Sifting for Gems in the Rubble

 | Aug 05, 2011 | 3:57 PM EDT
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As the indices suffer a barrage of heavy-volume selling, even many of the best performers have taken a severe beating.

But with sector weakness across the board, investors who kept their eye on the strongest individual stocks fared better than many others, so far.

One of the key indicators of technical strength is support at the key 10-week -- or 50-day -- moving average. When a stock holds above or just slightly below that trend line while the general market is declining, it shows that investors continue to have conviction about the company, hanging onto shares even in the mass market exodus.

Many growth fund managers gravitate toward highly liquid stocks, such as Apple (AAPL), Google (GOOG), Amazon (AMZN), Baidu (BIDU) or MasterCard (MA). All of those widely held names continue trading above or near their 10-week lines.

There are also some growth names that aren't necessarily top-of-mind, but are showing price performance superior to the general market. Investors who focus solely on the negatives risk missing out on stocks that may be setting up for rallies once sentiment improves.

As the indices emerged from the bear market in March, 2009, one of the early growth winners was a company that few were familiar with at the time: Green Mountain Coffee Roasters (GMCR). The conventional wisdom is that defensives are the stocks to watch in a downturn. They can offer stability while growth names decline at a faster rate than the broader market. But there are often growth names that are worth tracking for clues that price gains could be ahead.

Keep in mind that Green Mountain was not a buy candidate during the depths of the bear, but it was among stocks showing outstanding price growth just before the general market began to rally. That early leadership is hallmark of a stock that takes off and leads the next uptrend, which is exactly what Green Mountain did.

Baidu was another such name. The stock began staging its own uptrend in February, 2009, several weeks before the broader market went into rally mode. That early strength was a precursor of Baidu's 215% gain in 2009 and 135% gain in 2010.

Sometimes it's small, unknown names that can catch investors by surprise. Small-cap Zagg (ZAGG), which makes protective film coverings for personal electronics gear, remained above its key 50-day line going into Friday's session.

With a market cap of $368 million, Salt Lake City-based Zagg is a speculative name, a category that can be risky even in a roaring bull market. Despite the technical health, a stock like this requires extra caution these days, as bears have the upper hand.

The company reports earnings on August 15, so it could make some significant moves leading up to and following those numbers.

QuestCor Pharmaceuticals (QCOR), which makes drugs to treat nervous-system disorders, hovered nearly 10% above its 10-week average ahead of Friday's opening bell. The stock has been trading above that key trend line since early April.

It's up more than 93% so far in 2011. A pullback to digest some gains at this juncture would not be surprising, but if it continues showing technical support, it's another that may set up for further gains. The fundamental outlook looks promising, with analysts eyeing profit increases of 67% this year and 42% in 2012, another factor bolstering the stock's case.

Investors who remember Crocs' (CROX) meltdown in 2007 may have permanently written off the shoemaker's stock. That's a mistake. It's been in a sustained rally since early 2010, and sales and earnings growth have rebounded to healthy levels.

Like QuestCor, Crocs is continuing to hold above its 50-day line, despite a sharp pullback along with the general market this week. Even after a pullback, watch Crocs to see if it sets up to offer a new entry point in the next market uptrend.

Crocs has some good liquidity. It's a mid-cap that moves more than 2 million shares per day.

With market volatility so high and the fear meter going crazy, it's best to hold off on new buys, even if a stock is showing potential and has escaped the selling that's damaged so many others. But technical support levels are indications of investor confidence. If you see that professionals are holding and buying shares right now, it could mean there's an opportunity to jump in, once market conditions improve.

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