As the Market Sends Mixed Signals, Now's the Time to Hone Your Watch List

By Jim Koford  OCT 11, 2012 10:35 AM

The key is to not be frozen into inaction. Consider Sarepta Therapeutics and these mortgage investment names.

 


MINYANVILLE ORIGINAL After four days of some pretty nasty action, news of another Spanish debt downgrade is providing a bit of a boost as we enter the back half of the week. The question, of course, is if market players will use any sort of reflexive action to the upside as an excuse to further lighten up their exposure and turn the post QE3 rally into a failed breakout.

From a technical perspective, so far both the Dow (INDEXDJX:.DJI) and the S&P 500 (INDEXSP:.INX) have held on well. There was no question that just about every area of the market was extremely overbought by mid-September and that we’d need to see some good backing and filling before the troops could make better progress. In fact, a pullback and re-test of previous resistance levels (in the general vicinity of 1,420 and 13,000 in the SPX and DJI, respectively) is a classic scenario.

So, should we be loading up in anticipation of a certain and sudden surge to fresh highs? Unfortunately, there have been a number of warning signs under the surface to warrant a more cautious approach. Again, from a technical perspective, both the Nasdaq (INDEXNASDAQ:.IXIC) and the Russell 2000 (INDEXRUSSELL:RUT) have already experienced failed breakout, and after last week’s lackluster bounce, they’ve each put in near-term lower lows.

Under the surface, there has been some serious damage to several big cyclical names, and the only areas that look decent are defensive in nature, which indicates the big money is thinking defense and remains concerned about the prospects for slowing global growth.
 
The question, then, is how do you deal with these mixed signals? First of all, don’t put on blinders in and hope that the troops will step up at the last minute to save us from some real trouble. Make sure you have drawn some lines in the sand and stick to them. Too many investors think that selling is the end of the world and is akin to breaking up with your high-school sweetheart. It’s easy to have that outlook, since that’s the sort of drivel that’s fed to us constantly, but nothing could be further from the truth. There’s nothing wrong with taking a stop and re-buying should the action suddenly reverse. It’s a form of insurance that protects you from letting losses get out of hand.

Meanwhile, now is a perfect time to hone those watchlists and possibly nibble on some names that have pulled back towards support. The key here is to not be frozen into inaction. There has been a shift in the character of the market, and there’s no telling if we’re at the cusp of something more serious or if what we've seen is a period of healthy consolidation that helps set up another ascent up Ye Olde Wall O' Worry. Personally, I suspect that we’re in for the latter, but right now my focus is on individual names, and I’m just not finding a lot of great setups that get my juices flowing.

One name that is high on my radar is Sarepta Therapeutics (NASDAQ:SRPT), which has been digesting last week’s giant move nicely and is setting up for another leg to the upside. Some mortgage investment names like Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) and IMPAC Mortgage Holdings, Inc (NYSEAMEX:IMH) are in good shape, but need time to develop some more, and while Reed's (NASDAQ:REED) is a standout chart, I’m wary of chasing much to the upside in this tape.

The thing that we need to be watching for is a failed bounce, and this morning’s action could provide a good test. Market tops will invariably be processes that play out over time, and it’s a series of failures that push the buyers to the sidelines. I’m not saying we’ve topped, but I am saying that there are some breakdowns under the surface and we’re near important support levels. Be mindful of the action and don’t be afraid to act.
Position in SRPT

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