Not all cash is moving back to the sidelines in this tough summer market. For example, precious-metals stocks are grinding higher as the commodities recover and raise the likelihood of another rally leg in the group's strong uptrend. Biotech is also getting a bid these days, although these stocks need more time to recover from a major technical rout.
Let's look at the top performers in the
to see where the smart money is headed as we stand at the cusp of second-quarter earnings season. But first, we need to filter the list to remove energy, steel, agriculture and other relatively strong sectors because these overloved issues won't help us uncover emerging rotation.
Keep in mind this new leadership isn't necessarily in a good position to buy right now. A deteriorating market environment, like the current one, often waits until its latter stages to take down the strongest components. This destruction of hope offers the perfect mechanism to induce a final capitulation that sets the stage for a long-term recovery.
But the strongest stocks before a major low normally find buyers as soon as the market turns and head higher. So these issues might offer excellent opportunities when it comes time to rebuild portfolios. In the meantime, get them onto your watch lists and have them ready to go when we finally see the light at the end of tunnel.
received multiple upgrades at the end of May, following a well-received earnings report. The good vibes continued through June, with the stock rallying up to a test of the 2007 high in the mid 30s. It's been pulling back for the last three weeks, but is still in a good position to eventually move higher and break out.
The stock has held up well in the current selloff, but could still move lower and test 50-day-moving-average support near 30, before rounding the bend and retesting the rally high. Caution is also advised because
, another discount-based retailer, is stuck in the mud after a very strong second-quarter rally.
It's quite likely both stocks will turn together, given the growing anxiety about the American consumer. The recovery might not happen until we get deeper into earnings season, at the earliest. It's also a good idea to watch gas prices. An intermediate pullback in crude oil will probably trigger a notable short squeeze throughout the retail universe.
rallied to a new high at 33.50 in May 2007 and pulled back. It returned to that level in July, where it rolled over and entered a deep correction that finally bottomed out near 21.50 in January. The stock then moved higher in a steady recovery and broke out on heavy volume in April, after a strong first-quarter earnings report.
The rally pressed into round-number resistance at 40 in May, where the move stalled out and gave way to another downturn. The decline off the high fell into breakout support last week. This level often provides a launching pad for a strong bounce, but there's still no evidence an upside reversal is about to get underway.
The stock is in a strong technical position and trading in a unique sector that can withstand the downward pressures of a worldwide slowdown. It's also a good time of year because speculators turn their attention to holiday prospects during the quiet summer months and start to build positions.
Surprisingly, the strongest tech stock in the S&P 500 right now isn't a household name. Detroit-based
provides software for a number of applications in information technology and the service sector. This perennial underperformer now shows a solid uptrend that should lift price up into double digits in the coming months.
The stock bottomed out at 6.10 in late January, after a six-month decline, and started a steady recovery. Notice the textbook consolidation between February and April. This sideways pattern gave way to another rally wave that broke above the 200-day moving average at the same time the major indices were topping out after their spring run.
Price moved higher into June and then pulled back in a bull flag pattern for four weeks before breaking out last week. It's now testing new support and should continue to gain ground in coming weeks. Notably, the stock shows an unfilled gap between 9.75 and 12, posted in July 2007. That zone marks a logical target for this developing uptrend.
rallied to an all-time high at 75.44 in October and sold off. The decline bottomed in December, well ahead of the broad market, with price bouncing strongly in a slow but persistent recovery. The uptrend stalled in April, just below the October 2007 gap between 65 and 70. That resistance level marked the high for the next two months.
The stock gapped into resistance on heavy volume last week, right in the middle of the broad selloff. It appears that drug trials in a competitive product are showing poor results, giving this blue-chip biotech a renewed market advantage. This bullish turn has translated into strong buying interest that could lift price to a new high later this year.
As noted earlier, biotech stocks are finally waking up from the dead. But this group has a long way to go because its biggest components haven't hit new highs since 2005. However, 2007 sector leaders like Celgene,
could attract a ton of institutional capital between now and the fourth quarter.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Farley is also the author of
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