Don't Worry About That Rally

 | Dec 20, 2012 | 10:30 AM EST  | Comments
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The major averages reversed and finished near session lows Wednesday -- but don't worry. The market uptrend is still intact. "Fiscal cliff" headlines seem to be more bad than good, but there are subtle signs that institutional buyers are starting to come in from the sidelines. The market is serving up buying opportunities, and that's the most important thing.

Sure, Wednesday was a disappointing day for the bulls, but the session didn't have the feel of institutional selling. It was far from that, actually: The major indices traded in a tight range and volume fell from Tuesday's levels.

The bull case still holds more water than the bear case. The Nasdaq Composite and S&P 500 broke out above key resistance levels Tuesday. The Nasdaq cleared 3035 and the S&P 500 cleared 1438. This raises the probability of a retest of the September 2012 highs.

It's good to see a market that's finally starting to show signs of accumulation. The Nasdaq Composite has shown three higher-volume gains since Dec. 11. Institutional buying is the lifeblood of any sustained market uptrend, and we're finally starting to see signs of it.

Headed into this week, it wasn't an easy rally to trust. For a while, it was driven more by retail investors than by institutional investors -- a classic melt-up. There wasn't much conviction behind the buying, and growth stocks with the potential to lead were showing wishy-washy price action at best.  It was easy to be skeptical with so much money on the sidelines, unwilling to commit.

But the Nasdaq's action since Dec. 11 shows that big investors are starting to put some money to work in stocks. Tuesday's session was encouraging, for instance, because of the number of technical breakouts it served up. Leadership is starting to broaden out. Names like Amazon (AMZN), Rackspace (RAX), Goldman Sachs (GS) and Oracle (ORCL) all broke out to the upside in heavy volume.

Oracle was in a bullish technical setup ahead of earnings, and the company didn't disappoint late Tuesday, reporting better-than-expected earnings and sales growth. The shares broke out above $32.50 Tuesday and followed through Wednesday, rising 3.7% to $34.09. Volume was heavy both days.

Meanwhile, another software name flexed its muscles Wednesday: Workday (WDAY) broke out in heavy volume, rising 3.3% to $55.13 in a classic first-stage base breakout that cleared resistance at $53.68. The company, with market capitalization of just over $9 billion, provides enterprise cloud applications for human resources and finance.

What's also encouraging is that several stocks with leadership potential are carving the right sides of bases, possibly getting into position to break out to the upside. Stocks in this boat include Equinix (EQIX), LinkedIn (LNKD), Lululemon Athletica (LULU) and Michael Kors (KORS).

All the pieces are in place for continued strength. If institutional money continues to come in from the sidelines in coming weeks, more leadership will come into focus. For now, it doesn't make sense to argue with the market trend. It will be upward until proven otherwise.

Ken Shreve got his start in the financial markets with Investor's Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its Web site Investors.com.  He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. He continues to provide market commentary on national radio and has appeared several times on CNBC. He now hosts the Breakout Investing podcast Monday through Friday from 3-4 PT on TFNN.

You can learn more Ken's Ultimate Growth Stocks newsletter here (http://marketfy.com/store/item/ultimate-growth-stocks/). For a sample copy, email Ken at kshreve84@gmail.com.

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