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April 12, 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
Wednesday's feeble rally, which came on the second-lightest NYSE volume of any up day in the past 32 sessions, offered scant evidence that the April showers hitting Wall Street are ready to end.
A mild plus was the Nasdaq Composite's /quotes/zigman/123127 COMP +0.84% near-identical showing compared with the S&P 500 /quotes/zigman/3870025 SPX +0.74% , continuing a trend seen since the Apr. 2 high. The latter is off 4.6% during this reaction, with the former, a riskier index, down just a few hairs more.
Until some solid accumulation, and even a few breakouts, begins to materialize in leading stocks, there will be little to suggest the path of least resistance is northward. This should ideally be accompanied by one or more accumulation days in the averages.
For aggressive speculators who entered the speculative growth glamours at the entry points mentioned in these reports since this advance found its footing in January, this has been, and continues to generally be, a time to be raising cash, not adding to positions on pullbacks.
Pullback buying is the modus operandi for institutions pursuing a long-term, buy-and-hold mandate, as these elephants cannot fill out complete positions by entering on breakouts alone. Entering on pullbacks in leading stocks is also part and parcel for shorter-term swing traders.
This column, though, is about intermediate-term speculation, and pullback buying is usually discouraged, especially when shares are in the midst of what is believed to be a long overdue 8%-12% intermediate-term correction.
If there are a few positions that have been among the true leaders, and they are holding up without showing much sign of institutions running for the exits, an intermediate-term speculator who already holds these can play them out for a bigger move.
These might include Starbucks /quotes/zigman/20720/quotes/nls/sbux SBUX +4.43% , Chipotle Mexican Grill /quotes/zigman/395806/quotes/nls/cmg CMG +1.45% , Monster Beverage /quotes/zigman/8035590/quotes/nls/mnst MNST +3.70% , and Ulta Salon /quotes/zigman/107036/quotes/nls/ulta ULTA +2.00% . However, the speculator should not make assumptions about any of these titles holding up for the duration.
For it is to be noted that the distribution process in a leader, particularly one that is an institutional must-own, often occurs on the way up.
Otherwise, each participant must decide who he or she is. Long-term investor? Intermediate-term speculator? Short-term swing trader? Day trader? Scalper? Knowing the investment time frame in which one is most comfortable playing is most important during market transitions.
Along these lines, of the three decisions that confront a trader - the entry decision, the exit-to-limit-a-loss decision, and the exit-to-lock-in-a-profit decision, it is the latter that is the most challenging.
These reports discuss a trend-following strategy that operates in the medium-term timeframe, whereby a winning position is often held for a few weeks to a few months. At present, it is possible for one to harvest gains in every position held, with the understanding that some of the leaders may well build new basing patterns in coming weeks or months that would allow for new entry points to be created.
Selling a position because one is fearful of the gain being swept away by continued market weakness is not a bad reason to sell. But there is a consequence for this. And that is that once an exit is made, an "attractive entry" must be there before one can rush back into the stock.
If a speculator offed some of her positions in recent sessions for fear of surrendering some of those hard-fought gains, and the averages find their footing and bolt upward, the speculator may feel tempted to jump right back into the positions she had sold the week prior.
This is where discipline comes in. Discipline can be taught, but it is much better learned through experience. "Plan the trade and trade the plan" sounds good, but part of the plan should be to only take entry when certain criteria are met. For example, with respect to the strategy spoken about in these reports, exiting Priceline.com /quotes/zigman/90481/quotes/nls/pcln PCLN -1.58% now that it is 4.6% off its high may or may not be the right thing to do.
But discipline says that once you are out, you cannot simply jump right back in to avoid missing the next big upleg in the market. The reason why is because this strategy calls for entry to be made as price leaves a technical support area. In most cases, this means a period of sideways consolidation, a base. A base takes five weeks, at a minimum, to form. One can stretch the rules as to what constitutes a base by entering on the breakout of a shorter consolidation than five weeks. But that is no longer a base, and the risk is then higher.
Among the names, Yandex /quotes/zigman/5262665/quotes/nls/yndx YNDX +2.66% and Zillow /quotes/zigman/5930210/quotes/nls/z Z +3.36% are to be monitored for future potential entry. They are forming constructive bases and are not seeing a spate of distribution hit their shares. Very few others are at attractive entry points, even if the averages were in better shape.
In summation, Wednesday's technical inside-day was unimpressive. The leading glamours are largely split into two camps, the haves and have-nots. The latter are many of the hot, young, thin things that comprise the recent-new-issue crowd. They are dominated by performance-chasing hedge funds and other hot money. The haves are the more-mature growth issues with a more-visible earnings stream, e.g. Priceline, Dollar Tree /quotes/zigman/109619/quotes/nls/dltr DLTR +1.45% , Ulta, etc. (a more complete list is in Tuesday's report ). It is of paramount importance for the speculator to map where each position held will be exited should this near-5% reaction in the averages continue.
If in doubt, get out.
Charts created using TradeStation . ©TradeStation Technologies, 2001-2012. All rights reserved. All mutual fund ownership and earnings estimate data provided by Thomson Reuters.
At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.
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