Defense Is the Best Offense

 | Jan 09, 2012 | 1:02 PM EST
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I didn't think I was going out on a limb when I said that volume would come back into the market after Wall Street returned from vacation. But I was wrong -- at least so far.

Volume on the New York Stock Exchange (NYSE) and the Nasdaq has stayed anemic in early 2012. Even a healthy employment report on Friday couldn't bring volume into the market. NYSE turnover stayed light at just over 700 million shares. Volume on the Nasdaq was also tepid at nearly 1.7 billion shares.

Despite renewed signs of technical strength in the major averages -- particularly in the Dow Jones Industrial Average and the S&P 500 -- overall light volume suggests that big buyers are still hesitant and are taking a wait-and-see approach ahead of the fourth-quarter earnings season. In addition, the lack of conviction behind the buying recently tells me the market's foundation is not as strong as some might think.

I'm concerned about the overall technical look of my growth screens. In the early stages of a market uptrend, buying opportunities should be a dime a dozen. There should be no shortage of bullish technical setups in individual stocks. This usually points to the new leaders. The problem is that they're not easy to find. Even worse, there appears to be just as many bearish setups as bullish ones, which gives me pause. Some high-quality biotech names are working, as are some oil exploration-and-production names and some regional banks. But heavy-volume upside breakouts remain in short supply.

Eye on Earnings

Fourth-quarter earnings season officially gets under way later today when aluminum giant Alcoa (AA) reports after the close. The stock still gets much attention despite the fact that it's been a laggard for some time. In 2011, shares fell 44%. Value investors will say that most of the bad news has been priced into the stock, but it still looks like dead money to me.

Overall, S&P 500 firms are expected to have increased their earnings by an average of 7% to 8% in the fourth quarter. As usual, earnings season will have its bright spots, but the question is whether there will be enough solid reports and outlooks to fuel more gains for the major averages.

Optimism is building about another strong quarter from Apple (AAPL); the company hasn't announced an earnings release date yet, but it should be on or around Jan. 24. But just as low-volume gains for the major averages are a concern, the same holds true for Apple. It's been wedging higher in light volume since mid-December.

Clearly, it's an institutional-quality stock with the potential to lead, but it's another example of a late-stage base after rising around 300% gain since March 2009. The challenge it faces now is that a huge quarter might already be priced into the stock. Since Dec. 14, the stock is up close to 12%. Its valuation is still compelling at 15x trailing earnings and 11x forward earnings, and Apple could be on the verge of a good base breakout above $426.70. Still, its chart is suspect due to a lack of volume behind recent price gains.


Intuitive Surgical (ISRG) is another institutional favorite showing relative price strength, but no conviction behind the buying in this name either. Volume finally picked up on Jan. 5, but the stock didn't make much headway. On Friday, some big sellers came in as shares lost $11.90 to $460.46. Still, it is holding above its last buying are of $449.06. I'm expecting the company to report another strong quarter (on or around Jan. 19). Just like Apple, though, I need to see more signs of institutional buying in the stock. Without it, its foundation is weak.

Regarding the overall market, I wouldn't be surprised to see an eventual breakout for the S&P 500 above its Oct. 27 intraday high of 1,292, but I'm expecting one more shakeout in the market in coming weeks. After a quick selloff, I expect a new bull to gain traction in March.

I'm not afraid to open new positions in the current market, but with volume so light, it's still a trader's market where defense is the best offense. Putting money to work is alright, but don't be afraid to take quick profits if you get them.



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