The market is continuing to act just fine. Don't let the naysayers get you down.
Do the major averages look technically extended and overbought? Absolutely -- but, with seemingly everyone calling for a market pullback at this point, stocks could keep right on going.
It's hard to believe, but the Dow could drop 558 points from Friday's close to its 50-day simple moving average (SMA), and it would only constitute a pullback of 4.9%. That's fairly tame, considering its 12% rise since hitting a low of 12,471 in mid-November. For the S&P 500, a pullback of just 4.6% would take it down to its 50-day line -- and, for the Nasdaq Composite, only 4%.
It would take a daunting headline or two for the major averages to come down to their respective 50-day lines, but it's certainly not out of the question. It wouldn't be a bad thing, either, because it would give leading stocks a chance to catch their breath after big run-ups. Of course, a market pullback in generally light volume would be more preferable to one on heavy trade.
Extended stocks outnumber those still within buying range, and by a wide margin. While there's nothing wrong with being on the offensive during a market uptrend, be careful not to force the issue now by buying too late.
For instance, many high-quality growth names have moved a lot already, as the market served up a bunch of technical breakouts during the heavy-volume surge Jan. 2. So, instead of looking for stocks poised to break out from consolidation areas, focus on stocks showing bullish price and volume action post-breakout. Names like Celgene (CELG), HCA Holdings (HCA) and Nationstar Mortgage Holdings (NSM) continue to show great action after recent breakouts.
Nationstar, in particular, recently pulled back in light volume and filled its Jan. 7 gap. It now seems intent on retesting its recent high of $40.61.
The financial group still looks good here, and particularly so for asset managers like BlackRock (BLK) and Raymond James Financial (RJF). Goldman Sachs (GS) and JPMorgan Chase (JPM) continue to show relative strength, as well. But the common bond among all four stocks is that they're too far extended past proper buy points -- so don't chase them here. Instead, wait for a market pullback, at which point each of these will likely pay a visit to its 10-week moving average. That's the level where the strongest stocks tend to find support during market uptrends.
We have several other names on our watch list and own several strong performers in the Ultimate Growth Stocks model portfolio. For a sample copy of my weekly letter, shoot me an email.