Is Another Breakout Possible?

Hard to image, but with the VIX at a 30 month low and Oil sticking again at $80 a barrel we could see many commodities related stocks break to new highs before we roll over.

USA stock fundamentals have been improving. Even if the top lines are not expected to grow, profits will, resulting from two years of layoffs and hiring freezes. This market has been like a snowball rolling downhill and picking up momentum as it goes. It just feels like the worst case scenario near term is only a 5% downside risk. But of course, that's for the aggregate market, not individual stocks. Still plenty of 10-20% pull-back risk in individual stocks. At this point in the game I'd beware playing break-outs and look more for quality names in a pull-back (falling wedge patterns)e.g. Exxon. U.S. Steel for example is back at the top of it's range. It's been climbing for two months to reach new 12 month highs. Purhaps the US declaring China is dumping steel and plans a small but important tariff caused US Steel (X) to hit those highs. Long term you know USA steel is in recover but you can also see how easy it was for it to fall back 20% last fall. Note how it dropped 20% even as the market continued to climb.

Keep an eye on those individual stock trendlines and range bands. I've seen to many market tech. newbies only recommending buying individual stocks on breakouts to new highs. At this point in the game thats a very high risk play. Best to buy cyclical stocks only after a falling wedge pullback. I read two Seeking Alpha gurus telling people to by POT after it had a 30-35% run up. POT and gold stocks (GG, ABX) where at the top of their buy list two months ago. Why can't these guys right these articles before the 30-35% run up? As expected the big boys sold into those new breakouts and the stocks just fell back down 20-25% making those recomendations look stupid and sending the sheep to their financial death in a roaing bull market. But you can bet as they hit those imaginary support lines the big boys come into to buy them again. Note how deepwater drillers RIG, DO and ESV had been in a fallen wedge pattern like Steel stock X and Bank stocks C and BAC since early fall. All these stocks began climbing again in December when it was clear oil was not falling below $70.

Now steel stocks like X have hit new highs. I sold my US Steel(X)much to early into this advance. Health care providers like AFAM and AMED hit new highs. Two weeks ago the deepwater drillers began their climb and oil transport tanker FRO is holding close to highs. Now the drybulks shippers like DRYS, GNK and DSX are showing strenght and look set to move backup to their highs from a few months ago.



Over the last three months little money has been made on betting on any 10% move in the index up or down. The market is so stable it's hard to make money with the ususal ETFs. Best to look for turning points and pull backs. One ETF I've continued to make money with in spite of it's issues is Natural Gas play UNG. It fell all last year but on three occassions I made money buying at new low extremes and selling into the bounces that always followed. This year with a recovering economy and winter cold snap I'm betting the institutional buyers will be pushing this into a new upward trend.

In a steady eddie stable market the money has beem made in selling cyclical stocks reaching new highs and buying those stocks on major sector(falling wedge)pull backs.

One need only look at the charts of Steel stock X or Oil driller RIG and ESV along with refiners to see examples. At this point I'm selling airline CAL which recently hit new highs to buy Exxon (XOM) and more drybulk shipping. I loaded the boat on the dog with fleas stock Citi (C) along with a little BAC and GE on this most recent pull back. No need to sell them until they return to their old highs of last year. No need to worry about any panic sell-off in the first quarter like last year with bank stocks.

Health care and big pharma stocks like PFE (3.5% yield) and LLY (5.5%) paying high stable dividends are safe value plays. Lots of telecom dividend plays, with VZ yielding 5.5% and VOD with 5.5%. Korean play SKM and China Mobile paying 3.5% in a strong growth markets have fallen back from last summers highs. I recently picked up both shares alone with steady eddie MO. With USA money market funds paying less than 1/2% any steady eddie 3.5% or higher dividend play is a safe bet in this market.