The Iconoclast Investor

“XYZ stock is up 15% today!  The story is great!  And the market was up 10% on Tuesday!!  Should I load up on XYZ?!?”

This is a common question I’m getting this week–many just can’t stand the sight of some stocks roaring ahead 10% or 15% without them.  But that’s what you should do.

First, because the market is still in a downtrend by my measures; we’ve been able to be defensive (mostly in cash) since early September, and really, since late-June.  Really, the only investors enjoying these huge bounces are the ones that stayed in during the crash.  That’s not good!

Second, realize that the stocks that are bouncing so furiously are also the ones that fell the farthest.  The examples are endless, but take First Solar (FSLR), which ripped ahead on a great earnings report last week; as I write, it’s up 17% today!  But one glance at the chart tells the story–FSLR isn’t even back to its 25-day moving average.  And it’s still below its high from two weeks ago, after the last mega-market bounce.

That’s not to say FSLR can’t keep rallying–indeed, many of these beaten-down stocks will rally up to their 50-day moving averages (blue line in the chart above) before turning lower–but they’re not your leaders.

Instead, you should keep an eye out for the stocks that are quietly pushing above resistance, and closing in on new peaks.  Celgene (CELG), a dominant biotech company with terrific sales, earnings and profit margins, is an example.

It still has work to do, but notice how the stock is pushing above its 50-day line, and isn’t all that far from virgin turf.

The novice investor will get more excited about FSLR, but usually, once the big pop occurs, the going gets rougher.

The experienced operator, on the other hand, will keep his perspective, and realize the stocks like CELG that are closing in on new highs–even though the market is down 40% for the year–are the ones capable of doubling or tripling when a new bull market begins.