Welcome to this week’s edition of The Growth Stock Report!
Just as a rising tide lifts all boats, It’s been hard to be wrong if you’re long.
This camp has been rewarded nicely with energy and homebuilder positions, but there’s no cheering here.
Our current position:
MARKET IN LIMBO
In this week’s edition you will find:
- Where We Are
- The Growth Stock Landscape
- What We Like – What We Have
- What Was Important About Last Week
- What We Are Watching For This Week
- This Week’s Scans
- A Word On Discipline
Taking a look at the overall markets:
Where leadership comes from is often telling of what we can expect from the market as a whole.
Typically markets led by energy stocks are not ideal for technology and financial issues. This is the environment we find ourselves in.
Where the broader market goes is usually where the tech sector takes us.
The market for technology stocks has been stagnant. Within the Nasdaq we are seeing strength in Telecoms, potential in Internet and Software, and weakness in Hardware.
The Semiconductors may prove to be the deciding factor for future action. This group made a nice recovery after falling below its 20-day moving average, and this gives us reason to be optimistic.
We are also liking further strength in the Broker Dealers.
Banks are attempting to improve on their current poor technical shape, though are still a significant weak spot.
Until we see improvement in techs and banks, we’re going to continue our neutral stance for the overall market .
Until proven otherwise, we will continue to take opportunities in select groups as discussed below, while keeping half of our portfolio in cash.
The Dow Industrial Average ($INDU), +1.05%, and S&P 500 ($SPX) ,+1.57%, took out three weeks worth of trading range to the upside. Both are well above their major averages, with the S&P just short highs made in March, but the Dow relatively weaker, with over 350 points needed to recapture its March high.
The Nasdaq ($COMPQ), +1.31%, despite having a solid week, remains within a four-week trading range. The index is trading above all its major moving averages.
The stand out action from the major indexes goes to the Russell 2000 ($RUT), +2.85%. This collection of small-caps was a driving force for market action as it notched in a new high for the year.
The Volume situation showed us an abundance of buyers. There were two accumulation days for the Dow, three accumulation days for the S&P 500, and four accumulation days for the Nasdaq. Volume on the whole was well above the 60-day averages across the board.
Key chart action for the week:
Charts courtesy of Stockcharts.com
Consumer Cyclicals ($CYC) made a nice gain, while Consumer Staples ($CMR) were quiet. As far as a technical picture is considered, The $CMR continues to appear in stronger shape than the $CYC, which needs much work to do before the 50-day moving average moves back above the 200-day average.
The Semiconductor Index ($SOX) didn’t gain much ground for the week, though made a strong move up after trading down significantly. We want to see a break above the 440 level to have more belief in the overall market’s upward mobility. Further than that, the 450 level is a key decision area.
Banks ($BKX) stayed within a now four-week trading range. We’re looking at the 100 level to be taken out for our stance to change to bullish for this sector.
Broker Dealers ($XBD) had another great week. This is our leadership.
Retail ($RLX) was also strong for the week. The technical picture here is suspect as it forms a V-bottom, which can often be less than durable.
Internet stocks ($IIX), were lackluster on the week. Despite stellar performance from some star individual stocks. the sector could potentially forming a right shoulder of a bearish head-and-shoulders. This sector led us up for the past two years and is a likely candidate to lead us down.
Telecommunications ($XTC) have been steadily gaining ground. We don’t perceive action here as having a strong influence on overall market action, though it should be noted the trend has been very solid over the past three years as it steadily makes up the massive ground lost during the “bubble” of 2000 fall out.
Healthcare ($HCX) is in breakout form. The sector is now poking out of a six-week base. This continues to be one of our favored areas for longs.
Biotech ($BTK) also broke out. We believe the prospects here are strong as well.
Drugs ($DRG) were quiet, though continue to hold potential. We want to see the 50-day moving average taken out successfully before having conviction for the sector as a whole.
REIT’s ($DJR) continued their upside momentum.
Homebuilders ($DJUSHB) went nuts. We saw a massive breakout among all the homebuilders occur on strong volume.
Transportation ($TRAN) continues to lag as it trades in what we perceive as a bearish technical condition.
Airlines ($XAL) have been drifting lower over the past couple of weeks. We see this as corrective action of what could mature into a cyclical move up – if we’re right, there will be another opportunity to take advantage of it going forward.
Defense ($DFX) just keeps on chugging higher. Performance from this sector has been more solid and steady than anywhere else in the market over the past three years.
Energy ($IXE) staged a breakout for the week as stocks across the industry were bid up well on high volume. As mentioned in a previous report, we believed energy would likely hit new highs for the year, but we didn’t see it coming this fast.
The top 10 industry groups from the 6 month RS screen are:
- CONSUMER SERVICES
- GROCERY STORES
- RESIDENTIAL CONSTRUCTI
- APPAREL STORES
- OIL GAS DRILLING EXPLO
- DEPARTMENT STORES
- INTERNET INFO PROVIDER
- FOREIGN UTILITIES
- SEMICONDUCTOR EQUIP MA
The Growth Stock Landscape:
After a frenzy of breakouts in Growth Stock land our biggest concern is will it last?
The majority of stocks that have passed our fundamental screen are in breakout mode. The downside of this is we do not see a whole a lot new names setting up. Much of what has recently broken out did so without proper bases.
The industry groups in play are few, though have been very rewarding. Energy and homebuilders have been the dominant players with decent sponsorship from health and commodity related issues.
This climate has not seen a lot of technology issues well bid for.
For the week:
New highs in energy continued to file in from Apache Corp. (APA), Burlington resources (BR), EOG Resources (EOG), Remington (REM), Swift Energy (SFY), San Juan Basin (SJT), Statoil ASA (STO), Sunoco Inc. (SUN), and Southwestern Energy (SWN).
Homebuilders, on the heels of blow out earnings from KB Home (KBH), saw huge advances as new highs were made in: DR Horton (DHI), Hovnanian (HOV), KB Home (KBH), Lennar Corp. (LEN), MDC Holdings (MDC), Pulte Homes (PHM), Standard Pacific (SPF), and Toll Brothers (TOL).
Commodity related stocks were also hot with new highs from: Agrium Inc. (AGU), Building Materials (BMHC), Cemex (CX), Lone Star Tech (LSS), and Tenaris (TS).
From our “Setups” section on our home page, we had breakouts in: Asta FDG (ASFI), Center Financial (CLFC), Cognizant Technology (CTSH), and Teledyne Technology (TDY). Not to mention the stocks cited in our “Bases” section that launched without proper handles.
Though the overall Health Index ($HCX) made an encouraging breakout, individual names in the area meeting our fundamental requirements weren’t participating. Continued strength in health will pave the way for stocks discussed in our “What We Like” section of this report.
Recent strength from apparel retailers and stock market related issues cooled for the week
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.
Pulte Homes (PHM) triggered a buy for us at 79.65 and followed up with an immediate 10% move. We love it when stocks go immediately in our favor, though become skeptical towards too much excitement for the homebuilders. Coupled with the technical weakness often found in later stage bases, we want to lock in profits in half of our position while waiting to see what transpires. Any signs of distribution will be a red flag.
Potash Corp. (POT) flashed a buy signal when it opened at 92.40 Tuesday. We got in at 93.10, and were delighted to see the company post glowing earnings, though as with PHM we are concerned the 10%+ gain is a mark of an over reaction. We like POT more than PHM, and have yet to take any profit. The bearish tail on the weekly chart is one of weakness, but we’re going to give it a chance.
Black & Decker (BDK) is set up to go as it took in large volume right at its buy-point through 89.19.
Investment Technology Group (ITG), after triggering an ideal buy two weeks ago, moved higher for the week. We’re buyers at 20.75, which is a little late to the party. We believe the stock may set up again, and are paying close attention to action from the Broker/Dealers for further guidance.
Still on the launch pad, Coventry Healthcare (CVH) teased us while it nearly broke out before forming a new handle. This one still looks good.
Also in the health related field, we are closely watching Centen Corp (CNC) and Pharmaceutical Productions (PPDI). Action around buy-points marked on our “Setups” section is what’s vital here.
If health continues to be in play we will likely be adding more names here.
Tarragon Corp. (TARR) continues to hold potential as a “high risk” setup. REIT’s are technically strong.
Action from our open positions:
Lojack Corp. (LOJN) moved nicely higher for the week. Original buy-point 15.56. First target is 18.67, last closed at 17.00.
Petro China (PTR) failed to make a new high for the week, though remains strong with the rest of the oil sector. Original buy-point 66.25. First target of 79.5. Last close 70.28.
Kendle International (KNDL) consolidated for the week. Original buy-point at 13.05.First target 15.66. Last close14.99.
RyanAir (RYAAY) remains in positive technical shape. Original Buy Point 42.55. First Target 49.97.Last close 45.40.
LCA Vision (LCAV) made a new high for the week. We took half of our position off at the 20% mark and are letting the rest ride until weakness presents itself. Original buy-point 36.05. Last close 48.53.
Southwest Airlines (LUV) sold off and we exited this one for less than a 5% loss. If this one is the real deal we will have an opportunity to re-enter.
- Lehman Brothers (LEH) reported better-than-expected earnings, and cited strength from foreign operations.
- The No. 1 U.S. electronics retailer, Best Buy (BBY), said profit in its first quarter was up 85% from a year ago as it topped Wall Street forecasts.
- Bear Stearns (BSC) beat first-quarter estimates with earnings up 5% from a year earlier.
- Goldman Sachs (GS) said second quarter earnings fell 27% from a year earlier, and were hurt by a difficult trading environment that slowed merger activity and initial public offerings that also affected trading and investment banking revenue. The report was below Wall Street expectations.
- KB Home (KBH) reported earnings up 78% from a year ago, as it blew past Wall Street estimates. The company raised guidance.
- Circuit City (CC) announced a loss of $13.1 million for the first-quarter, to more than double its loss a year ago. Wall Street was looking for a smaller loss.
- The producer price index fell 0.6% in May, the biggest drop since April 2003. Falling prices for crude oil, gasoline, food and computers were significant. The drop was bigger than economists expected.
- The consumer price index slid 0.1% in May, the first drop in 10 months. The modest move was attributed to a decline in energy prices. The “core” CPI (which excludes volatile food and energy prices) rose just 0.1%. Results were less than what economists expected.
- Fannie Mae said home-price appreciation is likely to cool off, but not crash. The company expects the median price for a new home to rise 6.2% to $231,400 this year and another 2.8% to $237,800 in 2006. It also expects the median price for a pre-owned home to rise 6.9% to $196,700 this year and to rise 3.2% to $203,000 in 2006.
- U.S. home construction moved slightly higher in May, and was slowed by a drop in activity in the South.
- The Philadelphia Fed said its index of factory activity in Pennsylvania, New Jersey and Delaware was down in June. This is the first negative reading in more than two years.
- Crude Oil rose over 9% to settle at $58.47 a barrel.
- The U.S. current account deficit, came in at $195.1 billion in the first quarter, a new record. This is 6.4% of U.S. gross domestic product, also a record.
What We Are Watching For This Week:
Key earnings releases:
- MONDAY: none
- TUESDAY: Lennar Corp. (LEN), The Kroger Co. (KR)
- WEDNESDAY: Bed Bath & Beyond Inc. (BBBY), Morgan Stanley (MWD)
- THURSDAY: A.G. Edwards (AGE), FedEx (FDX)
- Friday: none
On the economic front we have potential market movers with:
- MONDAY: Leading Indicators
- TUESDAY: none
- WEDNESDAY: none
- THURSDAY: Initial Claims, Existing Home Sales
- FRIDAY: Durable Orders, New Home Sales
This Week’s Scans:
“Attitude is a little thing that makes a big difference.” —
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