This Surge Could Be Just Getting Started

I heard from a friend yesterday who said, I'm still not in the market yet. Is it too late to get in? I've been getting the question a lot lately. Clearly there are people who are underinvested or, worse yet, not invested at all. For those wondering if it's too late to get in, my short answer is that it's not. Let me explain. Consider that, despite a 12% gain for the S&P 500 since Dec. 19, the index still hasn't staged a true technical breakout -- it's still sitting underneath its July 7 intraday high of 1356 and its May 2 intraday high of 1370. I don't believe it's a question of whether the S&P 500 will take out its highs, but when. For this reason, I believe the market could still be in the early stages of a move here. Maybe we'll see a shake-out before a breakout, but I'm not expecting serious selling pressure. S&P 500 -- Weekly Source: StockCharts.com View Chart » View in New Window » The challenge now is finding stocks that are still within buying range. Scads of market leaders have made big moves already, and a common pitfall of investors is to chase performance by buying extended stocks. Don't do this. Instead, look for names that have been basing for a while, and could be poised to come out of consolidation areas. Keep in mind that Priceline (PCLN) broke out in heavy volume Monday, so breakouts can still be found if you're paying attention. Meanwhile, several high-quality names have recently gapped up in price. Many investors believe they have missed the boat after a stock has gapped up, but the truth is that new entry points can be found soon after such a move. Names such as Seagate Technology (STX), Akamai Technologies (AKAM), Ralph Lauren (RL), Teradata (TDC), Constant Contact (CTCT) and Cerner (CERN) continue to trade tightly, unwilling to give up recent gains. Cerner, in particular, is still building a base, and it could soon try to take out its recent high of $71.80. I'll be watching the other four stocks for new entry points, as well. All could end up forming a three weeks tight pattern, in which each weekly close is within 1% of the prior week's close. Price action like this can often presage continued price strength. The other potential scenario is that the four stocks continue to move sideways and form what's called a flat base. This has also acted as a launching pad for breakouts in the past. I've also been getting an occasional email about shorting stocks. This is an easy one: Don't short stocks when new institutional money is coming in from the sidelines. Institutional buying is a tough tide to swim against. Also, don't short stocks because you believe a recent big move is unsustainable. For example, I've heard some people say they want to short Apple (AAPL) because the stock is up 34% in one month. While it's true that Apple is extended well past its last buying area around $426, it is not a short candidate. The goal should be to short low-quality merchandise in the market -- not high-quality names. Recently debuted Michael Kors (KORS) is not a short candidate, either, even though its shares have more than doubled after its mid-December initial public offering at $20 a share. The company reported blowout earnings Tuesday, and shares closed the day at $42.85 -- up $9.24, or 27.5%. Is the stock overdone to the upside? Perhaps, but don't argue with the market and try to short this name. Michael Kors is another example of a bullish gap up in price, and I wouldn't be surprised at all to see tight, sideways trading in it from here. You know what that means: a possible new entry point down the line.

This Surge Could Be Just Getting Started

The question isn't whether it's too early to get in -- it isn't. The question is how to find buyable stocks.

Columnist Conversation

More Insider Buying in American Woodmark (AMWD)

This Weekend on Real Money

Stocks Under $10

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.