Two Growth Names to Avoid

 | Sep 21, 2011 | 9:00 AM EDT  | Comments
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Stock quotes in this article:

bidu

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cf

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vmw

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crm

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ffiv

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celg

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wpi

Sellers rained on the market parade in fine fashion Tuesday as major averages reversed off their highs and ended mixed. The Nasdaq took the hardest hit, falling 0.9% to 2590 after hitting an intraday high of 2643.

There wasn't much volume behind the selling Tuesday. Volume on the Nasdaq totaled 1.9 billion shares, a hair higher than Monday's level but still below average. Volume on the NYSE came in around 850 million shares -- also below average and lower than Monday.

I'm not going to get too worked up over one day of selling, considering the market's performance in the prior six sessions leading up to Tuesday. After all, growth names are busting out left and right. What's not to like? It's exactly what you want to see in the early stages of a rally.

Still, I'm not ready to wave the white flag yet, especially in light of the decidedly positive action I've seen in my growth screens. Recently, I've heard plenty of growth guys say they're still a distrustful of the recent move. They say there's not enough leadership -- but I disagree. From my perspective, the leadership has been pretty darn good across several sectors, including in retail, health care and technology, just to name a few. For what it's worth, I'm not expecting technology names like VMware (VMW), Salesforce (CRM) and F5 Networks (FFIV) to lead anytime soon. All three are former bull market leaders with weak technicals.

Despite selling in the market Tuesday, there's no shortage of breakouts that still look fine, particularly in the health care space. How about Celgene's (CELG) monster 7.1% move Tuesday in strong volume? Or Cerner's (CERN) 4.3% gain in fast trade? Watson Pharmaceuticals (WPI) broke out powerfully on Monday and followed through in convincing fashion on Tuesday. Clearly, the number of breakouts still working have the upper hand over those that aren't. There's no need to panic yet.

It's not to say there wasn't disturbing action in some big leaders Tuesday. A couple of high-quality growth names dropped precipitously in heavy volume. Both should be avoided for the time being.

Baidu (BIDU), for example, showed extremely bearish price action on Tuesday, falling 3.9% to $139.94 in heavy volume. On my radio show yesterday, portfolio manager Kier McDonough reminded listeners that bull market leaders such as Baidu eventually suffer when buying demand dries up. Given Baidu's 700% price gain since the start of the bull market in March 2009, this could be happening now in that name.

In recent days, growth names have been breaking out left and right, yet Baidu was having trouble getting over a buying area of $151.11. That's a yellow flag. Part of the problem is that there was a fair amount of institutional selling in the stock in August. At this point, institutional investors seem hesitant to start accumulating the stock again. For an individual investor, this is important to note.

 

Baidu (BIDU) -- Daily
Source: StockCharts.com

Baidu is a good lesson on why it's important to be in the right stocks in the early stages of a rally. You'll know quickly if this is the case, as the right ones will be those outperforming. The wrong stocks will be those making no progress when everything else seems to be going up -- such as Baidu in recent days.

Meanwhile, fertilizer stocks fell en masse Tuesday. It was one of the hardest-hit groups by far. One of the strongest price performers in the group, CF Industries (CF), had a wild day, falling 6.5% to $163.67 in heavy trade. Shares closed below their 50-day moving average, a key support level. CF Industries staged a nice technical breakout from base in late May and rallied about 33% in a little over three months. Its current technical picture tells me the stock is not likely to be a leader if the market rally continues.

 

CF Industries (CF) -- Daily
Source: StockCharts.com

Finally, there's the Fed policy statement, due out at 2:15 p.m. EDT. It's certainly possible that the market will decide to sell the news -- and, if it happens, watch the volume. A close near session lows on significantly higher volume than Thursday's will be my cue to starting taking some money off the table. It could be a sign of more weakness to come. But if the losses are contained and volume is close, or even lighter than Tuesday, then I won't be in any rush to sell.

Further, let's not rule out the fact that the market may even like what the Fed has to say tomorrow. The market's expecting Operation Twist, but what if it gets something more -- something unexpected? That might be enough to bring more money in from the sidelines. In that case, Tuesday's selling would become all but a distant memory.

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