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10/31/2011 7:00 am EST
Retail investors should track stocks that have rallied in heavy volume, and be patient, says Amy Smith, who warns against chasing stocks that are extended too far beyond technical buy points.
Kate Stalter: Today, my guest is Amy Smith. She’s the host of the Market Wrap Videos at Investors.com and also of the Investor’s Business Daily Meetups.
Amy, that gives you a valuable perspective on what individual investors are concerned about in this rollercoaster market that we’ve had. I wanted to start out by asking you: IBD uses some price and volume indicators to determine general market strength. Tell us what that is showing you these days.
Amy Smith: You know, we’ve seen the Nasdaq was stuck in this choppy zone, and what we really look for—you’re looking for the price and volume action in the indices to be positive. We have something that’s called a follow-through day, which we had, so we are in a confirmed uptrend.
It has been a tough environment for investors, and I’m sympathetic when I go out to the Meetup groups and I meet individual investors. They say, “Gosh, it’s been so choppy, and how do I handle this?”
Now, the good news is, we have seen stocks come out with some terrific earnings, so at IBD, first of all, we’re going to see if the market is in a confirmed uptrend, which we are.
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Now we’re going to see how the individual stocks are behaving. Are they breaking out? Are they holding onto those games? And if they are, that’s a really positive sign.
Kate Stalter: What are you seeing in terms of sector strength and weakness?
Amy Smith: Well, you know, we’re getting into the Christmas holidays, and we’re always hopeful to have the Santa Claus rally, and we’ve seen retail-restaurants behaving very well.
I don’t know how often you go out to eat, Kate, but you know, we’ve had Buffalo Wild Wings (BWLD); we’re in the middle of football season, and people like to go watch sporting events. They came out with earnings, and they’ve been doing very well.
We’ve seen Panera Bread (PNRA), which is one my favorite places to go grab a sandwich, and they’ve vaulted higher on earnings. Then Chipotle (CMG) has done very well, and even sort of an older stock, McDonald’s (MCD), has done well.
Kate Stalter: And certainly, among some of those that you’ve named, the customer experience has certainly been created to be unique, driving business.
Amy Smith: That’s right. I mean, my daughter goes to Chipotle, and she orders what she wants before she gets there. She goes in the back door, she picks it up, and the order is made exactly the way she wants it.
It’s made fresh. They have more organic things at Chipotle, so that’s very appealing to someone, and it’s also not very expensive food. So, that was one thing that’s done very well.
Kate Stalter: What other sectors are you seeing out there, Amy, that are showing some strength right now?
Amy Smith: Well, you know, the apparel sector is acting pretty well. Ralph Lauren (RL), that’s done very well.
Under Armour (UA) makes that very popular moisture-wicking fabric that keeps you drier and cooler when you work out, and that company was started by a former professional football player. That stock came out with earnings, and that vaulted higher, so that stock has done very well. So, apparel has been acting strong.
Another thing that’s been coming on strong…believe it or not, we’ve seen a recurrence of silver and the gold-mining sector showing recent strength.
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Kate Stalter: Let’s talk a little bit about some of the individual stocks. You mentioned a few just a moment ago, with regard to the restaurant and apparel industries. Any other names that you’re seeing that might be potential watch list candidates?
Amy Smith: Oh, absolutely. Keep in mind, Kate, this has been very earnings-driven. You never know what you’re going to get as you go into an earnings cycle, and everybody was very jittery because of the European news.
But we’ve really had a pretty good earnings season here. Intuitive Surgical (ISRG), which of course is the DaVinci robot surgical stock, that broke out of a cup-and-handle base. We’ve had Tractor Supply (TSCO). That broke out, and that’s still holding up and acting very well.
We have a ticker symbol named Biogen (BIIB). They have a multiple sclerosis treatment called BG12, and again, that vaulted up and is acting quite nicely.
There’s really kind of a bigger and bigger list as we go through earnings, Kate. It’s been kind of a positive sign to see so many stocks that are acting well, that have come out with good, solid earnings and sales.
Kate Stalter: As I well know, the way you identify some of these names is by looking at a combination of fundamental and technical indicators to get some stock ideas. What are some of these key metrics that you’re looking at, Amy?
Amy Smith: That’s right. Well, the things that Investor’s Business Daily really concentrates on—and you can keep this really simple—you’re looking for quarterly earnings and annual earnings, and of course you’re looking for strong sales.
When you have strong earnings, all it means is that there is demand for that particular product. We just talked about Chipotle; whatever stock it is, when you see earnings, the company is obviously providing something, a product or a service, that people want. So, those are the stocks that we concentrate on at IBD.
Kate Stalter: How about on the technical side? What kind of indicators are you looking for?
Amy Smith: Well, as always, you are going to look for stocks that are breaking out of sound base patterns, and volume is always your biggest indicator of how healthy a stock is acting. For a stock to go up—and if it hits heavy volume—that tells you that the institutions are in there really buying the stock.
So, really, look for a healthy base pattern—you can see more of that on investors.com if you’re unfamiliar with base patterns—and look for heavy volume. That just shows you the elephant imprint of an institutional investor.
Kate Stalter: Last question I have for you today: As you mentioned, you’re out there on a regular basis, talking to retail investors at the Meetups, at MoneyShow events, and at other places. What are some of the biggest mistakes that you are seeing the retail investor making in this current volatile environment?
Amy Smith: Well, people have been concerned about the choppiness, so they are either frozen and they’re not believing what they’re seeing.
The one thing is: You don’t want to argue with the market. If you’re seeing the market behave well, you’re seeing it continue to rise higher, and you’re seeing volume, you have to get out of the mindset that you are afraid of your opinions or all the choppiness, or “I don’t know about what’s going to happen with the elections.”
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Really, just take a look at what the market is doing. That’s one thing that I see.
The other thing is: People are seeing these earnings, and they’re not really sure how to handle it, so here’s one way that you might do that. If a stock gaps up on you—so let’s say it’s too far extended…Panera Bread was up 15% or 16% after they came out with earnings.
You don’t want to chase a stock like that, because it’s gone up too much on you. The stock will probably naturally pull back to a place where you could buy it again. It may form a three-weeks-tight, which is one of the indicators that we have at IBD, or it may pull back to a moving average line. If bounces off of that line, maybe the ten-day or the 20-day, then you may get a chance to go into that stock again.
So, when you see this list of stocks, you think, “Oh, I missed the party! What am I going to do now?” Well, it’s not too late. Keep these on your watch list.
These are stocks that are acting very well and very healthy in this environment, and you can go back and revisit these stocks. Hopefully, they’ll give you a chance on a pullback, and then you might be able to go into them.
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