Not Enough to Derail This Rally

 | Feb 16, 2013 | 12:00 PM EST
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Four months ago, we'd gotten news of worse-than-expected gross domestic product growth in the eurozone, the U.S. market would've sold off in spades. But times are different now. The indices are not under massive distribution; in fact, they are showing very little in the way of sell signals. These might come soon -- but, for now, distribution days, or higher-volume declines, remain fairly well contained. The S&P 500 has shown just two higher-volume declines in recent weeks. That's just not enough to derail a rally.

On Friday, sellers came into the market late after an internal email was leaked from Dow component Wal-Mart (WMT) that described sales so far in February as "a total disaster." Nonetheless, the Dow managed another impressive close, finishing near its high for the session.

We've seen a lot of near-high finishes after early weakness, and this is what you want to see during a market uptrend. If the opposite starts to happen -- closes near lows after early strength -- it would be a sign that the market could be running out of steam. It's also prudent to pay attention to higher-volume declines in the indices. Again, such action is well-contained for now, but that could change depending on headline flow in coming days.

One area of concern is recent strength in the dollar index. The prospects of another eurozone interest-rate cut down the line have weakened the euro and strengthened the greenback. Last week, the dollar index broke out above a descending trendline, which means its trend is upward for now. The index still has a potentially significant resistance level to conquer, however -- its 200-day moving average at 80.91.

Dollar Index -- Daily

I'm encouraged by the fact that my growth screens are also showing little in the way of sell signals. The vast majority of leading growth stocks I follow are holding up just fine. Believe me, I'm not chomping at the bit to put new money to work here. But, for my strongest performers in the Ultimate Growth Stocks model portfolio, I'm willing to give them more room to work.

Meanwhile, 3-D printing firms are starting to chinks in their armor. 3-D Systems (DDD) is still holding above its 50-day moving average ahead of its earnings report, due Feb. 25. Selling pressure has been much more pronounced in Stratasys (SSYS), which broke below its 50-day moving average last week in heavy volume. The company is set to report March 4.

The good news is that high-quality growth names still trading well and holding above key support levels. These far outnumber those acting weakly -- still a good sign for the bulls, in my opinion.

For now, I have my eyes on the 20-day moving averages for the Dow (13,909), S&P 500 (1507) and Nasdaq Composite (3164). The Dow touched its 20-day line Friday, but still managed to close near its high. If I see a meaningful break below this near-term support in heavy volume, it will be my cue to start trimming positions. A break below the 20-day line for each index could easily bring a trip down to the 50-day moving averages into play.

Believe it or not, for all of these indices, a visit to the 50-day moving average would only mean a pullback of about 3% to 3.5% from Friday's close -- pretty tame, considering that the S&P is up about 13% from its mid-November low.

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.

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