“The second most important indicator of a primary change in market direction, after the daily averages, is the way leading stocks act.”

William J. O’Neil

How to Make Money in Stocks


Studying past market cycles gives you a perspective that most investors have never accessed or have written off as irrelevant.  Although it would be nice to overlay the current market to some past market cycle, and therefore “predict” where it is going to go, it definitely does not work that way.  But analyzing historical comparisons can be useful.

For example, the current environment reminds me a lot of the 1990-91 market.  Everything can be working, then all of a sudden there is a sudden shift in the risk level. The first landmine during that market was Adobe Systems (ADBE).  In 1990, Adobe Systems was a true leading stock.  The kind of stock you did not want to miss breaking out of a base.

If you bought it coming out of this base, you were up almost 10% when Adobe warned about its upcoming quarter. The stock gapped down a whopping 30% the next day, with no chance to stop out in the 7-8% range we prefer.  It proceeded to correct 40% in three weeks! 

Similarly, Monday morning QLYS was trading at 52-week highs before it cratered some 30% in one trading day!  On a side note, the reported earnings were 200% year-over-year.  It is not the news but the reaction to the news that is important in your evaluation.  Other leading stocks haven't fared so well on earnings either.

When Adobe gapped down in May of 1990, the market shrugged off the news for a number of weeks, before it finally succumbed, leading to a bear market in late 1990.

If you review other leading stocks in 1990 (using the change date feature in MarketSmith) like Microsoft and Intel, you will find their action and charts are eerily similar to Apple (AAPL) as it tried to break out of its most recent base.  Intel and Microsoft went on to make enormous moves after the 1990 bear market, but they each corrected significantly before resuming their price advances.

In hindsight, it is easy to see that you should just sit through the base and wait it out.  Protecting your mental as well as monetary capital is vital to staying the course in any market correction. Ask yourself honestly if you would be able to hold on, as your two “best” stocks correct 37% (MSFT) and 46% (INTC) in the bear market?

Whether you own(ed) Qualys Inc. (QLYS), you’ll want to be evaluating all leading stocks right now, and assessing their behavior as normal or abnormal.  Shifts in market direction can also be determined by reviewing your most recent purchases (Have they made price progress?). It seems like everyone is quick to call every 3% move down as the top of the market.  Inevitably there will be a bear market/correction.  It's just not going to boldly announce itself in real-time.  All we can do is use the tools we have to heed any warning signs and adjust accordingly.

“Don’t expect the market to end in a blaze of glory.  Look out for the warnings.”

Amos Hostetter, a hugely successful commodities trader in the 1970’s


Best returns,

Scott St. Clair

Senior Product Coach