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How to Get Aboard an Emerging Rally

November 05, 2014



After a correction, before jumping in with both feet, I like to see a couple waves of stocks emerge from bases. During the first few weeks of a new up leg you should see multiple waves of stocks emerging and general market pullbacks contained to just a few percentage points on the major averages. Inexperienced investors will be looking to buy a pullback, which rarely materializes during the initial leg of a new powerful bull market, which from the onset will appear to be overbought.

 

Typically, the early phase of a move off an important bottom has the characteristics of a “lockout rally.” During this lockout period, investors wait for an opportunity to enter the market on a pullback, but that pullback never comes. Instead, demand is so strong that the market moves steadily higher, ignoring overbought readings. As a result, investors are essentially locked out of the market. 

 

If the major market indexes ignore an overbought condition after a bear market decline and your list of leaders expands, it should be viewed as a sign of strength.

 

In order to determine if the rally is real, up days should be accompanied by increased volume while down days or pullbacks have lower overall market volume. More importantly, the price action of leading stocks should be studied to determine if there are stocks emerging from sound, buyable bases.

 

Additional confirmation is when the list of stocks making new 52-week new highs outpaces the 52-week new low list and starts to expand significantly.  At this point, you should raise your exposure in accordance with your trading criteria on a stock-by-stock basis. As the adage goes, "It's a market of stocks, not a stock market." 

 

In the early stages of a market-bottom rally it's absolutely critical to focus on leading stocks if your goal is to latch onto big winners.  Sometimes you will be early.  Stick with a stop-loss discipline, and if the rally is for real, the majority of the leading stocks will hold up well and you will only have to make a few adjustments.  However, if you get stopped out repeatedly, you may be too early.

 

Mark Minervini



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