Market Leaders; a Double Edge Sword - Part 1 by Mark Minervini (zz)

http://markminerviniblog.blogspot.com/2011/08/market-leaders-are-double-edge-sword.html

Market Leaders; a Double Edge Sword - Part 1
Just as the leaders lead on the upside, they also lead on the downside. Why? After an extended rally or bull market, the market’s true leaders have already made their big moves. The smart money that moved into these stocks ahead of the curve will move out swiftly at the first hint of slowing slow. When the leading names in leading industry groups start to falter after an extended market run, this is a danger signal that should heighten your attention to the more specific signs of market trouble or possible trouble in a particular sector or industry group.

Most stocks experience a relatively severe decline in price after a phenomenal advance has run its course. This is normally due to profit-taking and the anticipation of slower growth ahead. A weakening general market is often the cause for subsequent price declines.

There will come a point when leading stocks stop making new highs, start to churn, or, even worse, buckle and reverse direction. This often happens before the overall market tops and gets into serious trouble. For example, in mid-1999, I started to point out the divergences and negative signals that specific stocks were flashing. At the time, some of the market’s key leaders were starting to top out, while the indexes continued to accelerate higher. For months I saw evidence that the ice was melting beneath the market, based on the action of leading stocks. Institutional clients kept asking me if I was sure about my opinion, because while the divergences were clear, the market averages kept powering upward. I was asked repeatedly, are you being too cautious?

F5 Networks - Stock Tops Before Market

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Bull markets sometimes roll over gradually whereas bottoms often end with a sudden sell-off, followed by a strong rally. As the leaders start to buckle, the indexes can move up farther or start to churn, moving sideways. That's because cash stays in the market and rotates into laggard stocks. The indexes hold up or even track higher on the backs of the stragglers. Watch out! When this happens the end is near and the really great opportunities may have already passed.

Most investors miss these subtle signs, mainly because they become conditioned by the market’s previous persistence upward during the bullish phases. What’s the big deal if a few stocks start to crack, they tell themselves, as long as the Dow keeps heading higher; Right?

A bull market is always dominated by at least one sector and several sub-sectors. Within the top sectors leading a new bull market, the relatively few leading names that dominate the leadership during a bull market eventually attracts the attention of institutional money. The excessive, concentrated buying enthusiasm for those leaders can push their prices far above realistic valuations. As a result, those same issues tend to decline the most during the subsequent bear market. For those investors who hold on to the former leaders for too long, the results can be devastating.