Lost In Translation

Posted onAuthorGSRTrades

Welcome to this week’s edition of The Growth Stock Report!

Traders,

Our work as analysts is about translation. It is not our goal to understand every twist and turn of the market, but to weed out what is important from what is not.

The market speaks its own language, and when it comes to our interpretation of it – what we get is usually just noise.

What we wait for are the times when the market speaks loud and clear. It is at those times that we take action.

We have been taking advantage of select opportunities in this market and coming out ahead. However, we are not getting a strong enough message that we should be committing 100% of our capital to.

Our current position:

MARKET IN LIMBO

In this week’s edition you will find:

Where We Are:

Taking a look at the overall markets:

It’s been a few weeks since we’ve seen any real downside in price-action.

We believe recent strength has been from short covering, not true bullish sentiment, which is usually what happens in rallies after long down-trends, but we are also seeing leadership take form.

Encouraging moves in semiconductor stocks are always a good sign for the market, and if this trend continues we’re likely to set up our tent in the Bull’s camp. As discussed below, there is still a major hurdle for the sector to make.

Enthusiasm for broker-dealers is another positive. As with the semiconductors, we see well bid stocks here as a “feel good” sign for the overall market.

But, we’re not ready to put up the green flag.

Despite the fact no one has been eager to sell this market, there are major technical barriers to reckon with.

In lieu of individual sector action discussed below, the technical condition of the overall market is suspect. The weekly chart for the S&P 500 illustrates how the index broke down through a major trendline this year and has yet to recover. CLICK HERE.

This doesn’t mean we’re Bears either. We don’t want or expect anything from the market. We only do what it tells us, and it really isn’t saying anything important right now.

What we do is identify opportunities that have great risk to reward ratios, not try and predict every move of the market.

To sum things up, we see some encouraging things going on, and are committing money to select growth stock opportunities, though are not ready to go full steam ahead.

Technically speaking:

The Dow Industrial Average ($INDU) +0.49%, and S&P 500 ($SPX) +0.17%, were up slightly for the week, while the Nasdaq ($COMPQ) -0.41%, posted a slight loss. All three indexes found support at their 20-day moving averages and have roughly retraced 50% of the ground lost from the highs made March of this year. Price-action has been consolidating for three weeks.

Volume as a whole has been slightly below the 60-day average, so we’re not going to read too much into this.

Tuesday’s session gave us what we call a key reversal day in which the market shot to new highs but only to fall apart with hardly any gain. When this happens on heavy volume, as it did Tuesday, it gives a signal that a change in trend may be in place.

Key chart action for the week:


Charts courtesy of Stockcharts.com

Consumer Cyclicals ($CYC) remain very weak compared to their counterpart Consumer Staples ($CMR). We can’t be comfortable as Bulls until we see the Cyclicals Index clear above its 200-day moving average.

The Semiconductor Index ($SOX) is technically set up to breakout. We love this sector as a leading indicator, and know that if it can clear its high made over a year ago it will be a strong sign for the Bulls. The 450 level is a major benchmark here.

Banks ($BKX) remain a weak spot for the market. Considering banks make up the largest of the sector weighting in the indexes, further decline here will tilt the scale to the Bears.

Broker Dealers ($XBD) have been a driving force for this market which can be considered very positive. This is our leadership.


Internet stocks ($IIX), after a strong move off the year’s lows, have pulled back in tight Bullish fashion. A successful launch from it’s now formed base will be another Bullish sign for the market.

Healthcare ($HCX) and Drugs ($DRG) have lost ground recently but have not crossed the lines of what we feel are technically bullish.

REIT’s ($DJR) broke out for the week.


As mentioned in last week’s report, trade what is and not what should be. As the media wrestles with theoretical notions as to why the “real estate bubble” may or may not burst this sector just plows them over. All it takes to drive a market up is money and desire.

Homebuilders ($DJUSHB) also hit a new high, though performance was lackluster.

Transportation ($TRAN) is not giving a pretty picture (if you’re Bullish.) This is another important sector that historically dictates overall health of the market.

Defense ($DFX) stocks have been a pocket of strength for the market.

Energy ($IXE) had another strong week to make it four in a row.

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

  1. CONSUMER SERVICES
  2. GROCERY STORES
  3. SEMICONDUCTOR-SPECIALI
  4. OIL GAS DRILLING EXPLO
  5. RESIDENTIAL CONSTRUCTI
  6. DEPARTMENT STORES
  7. APPAREL STORES
  8. FOREIGN UTILITIES
  9. DATA STORAGE DEVICES
  10. HOME FURNISHING STORES

New Highs & Lows: Highs continued their dominance over the Lows, though numbers were little changed from last week’s action.

The Growth Stock Landscape:

The action has been realtively quiet for growth stocks.

We have names setting up, though did not see any any improvement over last week.

For the week:

The clear theme for growth stock land is energy.

New breakouts from oil stocks came from Burlington resources (BR), Sasol Ltd. (SSL), Statoil ASA (STO), and Sunoco Inc. (SUN).

Elsewhere in energy stock land, we had new highs from: EOG Resources (EOG), Occidental Pete (OXY), Petro China (PTR), Swift Energy (SFY), and Southwestern Energy (SWN).

Apparel Retail produced another strong week as well with a new breakout from American Eagle Outfitters (AEOS), and new highs from Chico’s FAS (CHS) and Urban Outfitters (URBN).

Market stocks (As in stock market related businesses) we’re well bid with another week of new highs in Chicago Mercantile Exchange (CME) Nasdaq Markets (NDAQ). Coupled with recent strength in Legg Mason (LM) other major names in the industry including Lehman Brothers (LEH), the sector is ripe for further breakouts.

And the Homebuilders held recent high levels, though were mostly quiet. Top names in breakout mode are: DR Horton (DHI), Hovnanian (HOV), KB Home (KBH), Standard Pacific (SPF), and Toll Brothers (TOL).

What We Like– What We Have

With the Yellow Flag out we are using caution for this market. This means we are extremely selective and go light.

New Acquisitions:

Petro China (PTR) made the breakout grade for the week as it shot higher five sessions in a row. It’s a tough judgment call to want o buy after the stock gaps above the initial buy-point, but we try to be in within 5% of the mark. Or buy price here is 66.25, and we’re looking at a first target of 79.5 for a 20% move.

We had a beautiful breakout from Kendle International (KNDL) which was listed last week here. This drug manufacturer is: “a contract research organization, provides integrated clinical research services worldwide.” We have an initial buy-point at 13.05, and the first profit target of 20% at 15.66. The stock closed at 14.68 Friday.


Lojack Corp. (LOJN) also took off as it cruised through its buy-point of 15.56. The company: “offers wireless tracking and recovery products for mobile assets worldwide.” First target is 18.67, last closed at 16.18.

Setting Up:

Still ready to go is Coventry Healthcare (CVH). Consolidation is good, so we wait. As United Health (UNH) holds ground after breaking out over a week ago, it will be taken as a positive sign for the prospects of its cousin CVH.


Though Investment Technology Group (ITG) did not make our screen, it is ripe to come out of a multi-year lower base. The stock lacks in relative strength, though receives a fundamental grade of B. “Aggressive” money only.

Pulte Homes (PHM) looks good to go after several homebuilders have successfully launched. Keep in mind there is technical weakness evident in later stage bases, so this one should be treated with caution. Go light, or don’t go at all.

Tarragon Corp. (TARR) is still setup, but only for those who tolerate extreme risk. If you can’t watch the market all day to be nimble here, stay away.

Action from our open positions:

RyanAir (RYAAY), First Target = 49.97. Original Buy Point = 42.55. Pullback here. So far so good. The stock closed at 45.40.

Southwest Airlines (LUV), First Target 18.06. = Original Buy Point = 15.05. The technical pattern here is looks discouraging. We we’re looking for a short covering rally above the right shoulder that was fored going into last week. The shoulder was broken, though another bearish tail was formed. We saw a close below 14.36 as bearish here, but it closed at 14.38. Keep it in perspective that you can always get out and re-enter. We’re sticking to our plan, though another opportunity will be had here if the tend truly is up.

LCA Vision (LCAV), still stellar. We took our 20% off at 43.26 and are riding the wave with half a position. On a slightly bearish note there was distribution in the stock Friday. Support at the 20-day average.

What Was Important About Last Week

STOCKS:

  • Sears Holding (SHLD) said it lost 7 cents a share for its 1st quarter. The results include 13 weeks of Kmart’s earnings, but just 5 weeks of Sears’. Cold weather was to blame.
  • GM (GM) announced it intends to cut 25,000 jobs, or 23% of its workforce.
  • No. 1 chip-maker Intel (INTC) raised its sales forecast for the second quarter to a range of $9.1 billion to $9.3 billion. Wall Street expectations have averaged revenue of about $9 billion.
  • No. 3 chip maker Texas Instruments (TXN) raised its second quarter estimates due to “growing demand across a broad range of its semiconductor products.” New estimates are for 27 to 30 cents a share vs. Wall Street forecasts of 27 a share.

ECONOMY:

  • The Council of Economic Advisers trimmed their forecast for U.S. gross domestic product growth in 2005 3.4% growth this year vs. their December forecast that GDP would grow 3.5%. The council also boosted their outlook for inflation.
  • Federal Reserve Chairman Alan Greenspan testified to Congress that the U.S. economy seemed strong, but not too strong. He also said inflation did not appear to be a threat.
  • The U.S. trade deficit was reported to be around $57 billion in April. This is a rebound from a drop in March, but far from February’s record gap of $60.1 billion. The gap was slightly less than expectations.
  • The U.S. deficit with China rose to $14.7 billion in April, as it approaches a record for the biggest U.S. deficit with any one country in a year.

What We Are Watching For This Week:

Key earnings releases:

  • MONDAY: none
  • TUESDAY: Best Buy Co., Inc. (BBY)
  • WEDNESDAY: Bear Stearns (BSC)
  • THURSDAY: Adobe Systems (ADBE), Goldman Sachs (GS), KB Home (KBH), Winnebago (WGO)
  • FRIDAY: none

On the economic front we have potential market movers with:

This Week’s Scans:

SETUPS

BREAKOUTS

BASE BUILDING

SHORTS

This Week’s Word On Discipline:

“What it lies in our power to do, it lies in our power not to do.” — Aristotle

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