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Et Tu, Big Blue?



This morning a Minyan asked me to take a look at Intl Business Machines (IBM:NYSE), which I was planning on writing up anyway. We Minyans must be psychically connected! Know what I'm thinking about right now? Nope, the leather ones. But good guess.

Now that we've gotten that first awkward & weird paragraph out of the way let's look at IBM. Below is the 1x3 scale chart.

In August I was wrong when I thought the violation of the trendline at 81 would spell the end of IBM's weak participation in the rally. The stock violated that trend line but then quickly reversed course and has risen steadily ever since and yesterday pushed above 90 for the first time since May. I'm still concerned about the relative strength readings for the stock. Short and long-term RS is very weak, which is another way of saying this stock is a follower, not a leader.

The 2x3 scale chart provides some additional context for Big Blue.

On this chart you can see that while moving through 90 was an important hurdle for the stock on a near-term basis, the more important breakout would occur at 92. The stock has not been able to print 92 in 16 months. This would break a spread triple top on the 2x3 chart and suggest further upside (108 is the next longer-term resistance area if the 92 breakout occurs.)

I'm still troubled by the relative strength readings for IBM. Weak RS stocks are almost never rally leaders. In fact, they typically are the last stocks to rise during a rally. Why? Put yourself in the position of trader or money manager six months into a broad based rally. What do you buy? The strong RS stocks (the leaders) have already moved higher. Many are technically extended or no longer have the attractive valuations they had six months earlier. So, the search begins for stocks that haven't moved. In August at 79, IBM was a classic big name stock that hadn't moved.

As this rally continues to age I expect to see some heavier rotation into these types of laggard stocks. I screened my database this morning for the weakest relative strength large cap stocks that had seen recent up moves. Among the names that came back from this screen were General Electric(GE:NYSE), Microsoft (MSFT:NASD), Motorola(MOT:NYSE), Merck(MRK:NYSE), Pfizer (PFE:NYSE), State Street Corp(STT:NYSE) and Vodafone(VOD:NYSE). All have been weak participants in the rally that began in March and, given the risk level of the indicators, their recent moves higher may be yet another sign this rally is about to enter its final stage. The flip side, of course, is that while the leaders rest, the catch up move by the laggards is a sign of expanding market health. Which side of this argument you fall on will likely determine your bottom line over the next 4-6 weeks.

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Positions in PFE.

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