Updating/weeding out the list

Today the market had very respectable and possibly encouraging gains. But judging from the volume on the major index ETFs, trading was not heavy enough to look at the day’s action as a convincing change of sentiment in the market. This images shows a daily chart of the three majors since November with a 30 day Moving average. All of them have areas of likely resistance to overcome before any serious bullish posture could be entertained again. In addition to resistance levels from price action, the descending 30 MAs might just might provide another influential nudge to the down side.
It should be noted that they all are in a double bottom reversal pattern, but there are a few things to consider. 1) The pattern is meaningless until the resistance from the high between the two bottoms is broken. 2) A bullish reversal should come at the bottom of a bearish trend. The recent bearishness is really just the first breakdown of a very bullish trend and not yet a trend with lower highs and lower lows(I’m looking at SPY on a daily closing basis). So, looking for an upward “reversal” seems a bit premature.
(Click for a larger view.)

While the market is sorting itself out, this is an ideal time to rebalance our lists. Everyone should be working on a bearish watchlist. Despite the current state of things, I think we should always focus on the primary watchlist for the group as a bullish watchlist. After all, that direction is the ultra long term bias and nature of the market. Besides, many people may not be interested in or comfortable with shorting the market or trading bearish. When the market does resume its strength, we want to be ready with a list of well chosen stocks that are likely to be among the first and strong participants of a new rally. But first we’ve got to get rid of the current stocks that are less attractive at this point.
I mentioned a few thoughts about trimming down our list a few posts ago. Here’s a complete run down on what I think should go and what should stay.
First: here’s a look at the list and how it scores in the Investools Phase 1 and Phase 2 analyzer.

The simplest way to start is by getting rid of KBH, UNT and ZMH because they have a combined F/E score of less than 3.25. I’m a bit sad to see ZMH go, particularly as it continues to work on a new 52 week high. But the growth estimates is less than our ideal 20% and it is estimated to grow at a pace slower than its group this year and also in the next 5 years.

Also, because the Estimates score is forward looking, we’d prefer for that score to be the stronger of the two, if possible. For that reason, I’d also like to see CRDN, WCC, and BHI leave our list.
CRDN – Growth estimates are a low 7.5%. Also estimated to under perform its group this year and next. Set an alert on this one for when it breaks 62.50 and forget it.
WCC – Growth estimate is less than 20% and it is estimated to under perform its group this year and next. It’s been in a range between 55 and 70 for about 9 months. Set an alert to notify you if it goes above 70 and forget it.
BHI – It is actually very attractive from a valuation standpoint. PEG is .45 with a P/E well under its group. But the most recent earnings miss and the current and next year’s estimates for earnings growth well below the group look like red flags. The chart is a mess with the gap down on the recent earnings announcement. It has also not participated in the latest rally attempt in the Oil Services.

The others:
ICE – Has had an incredible run and the trend has broken. PEG of 2.19 looks a bit overpriced. I’ll be looking for potential bearish entries on this on a bounce down from 135 or a break of 125.

NTAP – It had a strong reaction to the recent earnings announcement in February but couldn’t follow through and with the market selloff on the 27th, it gave back all the gains from the earnings jump. 36 remains important support, recently confirmed by a nice hammer formation. But once that breaks, things don’t look good. Again, this has a high PEG of 2.24. Institutions own 87% of the shares outstanding on this stock. Once they start selling, look out below.

HWAY – This stock has just been boring! The fundamentals are still quite good, but I’d like to get rid of it if or no other reason than that it trades well below an average 1 million shares a day. As a result, there’s not a lot of open interest throughout the options chain.

VSEA still looks to be a reasonable valuation with strong fundamentals. So I don’t see great fundamental reasons to take it off the list. But I’m nervous about the chart. It has seen great gains in the last 8 months. More impressive is the strength of its chart compared to the SOX index in the last 4 months and it is now working breaking recent resistance to an all time high. But the chart looks like it could be ready to roll over. It broke a long term trendline in January and rallied back up to find resistance on the underside of that line. It now looks to be in an ascending wedge, which tends to resolve to the down side. With a big bearish engulfing candle strengthening resistance at 50, a reversal could be at play here.

CWTR – Though the fundamental scores are still pretty good and the valuation is actually quite attractive, I think this industry comparison chart says it all. GONG!

RIMM is pretty expensive, but it has held up impressively in the recent market selling. We should wait to see what happens at the earnings announcement on April 4. Or maybe we should not include stocks over $100. Thoughts?

In Summary, here is my recommendation for the list:
KBH Cut
UNT Cut
ZMH Cut
CRDN Cut
WCC Cut
BHI Cut
ICE Cut
NTAP Cut
HWAY Cut
CWTR Cut

Keepers(for now)
VSEA Give it the benefit of the doubt until it breaks down
RIMM Hold ’til earnings, at least
COH This actually has 3 green arrows right now
AAPL Apple rolls out a bright iFuture
CTSH Just ranked 15th in the Businessweek 50 best performing companies. Setting up for a new batch of green arrows.

So how does that strike you? Please let me know if this assessment of things is agreeable or if you see certain stocks differently than I and would like to take different action. Once we agree on the stocks to get rid of, we can begin to find replacements. We still have over a week until our next meeting, but perhaps we ca
n get some ideas flowing between now and then. If you respond with ideas, I’ll try to respond and include charts. If you want to mock up a chart with what you’re seeing, I’d be happy to post that too on that blog.