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Sell the Dogs
by Bruce Zaro  | PUBLISHED: May 15, 2008 AT 6:07 PM |  

 

With the market leaping upward like hope in the springtime, most investors are following their hearts and looking for buys. We suggest browse your portfolio for a few sells. It's a good time to clean house, because a strong market bounce can make the underperformers in a portfolio easy to spot.

Look out for stocks that are merely bouncing along with the market, like the underachievers they are. The overachievers will be breaking out on the upside, showing improvements in relative strength as their price action outpaces that of their sector or the market in general. If you see a stock not doing this, just going along for the ride or worse yet unable to catch any upward momentum even in this market, think about showing it the door.

ADP is a good example of a stock failing to demonstrate much potential. The bounce it's seeing now is very likely just that-a bounce. The relative strength is on a sell signal against the market and it's a laggard even within its group. This weak sister hit the skids in January, falling to 38 from its October 2007 high of 49. I has since rallied over the past several months, along with the rest of the market. Currently sitting at 45, ADP is now back over the border into overbought territory on its ten-week trading band.

adp

In addition, ADP's weekly momentum recently flipped to negative after a long positive run that began in mid-February. Looking at its historical patterns, a flip to negative momentum has been a pretty good indicator that the stock is ready to correct.

So, let's see: we're looking at a stock whose long-term and short-term indicators are pretty unimpressive, that has little going for it in terms of relative strength or trends, and that is showing signs of having nearly exhausted its near-term bounce. Odds are that ADP has more downside in it than upside. What should investors do with a stock like this? Might want to sell the dog before it bites!

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*Click here to learn about Bruce's ETF Sector Rotation portfolio strategy

Hi Bruce,

I like your weekly commentary about the market and your recommendations, this week you had recommended in 2 part of the audio:
VOT,IJH,JKG, ILF,EFA,EEM, RJN,DBC,GAZ, FXA, short FXB, FXM.
This is nice but I have a feeling some thing is missing. First of all in the audio introduction you should show the tickers you are recommending, so people won't waste time finding what are you talking about. Second when you recommend stock ETF or currency let's say VOT I want to see your target price and target date, it doesn't have to be exactly to one day, but in months for example VOT Price Target: $90; Date Target: DEC 08.
FXB Price Target 1.85; Date Target MAR 09.

Investor,

Very worthwhile adjustment suggestions to my weekly pod! I'll work with our editor to put  into action.

The target prices on recommendations is something that I will look to include in every stock mentioned. Certainly this maybe very helpful in determining each individuals  appropriateness of the reccommendations. The target dates are more difficult in that that there are other factors involved.....overall market action....the strength and momentum of the sector. But let me give some thought to how I might give some guidance there.

Glad you enjoy the show and thanks for the imput

BZ 

With the market drifting upwards on light volume and somewhat overbought, it may be difficult to hold a stock like this. I'll be paying attention to ADP in the short-term.