Cree's Channel

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With all of these growth stocks, there comes a time when it gets hard to even draw a channel on them because their charts start to look parabolic. If you switch from an arithmetic chart to a logarithmic chart, you can straighten the chart out and see it more clearly. The strongest stocks look parabolic even on a log chart. Any stock that looks parabolic on a log chart is a strong sell in our opinion. No company can sustain that kind of growth. The numbers just get too big.

CREE has not gone parabolic on a log chart yet, but has definitely done it on an arithmetic chart. We can only draw a trend channel going back about 5 months on an arithmetic chart of CREE, as pictured above. Regardless of how you draw the channel, you have to admit that CREE is a tempting sell. If we were heavily invested, we'd be lightening up a bit on these shares. Considering we're only partially invested, we're going to ride it out. Based on the trend channel, CREE could reach 75 before needing any kind of a pullback. At 75, we'd be very tempted to take some off the table in an attempt to repurchase those shares at a lower price within a week or so. There's only so far a stock can go before people start taking some profits, and CREE is definitely in the nosebleed section at the moment. We'd feel more comfortable with it if it were just running parallel along the yellow line. It's a double-edged sword because we like to see the relative strength, but at the same time we don't want the stock to overheat out of fear that a sharp drop could rattle investor confidence. The best thing CREE could do is go sideways for a month while the market goes lower. That would take a lot of the risk out of the picture.

New Highs

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VECO is trading at new highs today, long before the indexes to say the least. It looks like VECO can make it to approx $42 before hitting the top of the trend channel and needing a breather. It's unlikely it will continue at this trajectory and get there within a week. It's more likely that the speed at which these stocks are climbing will taper off and give way to charts that cling to the yellow line in the center of the channel, moving slowly upwards until a new catalyst comes along.

That catalyst may be another leg down for the broader market, but that remains unknown. The broader market, for the record, is not out of the woods just yet. It remains below its downtrending 50dma, and neither the S&P nor the Dow have taken out their early Feb highs.

What the market does over the next several sessions is critical to helping us determine whether we just completed a healthy 10% correction, or whether we're in the early stages of a larger selloff.

CREE

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The chart of CREE above exemplifies why relative strength is the single most important attribute for a stock to have. When the market was correcting, CREE managed to stay above the moving average. Now that the market is hinting at a possible technical recovery, CREE is off to the races. No doubt it will make new highs LONG before the market itself.

If the market is just gearing up for another leg down, CREE will be able to absorb that plunge most likely without breaking through its moving average or trend channel once again.

VECO shows similar strength, but AIXG has become a weak stock. If AIXG does not begin to show signs of renewed strength, we may have to let it go.

We bought some MRVL today after researching it more thoroughly. The company is posied to experience explosive earnings growth over the next year or two. Having the support of fellow "aggressive growth" investor, Ken Heebner, doesn't hurt either. We like the prospects for the stock, and will more than likely be adding to it so long as it continues to gain popularity among investors. Popularity is the one element that is hardest to quantify, as there is no fancy formula to plug it into. Yet, it has more influence over a stock's future than any other variable.

CREE has certainly caught the attention of the investing public, and we hope to see that interest last for another few quarters, provided it doesn't overheat beforehand. Stocks with this kind of "popularity" run the danger of getting way ahead of themselves, hence our use of trend channels to help us scale into and out of positions in companies based on how close they are to the reality of their earnings potential.

We are now 36% invested, holding CREE, VECO, AIXG and MRVL. Cramer, are we diversified?

Financials

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What better reason to believe that the market is headed lower than charts that look like this? The chart above of Citigroup (C) demonstrates just how fragile the financial sector is at the moment. The odds that Citi breaks support and heads lower are very high. We continue to believe that we'll see a full 10% correction in the market, and perhaps even 15%. This is one of the reasons we sold all of our Ultralong index positions at the end of December. We don't have any reason to believe that the market will continue to drop after completing this modest, healthy correction. We believe that Dow 9,500 (S&P500's 1020) is in line with the reality of the current health of our economy. In an ideal scenario, the market would capitulate in two or three days of massive selling, then have a strong intraday rebound after a panic selloff one morning.

If it unfolds this way, there will be value to be had across the board. We will be backing up the truck on the LED stocks, particulary CREE, which is demonstrating excellent relative strength considering what the broader market is doing. If the market does begin to peel off a few hundred points a day for a few days in a row, it will look like we're headed to Dow 6,500 again. You'll be forced to decide for yourself whether or not this is a healthy correction or another leg down in a very tiring bear market. We're sticking with the "correction" theory, but encourage everyone to do draw their own conclusions.

Please participate in our poll at the left hand side of the page. Thanks, Snot

AIXG

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Charts don't get much more ominous looking than this. AIXG has spent the past several weeks forming a descending triangle. The odds strongly favor that this chart will break down into a new, lower trading range. We believe the market is not all that far away from doing the very same thing. This does not deter us from our plan, but rather has us excited that better prices may be just around the corner. The lack of buying interest in the broader market is becoming more evident with each trading session. Hopefully all stocks will capitulate in a fast and extraordinary selloff that marks the bottom of this correction.

Rubicon

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We promised we'd ferret out the material suppliers of the LED market, so here's one stock for you to look into. Rubicon Technology (RBCN) makes innovative crystalline products for LED applications. Unfortunately, it's not easy to put a price on the stock, as the company is in the red. It is expected to become profitable sometime this year. We'll file this one as the most speculative one of our "4 horsemen of LED". We don't normally buy large positions in stocks of companies that aren't generating profits, but we wouldn't mind gambling on this one with a small percentage of our portfolio given the potential of the entire sector.

RBCN is currently trading near the bottom of its channel, making it attractive on a technical level. VECO is supposed to be reporting earnings on Feb 8th, with RBCN reporting on Feb 9th.

We'd like to have about 1/3rd of our portfolio in the LED stocks before these earnings release dates. It would not be suprising if these stocks sold off just prior to their respective earnings releases. When an uptrending high-momentum stock sells off strongly just prior to earnings, we see it as a rare opportunity to sneak on board the train.

Broader Market

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The chart above is a chart of the Dow from 11:41am today. It's too early to say the market is going to have a down day, as it could well close up 200 points. But from its early indications, we may just get that broad market correction we've been looking for. To confirm that a correction is taking place, we'd need to see a simultaneous and decisive break of both the bottom of the trend channel and the moving average. If the market closed here (down approx 190), we would have neither just yet. Still, it would be a good sign that bargain prices may be in the near future. The financial news will tell you that the market fell this morning because Obama plans on further tightening banking regulations. This actually has nothing to do with why the market is selling off this morning. The financial news folks are the most frustrated individuals in the world. Every day, they have a stack of positive news stories in one pile, and a stack of negative news stories in another pile. Depending on which way the market goes each day, they blame it on stories from either the positive or negative pile. The real reason for the majority of the market's moves is just human nature. If the market goes in one direction long enough, people get bored. It's been going up for 10 months now, and is due for a correction. The "news" is irrelevant.