakness in the dollar.
Ignoring all of the above , what really counts is that the price/volume behavior of the major averages has been, and remains, stout, while the action of the leading stocks has been quite good . The most important broad sectors from a leadership standpoint - financial and technology - outperform, as does retail. The brokers, an excellent leading indicator historically, also performs better than the averages.
Smaller issues have now outperformed in nine of the last 14 sessions.
If there is one negative technically, it is that the S&P 500 has had only four major accumulation days in the 14 weeks since Dec. 19.
In short, the market has factored everything it is aware of into current share prices. And it likes what it sees.
Never wanting to argue with the market, this column seeks to align itself with the medium-term trend of prices, using O'Neil's research of historical precedent to identify the true leaders of a cycle.
Because the biggest-winning stocks of any bull market tend to show the earliest leadership right out of the gate, a speculator seeking to own these winners does not have the luxury of waiting six or 12 months after the initial breakouts in a new bull market occur.
At present, the majority of the initial leaders have broken out of bases and are now extended above these bases and no longer offer a low-risk entry. This includes names like Monster Beverage /quotes/zigman/8035590/quotes/nls/mnst MNST +1.50% , Ulta Salon /quotes/zigman/107036/quotes/nls/ulta ULTA +1.03% , Chipotle Mexican Grill /quotes/zigman/395806/quotes/nls/cmg CMG +2.21% , Priceline.com /quotes/zigman/90481/quotes/nls/pcln PCLN +2.85% , Under Armour /quotes/zigman/388552/quotes/nls/ua UA +1.92% , Apple /quotes/zigman/68270/quotes/nls/aapl AAPL +1.83% , Alexion Pharmaceuticals /quotes/zigman/59581/quotes/nls/alxn ALXN +0.52% , Select Comfort /quotes/zigman/79373/quotes/nls/scss SCSS +3.30% , etc.
Among the names, LinkedIn /quotes/zigman/5131883/quotes/nls/lnkd LNKD +1.89% followed through for a small gain Monday on the heels of Wednesday's big-volume breakout. The shares are moving out of buyable range, now 6.3% above the first area of support at Mar. 13's high at 94.99. Generally, it is preferable to limit purchases to when price is no more than 5% past the top of a base or other entry point.
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