Guest Author - Guido Deboeck

In mid August the “M” in CAN SLIM flashed a buy signal. The "M" stands for market direction in the O’Neill approach to investing. On August 15th the NASDAQ closed at 2115; yesterday it closed at 2252. This represents a 6.4% increase in about a month (actually a month and four business days). Did you miss it? If so, you have to ask yourself: why?

Maybe you were on vacation, somewhere on a beach or in the woods, somewhere were they still do not have high bandwidth to the Internet, or maybe you were overseas and did not take your laptop. Whatever may be the case when you got back and picked up the papers, you noticed that the market had changed! Didn't you ? The problem is then figuring out what is the nature of the change?

Early this year it was energy and commodity stocks that were leading. Investments in overseas markets, especially in Latin America or the emerging markets, also contributed a good return. In mid May all of those turned negative. You moved out of the market and stayed on the sideline, taking full advantage of the articles you read here on BellaOnline's Investment section.

When the buy signal flashed in mid August, it was natural to consider first what worked before. However all those choices were now no longer good picks. Emerging markets, most Latin stocks, are struggling to get back; energy and oil stocks are down. Since mid August a real sector rotation has occurred. Instead of energy and commodities there are financial and technology stocks that have come “in vogue”.

Look at the charts of Cisco, Symantec Corp and Oracle (yes, when was Oracle the last time on any watch list) After spending six months between $14 and $16, now Oracle suddenly jumped to $18. Besides some “old” technology names, look who else is back: financial stocks. If you review the IBD Big Cap 20 that are published every Tuesday in Investors Business Daily, you will find that 7 out of 20 big cap stocks are financial stocks. Print out the charts of these well known companies: Goldman Sachs (GS), Merrill Lynch (MER), Moody’s (MCO), Schwab Charles (SCHW), Morgan Stanley (MS), Lehman Brothers (LEH) and Franklin Resources (BEN). Do you notice anything special?

Except for Moody’s all six other stocks flashed a buy signal on September 12th! For example, buy signals were reached for GS at $154.55, for MER at $76.40, for SCHW at $16.84, for MS at $68.63, for LEH at $67.65 and for BEN at $100.50 all on or about September 12th.

So, even if you missed the August 15th turn of the “M”, the market was kind enough to wait until after Labor Day and after schools started again, to provide another chance to move cash back into the market. Note there may be more chances still coming, but don’t let too many chances go by without taking action. Sector rotations are hard to decipher, but when several stocks in a sector provide a buy signal it ought to be obvious what "new tune" the market is singing.

Last week I encountered someone who expressed strong views on the old “buy-and-hold” approach. Maybe, if he still is holding technology stocks that were popular in 1999, they may eventually come back...but at what cost?

Years ago I quoted in my book on "Trading on the Edge" (see below), the chinese saying : Sui ji fing bian, which means there is nothing more important than adapting to changing conditions. The market is again teaching that we should adapt to changing conditions, else it is unlikely that by the end of the year portfolio returns will exceed the market indices.