Our current position:

BUYER’S EDGE INTACT

In this week’s edition you will find:

• Where We Are
• What Was Important About Last Week
• What We Are Watching For This Week
• A Word On Discipline

The following sections can now be found on our home site:

• The Growth Stock Landscape
• What We Like – What We Have
• This Week’s Scans

Where We Are:

Taking a look at the overall markets:

At this juncture we’re believers the overall market averages are pulling back, not selling off.

Our major indicators of price and volume have given subtle evidence that we could expect something deeper than a pullback, but it would be premature to make that call.

The music goes on. The market might go up, and the market might go down.

While many stock market news letters go out of their way to impress their audience with ever more complicated and theoretical notions as to what the market will do, we here at The Growth Stock Report keep it simple, and stick to what works.

We do nothing more or less than execute a strategy that has worked for us.

This market environment has been a tough one if you’ve been buying technology, and a kind one if you’ve been long energy.

History has taught us that markets led by energy are often in their last stage of a cycle that will top out and lead to an overall move lower.

Higher energy costs have historically led to recessions.

The stock market has historically served as a leading indicator for the economy, and we don’t see any reason why this trend would change.

While we recognize the difficulty in timing the broad market averages, we make our money by selecting individual stocks and only acting when conditions are in our favor.

Our portfolio has been doing well for us. Until we begin to see evidence to suggest the markets could deteriorate, we’re simply going to believe our money will grow.

We let the market make our decisions for us. Of course we don’t expect to on the right side of things all the time, but through experience we’ve learned not to be burdened by whatever we’ve bought or sold, but libereated.

Once we’ve commited to a position we stick to it until our rules tell us to get out. This is what has kept us profitable, and this is what frees us.

Technically speaking:

The Dow Industrial Average ($INDU), +0.40%, continues to trade in a tight, 4-week range as it lags the other indexes with its reluctance to breakout. The Dow is currently on its 20-day average, and above its 50 and 200-day averages.

The S&P 500 ($SPX), +0.32%, drifted sideways as it trades on its 20-day average, and above its 50 and 200-day averages.

Nasdaq ($COMPQ), -0.96%, sold off below its 20-day average, while trading above its 50 and 200-day averages.

Russell 2000 ($RUT), -0.42%, also sold off below its 20-day average, while trading above its 50 and 200-day averages.

Volume for each of the major averages gave us one heavy distribution and one light accumulation day. Technology experienced the most selling with the Nasdaq 100 notching in 2 distribution days.

New Highs – New Lows continue to portray bearish divergence as the numbers have, so far, failed to make new highs in step with the major indexes.

The Advance/Decline Line remains flat with bearish divergence to the S&P 500.

Investors Intelligence reported the number of Bulls increasing with the number of Bears decreasing. This contrarians’ indicator continues to warn of a “shakeout” in the market.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Holdr (TLT) found support at its 200-day moving average and took out last week’s high.

The U.S. Dollar Index ($DXC) sold off for the week and is currently positioned between its 50day and 200-day averages. Meanwhile, The Gold Miners Index ($XAU) trended up for the week and is above all of its major averages

The Dow Jones Commodity Index ($DJAIG) broke out for the week. This vehicle tracks all commodities including energy, grains, metals, and softs (cotton, sugar etc.).

Consumer Staples ($CMR) held an edge in relative strength over the Consumer Cyclicals ($CYC). Staples continue to flirt with breakout levels, while Cyclicals face overhead resistance.

The Semiconductor Index ($SOX) sold off for the week. The 500 level remains a pivotal level going forward.

Banks ($BKX) went sideways for the week and continue to trade below the 50 and 200-day averages. The index is vulnerable to further selling.

Broker Dealers ($XBD) remain technically strong above the 20-day average, and poised to breakout to new highs.

Retail ($RLX) managed a modest gain for the week as it trades in pullback mode after breaking out of a multi month base.

Internet stocks ($IIX) sold off with the rest of the tech sector and are showing relative weakness to the overall market with overhead resistance to reckon with.

Telecom ($XTC) hit new highs for the year as it holds a steady trend up.

Healthcare ($HCX) continues to hold high levels after breaking out to new highs last week. The sector is sluggish, though bullish as it trades just above its 20-day average.

Biotech ($BTK) pulled back for the week as it cools off from an impressive upside run from the past 6 weeks.

REIT’s ($DJR) were hit with selling Monday, though regained much of the ground lost for the week in a four day rally. The index is technically bullish, though vulnerable if Monday’s low of 232.66 is taken out.

Homebuilders ($DJUSHB) are consolidating just below the 50-day average. This group is also technically bullish, though vulnerable to selling.

Transportation ($TRAN) posted a modest gain, and is setup to breakout. Whether or not it actually produces a legitimate breakout is yet to be seen, and will weigh in heavily for the direction of the overall market.

Airlines ($XAL) lost ground for the week and remain “triangled” in a possible lower base. The index has been bogged down over the past couple of years, though is showing encouraging action after shaking off negative news.

Defense ($DFX) sold off modestly, though its uptrend still intact.

Energy ($IXE) zoomed to another new high.

Basis Materials ($A1BSC) were a hot spot for the week as this index pushed above last week’s high. There is significant overhead resistance to be dealt with, though this vehicle is trending above all its major averages.

Utilities ($UTY) consolidated for most of the week, though its uptrend very much intact at this juncture.

The top 10 industry groups from the 6 month RS screen are:

• INTERNET INFO PROVIDER
• TECHNICAL SERVICES
• HEAVY CONSTRUCTION
• INDUSTRIAL EQUIP WHOLE
• SEMICONDUCTOR-INTGRTD
• SEMICONDUCTOR EQUIP MA
• DEPARTMENT STORES
• SEMICONDUCTOR-SPECIALI
• GROCERY STORES
• SEMICONDUCTOR-BROAD LI

What Was Important About Last Week

STOCKS:

• Dell Computer (DELL) reported earnings of $1.02 billion in the second quarter, up 28% from a year ago, with revenue up 15% to $13.43 billion. The market pounded the stock with analysts looking for $13.7 billion in sales. This is the second disappointment in three quarters from Dell.
• Auto-parts makers Delphi (DPH) and Visteon (VC) hefty losses for the second-quarter.
• Nortel Networks (NT) reported second-quarter profits up almost 300% from a year ago and gave a strong forecast for the year.
• Cisco Systems (CSCO) announced earnings of $1.54 billion for its fiscal fourth quarter, up 12% from a year ago.
• The world’s biggest steelmaker Mittal Steel (MT) said it earned $1.1 billion in the second quarter, down 15% from a year ago. Mittal also cut its forecast for third-quarter earnings.

ECONOMY:

• The Fed raised its target for the federal funds rate target to 3.5% There have been 10 increases since June 2004.
• The Labor Department said the productivity of nonfarm businesses increased to an annual rate of 2.2% for the second quarter. This is down from a 3.2% rate in the first quarter and well below the three year average.
• Retail sales were up 1.8% last month, but fell short of economists’ forecasts. The highlight of the report was autos and auto parts sales which increased 6.7% in the month for the biggest since October 2001.
• The Commerce Department reported the U.S. imported $58.8 billion more in goods and services than it exported in June, beating economists’ forecasts. This is the third-widest monthly trade gap on record.

What We Are Watching For This Week:

Key earnings releases:

• MONDAY: Agilent Technologies Inc. (A), Goldcorp (GG).
• TUESDAY: Abercrombie & Fitch Co. (ANF), American Eagle Outfitters Inc (AEOS), Applied Materials (AMAT), Deere & Company (DE), Hewlett-Packard (HPQ), Home Depot Inc (HD), Staples, Inc. (SPLS), Wal-Mart Stores Inc. (WMT).
• WEDNESDAY: BEA Systems (BEAS), Network Appliance (NTAP).
• THURSDAY: Gap Inc. (GPS), JDS Uniphase Corporation (JDSU), Marvell Semiconductor, Inc (MRVL).
• FRIDAY: CDC Corporation (CHINA).

On the economic front we have potential market movers with:

• MONDAY: NY Empire State Index
• TUESDAY: Building Permits, Core CPI, CPI, Housing Starts, Capacity Utilization, Industrial Production
• WEDNESDAY: Core PPI, PPI, Initial Claims, Leading Indicators, Philadelphia Fed
• THURSDAY: Initial Claims, Leading Indicators, Philadelphia Fed
• FRIDAY: none

The Following Sections Are Now On Our Home Site:

• The Growth Stock Landscape
• What We Like – What We Have
• This Week’s Scans:
  SETUPS
  BREAKOUTS
  BASE BUILDING
  SHORTS

This Week’s Word On Discipline:

“The discipline of desire is the background of character.” — John Locke