Four Generals Will Tell the Story

I am a big fan of market breadth indicators, but when considering whether or not the markets may be at a turning point, I prefer to focus on a handful of leaders rather several thousand small caps whose fortune is never to make it to CNBC’s scrolling ticker. Jeopardy may have “foods that begin with the letter Q” (one of my favorite movie scenes, for reasons I’m still not entirely sure of), but somehow I don’t think we’ll ever hear, “I’ll take micro-cap tickers for $200, Alex.”

Cramer has his “Four Horsemen of Technology” (RIMM, AMZN, GOOG, and AAPL), but this sector focus, while important, is a little too restrictive for my liking. I do think, however, that it is possible to get some meaningful information from watching only four stocks.

Right now, four areas of the economy that I am watching most closely are China, technology, global trade, and consumer spending. These areas just happen to coincide with four stocks that have been market leaders over the past few months, are current or recent members of my OHFdex (Overripe High Fliers Index), have recently made new highs, and probably need to continue to make new highs for this market to continue to the bull march.

In order of recent price strength, the four generals I am focusing on are Apple (AAPL), Baidu (BIDU), Southern Copper (PCU), and MasterCard (MA). Interestingly enough, it is possible that each of these stocks has already made an intermediate-term top. Apple has been the strongest of the group, but following an impressive earnings report on Monday evening, the stock gapped up and has slowly been drifting down since then. It would be hard to proclaim a top in AAPL right now, but the short-term momentum appears to have left the stock. Baidu’s earnings are tomorrow, but the high of October 11^th is already starting to look like a possible top, as BIDU trades about 30 points below that high at the moment. Southern Copper has also been drifting down since an October 11^th high; yesterday’s earnings report has done nothing to change the trend. Lastly, MasterCard’s high water mark dates from July 13^th. The company has been a consistently impressive performer since it’s May 2006 IPO, during which time it has quadrupled in price. For the past three months the action has been mostly sideways, with the stock rising and falling over concerns about the impact of the credit crisis on retail spending.

My personal belief is that all four stocks will continue to come under pressure as the markets grapple with the possibility that the October 11^th highs will be hard to take out. I am not a kiss and tell trader and I prefer not to talk about my trading and positions, but since many have asked, at present I am short all four generals, though I will not be short BIDU when it reports earnings tomorrow. For the record, anything less than a blowout quarter and BIDU could be the catalyst that turns the current small market correction into some longer term bearishness.

Now it’s your turn, readers. If you could only follow four individual stocks to divine the direction of the market, which stocks would those be?