When the Market Is Weak, Focus on the Strong: Buy eBay, Sell Abbott Labs

By L.A. Little  OCT 25, 2012 10:10 AM

Large players with lots of assets sell stocks that show signs of weakness and buy those that show strength. You should be doing the same.


MINYANVILLE ORIGINAL Stocks are always telling you a story as is the general market. The latter is mixed at best right now with the short term having turned bearish and the intermediate term still bullish. Individual stocks are mixed as well. Some still show signs of strength while others languish. Your job is to ferret out the strong and to concentrate your investments in them while avoiding everything else. When the general markets is strong and bullish, then almost everything works. When it isn’t, you have to jettison anything that is suspect and concentrate in only the strong.
It just so happens that earnings season is a time where the curtains draw back and you see the stocks for what they are worth. Are they growing their revenues or not? Are they finding a way to increase the bottom line? Is the future bright in management’s eyes?
These fundamentals show always up in the charts. They are pretty easy to see if you know what you are looking for. You just have to take your rose colored glasses off and see what is there. As an example, eBay (NASDAQ:EBAY) continues to do both -- top and bottom line and the charts show it. It is a stock I have recommended here previously and do so again.

All charts from investools.com.

In this daily chart you can see how buyers are willing to pay up on earnings day to get more of the stock. Yes, the next three days has seen selling but notice how volume is tailing off and it is more about short term profit taking, not distribution. The volume trails tell you that the weakness in the general market is actually an opportunity to get into this stock.
But short term isn’t all you should look at. What does the longer term time frame show you? Does it say the same thing? Does it compliment the short term picture? For eBay it does as seen here.

On a longer term basis, this stock keeps seeing more and more accumulation as prices rise. Why would anyone, let along large institutional type buyers, keep buying as price rises? The answer is simple: They believe it will rise even more, and that evidence is in the chart. It reflects the fundamentals of the company. It almost always does.   Now contrast this with a stock like Abbott Labs (NYSE:ABT) which just reported earnings. As seen here, rather than buying, there was a rush for the exits.

In this chart you can see a clear bias to “get me out” as the earnings disappoint. This is not a signal to load up even though the longer term has been quite bullish.

The demand for Abbott has diminished, not increased. Do you want to buy when others want to sell? Generally that is not the case since the large sellers have decided that this isn’t a place to be any longer. The good thing about a chart like Abbott is that they have a long term uptrend in place so this may be nothing more than a large consolidation period setting up. In that case, you have the ability to ride it out if you want and wait to see if they are able to right the ship but why do that? Why not put your money where it is working, rather than hoping on a stock like Abbott? Thank them for the gains they have delivered and promise them that you will return if they can return to their winning ways. Move on.
In a strong market, most everything works. In one that is struggling that is not the case. This market is struggling. Large players with lots of assets sell those that show signs of weakness and buy those that show strength. You should be doing the same. That is supply and demand at work. It shows up in the charts and it does so consistently during earnings season.

Twitter: @tatoday
No positions in stocks mentioned.