Not Giving Up on This Rally

 | Dec 07, 2011 | 7:30 AM EST  | Comments
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OK, I'll say it: I'm concerned about the market here, but I'm not ready to throw in the towel quite yet, because we're still in the early stages of rally attempt that started on Nov. 28. At this point, the major averages haven't confirmed a new uptrend yet with big percentage gains in higher volume.

Not that a follow-through day will be an instant cure for the market, but it would make me feel better about the prospects for additional strength. In case you're wondering, the market's bullish performance on Nov. 30 didn't count as follow-through, because it was too early in the rally attempt.

The market's strong performance on Nov. 28 and Nov. 30 was mostly short-covering. It was not fresh money coming in from the sidelines which is what the market needs at this point. The good news is that I suspect that the short-covering has run its course -- at least for the time being. But just because most short positions have been covered doesn't mean that that shorts won't be afraid to come into the market again at the drop of a hat.

That's what makes this market so difficult right now. There's no conviction behind the buying, and that makes it easy for sellers to gain control quickly. Without conviction behind the buying, the market will have a hard time making headway. Just look at yesterday. Stocks tried to rally in light volume late in Tuesday's session, but sellers came in late. The S&P 500 and Nasdaq finished in the bottom half of their trading ranges as buying demand dried up.

My other concern about this market is a lack of leadership and quality breakouts in growth stocks. I'm seeing a lot of hesitant action when it comes to stocks trying to break out -- not surprising, considering that institutional investors remain mostly on the sidelines. They're the fuel need for breakouts to succeed.

MasterCard (MA) hit a new high recently on light volume, and sellers have been in the stock ever since. It hasn't broken down by any means, but the stock seems hesitant. Alliance Data Systems (ADS) hit a new high on Dec. 5 but reversed. Selling continued in the stock on Tuesday.

While recent breakouts have been iffy at best, I'm not ready to complete give up on this rally because compelling setups are out there. I'm seeing no shortage of high-quality growth names with sound charts, including Rackspace Hosting (RAX), Under Armour (UA), Accenture (ACN) and Intuitive Surgical (ISRG). There are plenty more, too. All four have top fundamentals with charts that could yield eventual breakouts. But it probably won't happen if institutional money stays on the sidelines.

Don't expect leadership from the likes of Apple (AAPL), Amazon (AMZN) and Baidu (BIDU). It will come from elsewhere.

The market's recent action, and the overall action in growth stocks, is a good lesson for investors on why it's important to wait for clear signs of institutional buying in the major averages before aggressively committing capital. I've been nibbling here and there with mediocre results. No big winners, no big losers; just middling performance, which tells that underlying market health is still very much in question. Let's hope that big buyers come in from the sidelines soon.

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