Market Summary

The markets put in a mixed performance this week with the DJI and S&P 500 making gains of 0.34% and 0.41% respectively, while the NASDAQ Composite lost 0.55%.

After testing support at 10,000 last week, the DJI has consolidated this week. However, there were two distribution days and after Thursday's move down it looked as though it would fall further as Friday's session opened. A relief rally took hold, however, and the market closed higher on improved volume, much of it possibly resulting from short covering.

The NASDAQ undercut the low of April 18 in early trading on Friday, thereby putting the final nail in the coffin of the tentative rally that started on that date. The NASDAQ did close higher, however, and that starts the clock ticking as we look for a confirmation day to show that this time, the upturn is the real thing.

The S&P 500 is also in consolidation after setting its recent low on April 20. This index has fared best so far this year having lost least (4.54%), and is the only index to have a positive 'M' indicating that there have been slightly more accumulation days recently than distribution days. This indicates that while the large caps are being hurt by inflation fears, and technology stocks are out of favor, the broader market is showing some resilience.

Breakouts

The number of breakouts increased by 50% to 35 this week. BMHC was the best performer as it broke out of a double bottom base on Tuesday on 5 times average volume to gain 18.7% above its pivot before slipping back to an overall 11.7% gain at the close on Friday. A strong breakout was presaged by a rising price on above average volume on Monday.

You may have read in IBD (Thursday's Big Picture) that there are few breakouts and even fewer successful ones. It is true that the relative number of breakouts has fallen and that the number of failures has increased, but there are still very good returns to be obtained from breakouts, as this week's top tip shows. They are not coming from traditional CANTATA style stocks, however.

Breakdowns

There were 16 confirmed breakdowns this week and the average return on breakdowns has now risen to 9%. RAH broke down from a flat base on Thursday to lose 21.2% before recovering for a 14% loss.GMR broke down from ShortsaleWatch on Wednesday to lose 8.3% by week's end.

Newsletter Format Change

There are some slight changes to the newsletter format this week. The weeks Top Tip and New Features have been moved up to immediately follow this section. The usual statistics are now after these sections.

Technical Condition Outweighs Fundamental Strength in Breakout Success

Although breakouts are not providing the impressive returns of 2003 or last year's election rally, they are still giving very acceptable returns that easily beat the market averages by a substantial margin.

After allowing for stop losses at 8% for failed breakouts, the potential return from all breakouts so far this year is 14%. The distribution of returns is shown in the chart on the right.

Interestingly, strong fundamentals are not such an important factor in successful breakouts as you might think. Of much more importance is technical condition. An analysis of all confirmed breakouts this year yields the results below. Notice that most breakouts are in technical zone 4, and none in technical zones 1 and 2, while a breakout can come from any fundamental zone, although mostly zone 3. Stocks in zone 3 are potentially improving their fundamantal scores while those in zone 4 probably have their strength already priced in and are less likely to breakout.

Number of Breakouts by Zone Zone CET CEF 4 282 83 3 22 166 2 0 47 1 0 5 0 0 3 Total 304 304

This is an important result if you are a CANTATA purist who screens for stocks based on a high fundamental score because you may be missing some of the best breakouts. To further illustrate the point, here are all the stocks making gains of at least 20% after breakout since the start of the year. Of the 48 stocks, only 12 have a fundamental score of 4 while 45 have a technical strength of 4. Clicking the symbol in the table below will show the chart as it was before breakout, clicking the date will show the complete chart to date.

Why do we see these results? The CANTATA formula is oriented towards finding growth stocks and these perform well in a bull market. Although we are not technically in a bear market, we are seeing bearish characteristics and the WON philosophy is to wait on the sidelines in these conditions. Professional traders and many institutions don't have the option of waiting out the bearish trend, however. In this market (or perhaps in any) the technicals tell us where the 'smart money' is going.

Conclusion

Successful breakouts are providing very satisfactory returns, but they are not coming from stocks that would be selected by a classical CANTATA screen. CANTATA investors should modify their investment approach in this market.