Nearly all of the stock buys from our recent “Buffett-style” portfolio are paying off nicely. Now it’s time to adjust stops to lock in profits, and it’s still not too late for new buying.
On March 10, in a column titled “5 Stocks Buffett Would Love,” I recommended five large industrial stocks that had market values over $5 billion as well as fundamentals that could make them attractive for acquisition by Warren Buffett.
Our recommended buy levels were hit in four of the five Buffett-style stocks, and four could still be bought for more aggressive accounts, while stops should be raised on the previously recommend positions to lock in some nice profits.
Since the August lows, the Select Sector SPDR - Industrial (XLI) is up 34% versus 27% for the S&P 500. The powerful stock rally on Wednesday confirmed my view that Monday’s panic selling was a buying opportunity, as the advancing issues swamped the declining issues by more than a four-to-one margin.
The Advance/Decline (A/D) lines on the major averages have turned sharply higher and surpassed last week’s highs, providing strong evidence that the market correction is indeed over.
Particularly strong on Wednesday was the tech sector, which I expect to catch up with the other market sectors on this rally. The technical picture now suggests that the major averages will be able to move to new highs for the year over the next several weeks.
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Chart Analysis: Illinois Tool Works (ITW) is the only one of the four stocks I recommended that is down from the entry levels. It is 1% lower.
- The weekly chart shows that after a sharp rally in December 2010, ITW has been locked in a range between $52.09 and $56.32. This appears to be a continuation pattern that should be resolved to the upside
- Weekly resistance at line a corresponds to the May 2008 highs, and if it is exceeded, the upper boundary of the trading channel (line b) and the equality target are in the $66 area
- The weekly on-balance volume (OBV) is trying to turn upwards and shows a pattern of higher highs (line d), which is positive
Kennametal Inc. (KMT), after topping out in January at $44.10, declined to a low of $36.57 on March 15. It is up 8% from our recommended entry level of $36.75 and closed Wednesday at $39.70.
- A higher close this week will suggest a test of the prior highs and the multi-year resistance (line f) in the $44 area
- The equality target and the 127.2% retracement resistance target are in the $46-$46.50 area
- The weekly OBV has been leading prices higher (line h) and has turned up after testing its rising weighted moving average (WMA). This is typically quite a bullish formation
- The daily chart has short-term support now at $38.50-$39.40 with further support at $37.50
NEXT: The Two Best Charts
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Automatic Data Processing (ADP) rallied sharply from the March lows at $48.12, hitting the $53 level before pulling back. The up-gap opening and the strong close on Wednesday suggest the correction is over. It is up 8% from the original entry level.
- The resistance from May 2008 is at $54.40 with the all-time highs from 2000 at $62.26, which is not an impossible upside target
- The daily OBV moved through resistance (line b) ahead of prices and closed at a new high on Wednesday. The weekly OBV (not shown) is rising sharply and is well above its rising weighted moving average
- Very short-term support is now at $52-$52.30 and then at $51.38. Key support is at $51 (line a), which corresponds to the March highs
WW Grainger (GWW) formed a classic continuation pattern from December through March (lines 1 and 2) that was resolved at the end of March. Very strong action on Wednesday as the stock closed up 2.7%.
- The 127.2% retracement target for GWW at $143.60 has been exceeded. The equality target using the rally from the 2009 lows to the early-2010 highs is at $153 and could be reached in the next few weeks
- The daily OBV confirmed the completion of the flag formation by moving through resistance at line e and looks very strong. The weekly OBV (not shown) has continued to make new highs
- Minor support is now at $145-$146 with stronger support at $140
NEXT: One That Got Away…and How to Play the Rest
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Expeditors International of Washington (EXPD) is a transport stock that is in a strong seasonal period. EXPD has rallied steadily from the March 15 low of $45.91, just missing the recommended buying zone at $45.84.
- Next weekly chart resistance is at $53.84 to $55.11, and if exceeded, it should signal a test of the November 2010 highs at $57.15. The 127.2% retracement resistance target is at $60.60
- The weekly OBV made new highs with prices in November and looks ready to overcome resistance at line b this week. This suggests that EXPD should also exceed the November highs
- There is first good support at $51.80 and then stronger support in the $50 area
What It Means: Given the strong technical picture of the overall market these five stocks should continue to do well. More aggressive traders can still get on board four of these stocks while GWW has no good risk/reward entry after its recent sharp rally.
How to Profit: Buyers should be long Illinois Tool Works (ITW) from $54.25 with a stop at $51.37. It is still a good buy at $53.36 with the same stop (risk of approx. 3.7%). On a move above $55.30, raise the stop to $52.82.
Kennametal Inc. (KMT): Buyers should be long at $36.75 and should now raise the stop from $34.87 to $36.88. Those not long could still buy at $39.22 with the same stop (risk of approx. 8%).
Automatic Data Processing (ADP): Buyers should be long at $48.74 or better and should now raise the stop from $46.67 to $49.78. Aggressive traders could still buy at $52.34 with the same stop (risk of approx. 4.9%).
Expeditors International of Washington (EXPD): I raised the buy zone on March 28 to $46.60-$47.44, but that level was not hit, either. I would now buy at $51.92 with a stop at $49.42 (risk is approx. 4.8%). On a move above $55, raise the stop to $50.88.
Portfolio Update: Buyers should be long WW Grainger (GWW) from March 15 at $132.94 with a 12% profit. Raise the stop to $139.56 and sell half the position at $152.66, then raise the stop on the remaining position to $144.38.
