May Offer Some Joy

 | Dec 12, 2011 | 7:30 AM EST
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I saw this comment on Twitter recently, and it resonated with me: "This market rewards all the wrong things: Take profits quickly, or sit on losses and it will be okay with time." Tell me about it. It's not exactly an easy market, despite an 8.3% rise for the S&P 500 since Nov. 25. Market chop is alive and well.

I normally don't like to buy a stock and sell it a few days later for a 5% gain; nor do I like to sit on small loss and hope the stock will come back. Small losses in growth stocks can get bigger in no time. Before you know, you're kicking yourself for not selling.

My goal has always been to buy a growth stock at the right time and to hold it for a long-term gain. But I also know that preservation of capital is important during uncertain markets. Some growth stocks can turn sour quickly in a down-trending market.

It was frustrating to get shaken out of a few new positions Thursday, when the major averages suffered big percentage declines. I was showing short-term profits in three holdings, and all the gains disappeared that day, when the Nasdaq slumped 2% in higher volume. I sold either at breakeven or for minuscule losses.

Risk management is vitally important during volatile market periods, and when overall market direction isn't clear. I was willing to take a chance with some new buys recently, but I bought in a down-trending market. For that reason, I knew I would be forced to keep them on a tight leash.

The market could still go either way from here. The irony of Friday's big percentages gains is that the S&P 500 and Nasdaq remain in technical downtrends. We're 10 days into a rally attempt for the major averages that began Nov. 28, and the major averages still haven't flashed a buy signal.

The S&P 500 and Nasdaq are still stuck underneath descending trend lines. If both indices can break out above their respective trendlines, the action would coincide with a breakout above the 200-day moving price average for each index. Institutional buying is what's needed. Let's see if some materializes in the coming days.

Nasdaq -- Daily

The good news is that there are reasons to be optimistic. With the European Union summit in the rear-view mirror, I wouldn't be surprised to see buyers come back into the market. But it won't be easy for them to gain the upper hand without volume. Friday's gains were nice to see, but once again there was no conviction behind it: Volume on the NYSE and Nasdaq came in lower than it did Thursday.

The law of supply and demand in markets never changes. It's the same now as it was 100 years ago. New uptrends need strong buying demand to work -- and strong buying demand means strong volume. For the Nasdaq that doesn't mean 2 billion shares on an up day but, rather, at least 2.5 billion. For the NYSE, it means not 1 billion shares but at least 1.5 billion. This would be a sign of strong demand.

I always say my growth screens are a good indicator of market health, and they're not looking bad at all right now. In fact, several stocks I'm following in several different industry groups looked poised to move higher.

I particularly like the look of mining-equipment maker Joy Global (JOY) ahead of earnings, which are set to release Wednesday. Another strong quarter is expected, with fourth-quarter profit expected to rise 34% to $1.86 a share. Sales are forecast to rise 29% year over year to $1.35 billion.

Joy Global shares staged a technical breakout in October, but the move didn't get very far. Still, the stock's current technical setup tells me a fresh breakout could be in the cards. After hitting a high of $93.84 on Oct. 27, Joy Global has been drifting lower in mostly light volume, recently bouncing off its 50-day moving average. I'm not seeing any signs of institutional selling in the stock. Recent sideways action could be setting the stage for a breakout above $93.84.

Joy Global (JOY) -- Weekly

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