Looking for an Edge in a 50-50 Market

 | Oct 21, 2011 | 6:53 AM EDT
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I learned early on that when you don't have an edge in the market, it's hard for a stock portfolio to make any headway. There are good picks and bad picks and in the end, a portfolio will spin its wheels and not make much headway.

In a 50-50 market, which is the type of market we're in right now, it's best to do generally nothing rather than force the issue and buy when you don't have an edge. That's a recipe for poor performance.

With any new buy, there's a 50% chance the stock will go up and a 50% chance it will go down. I don't like those odds when picking stocks. They're terrible. The good news is that the odds will get better at some point, but it won't happen until new institutional money starts to come in from the sidelines. Rest assured that won't happen until uncertainty subsides, and there's still a lot of uncertainty out there, especially stemming from Europe.

The bear market is still relatively young. Some say it started in late February, others say it started in early May, while still others say it started in late July. A typical bear market generally lasts nine to 12 months. As former bull market leaders continue to roll over, new leaders need more time to set up properly. When you start to see a multitude of upside breakouts in heavy volume, this will be your cue that the bear could be coming to an end.

Initially, I thought that third-quarter earnings might have been able to trump the headlines out of Europe and bring new buyers in from the sidelines. Unfortunately, that hasn't been the case. Earnings and guidance, in general, have been good so far, but not great and certainly not superb enough to allay institutional investors' fears about the health of the worldwide economy.

When it comes to the growth names I follow, I'm seeing more bearish price action than bullish action at the moment. Some bullish setups that I thought had a chance of working aren't working. Not enough institutional buying has come in up to this point.

Some heavy-volume breakouts have occurred lately, from the likes of Intuitive Surgical (ISRG), Tractor Supply (TSCO) and Select Comfort (SCSS), but they're the exception, not the rule. Google (GOOG) continues to trade well after its earnings-inspired gap up on Oct. 14. But, the bottom line is that it's hard to trust breakouts when they are few and far between and the overall direction of the market remains in question.

Last week, the New York Stock Exchange (NYSE) was the only index that flashed a mild follow-through day on Oct. 12, the seventh day of its rally attempt, and it rose 1.4% in higher volume. Four trading sessions later, the S&P 500 followed through on the 11th day of its rally attempt, with a 2% gain. Despite this positive action, leadership remains in short supply.

As of Thursday's close, the Nasdaq shows three declines in the past four trading sessions where volume rose from the prior session. This signifies distribution, mild distribution, but distribution nonetheless. To its credit, the Nasdaq finished near its session high Thursday after falling 1.8% on an intraday basis. It closed with a loss of 0.2% as buyers came in late.

Most stocks in my growth screens are having a hard time making meaningful headway because of wishy-washy, back-and-force price action in the major averages. Without a fresh round of institutional buying, new leaders won't be able to take flight.

I have enough experience in the market to know that when two or three picks in a row head lower soon after I buy them -- or new buys tread water for several days -- there's something not quite right with the market. And that's been my experience lately. I just don't have an edge. Until I do, I plan on sitting tight and watching the market volatility from the sidelines.

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