September 12, 2007
Investor's Corner: Best Leaders Break Out Early In Bull Run

Alan R. Elliott

Okay, so the stocks on your watch list appear set to break out. Their earnings are sterling, but the market is fumbling.

Rally attempts are followed by weak confirmations, then undercut days later. It's a maddening test.

Hang in there, though. When a new rally takes hold, it's a fruitful time for stocks.

Most of a rally's best performers break out within several weeks of the rally confirmation, based on historical studies of stock market winners.

That confirmation comes in the form of a follow-through, when at least one of the major indexes makes a big price surge on higher volume.

Look for this move to happen in the fourth day or later of a rally attempt, which starts when an index starts climbing off a low.

Stocks with solid fundamentals and proper bases that break out first in a new rally will likely return the biggest gains of the rally.

The older the rally, the harder it is for leading stocks to emerge. That's one reason the start of a rally is generally a target-rich environment.

Also, historically the stock market makes its best money within the first year or two of a normal bull cycle.

The bull market that started in March 2003 provides a good example. The market had been in a historic bear market since March 2000.

A two-month ascent in the fall of 2002 crumbled. By March 2003, the Nasdaq had slipped to well below that short-lived rally's high.

Headed into March 2003, technology stocks were trying to hoist markets up by their bootstraps. The U.S. was trying to disarm Saddam Hussein's military regime. Economic data was too soft to stir enthusiasm. Oil prices were at their highest level since 1990.

A long list of stocks remained on deck, building sound bases underpinned by strong fundamentals. On March 17, as President Bush prepared Saddam Hussein's final offer -- exile or annihilation -- stocks rallied with a forceful follow-through.

Leaders began breaking out like greyhounds from the gate.

Among them were Sohu.com (NasdaqGS: SOHU), which soared about 350% to its July '03 peak; Netflix (NasdaqGS: NFLX), which more than quadrupled until topping in January '04; and Dick's Sporting Goods (NYSE: DKS), which more than tripled until July '04. A few broke out just ahead of the follow-through.



(Source: Investor's Business Daily)