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

Traders,

Just like that we’ve taken off our bear hats and are now wondering what the market will order us to do next.

Our current position:

MARKET IN LIMBO

In this week’s edition you will find:

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

Where We Are:

Taking a look at the overall markets:

The major indexes came roaring back for the week, erasing what was previously an unarguably bearish scenario to one that could potentially turn bullish.

We’re not bulls just yet.

We need the market to demonstrate itself with quality leadership and institutional support.

We have experienced some sector rotation from tech names into more boring “old economy” type names.

Clearly market players are thinking defensively – which is not by any means bullish.

If we are in a true bull market there will plenty of time for us to identify an appropriate time to commit money.

If we are in a true bear market we need to remember the topping process can take months to play out. Sectors experiencing new money inflows my gather strength and head higher for the time being, but they will ultimately succumb to wherever technology lead us.

Technology sectors such as the semiconductors and the Internet leads the markets.

Technically speaking:

The Dow Industrial Average ($INDU) S&P 500 ($SPX) and Nasdaq ($COMPQ), have successful broken free from their downtrends and have retraced roughly half of the ground lost from highs made in the beginning of the year. All three major indexes are back above their 50-day moving averages.

With two days of accumulation apiece for the major indexes, volume indications tell us this may or may not be more than short covering. It’s not enough for us to believe there is real conviction just yet.

On our lookout for institutional support we have conflicting reports from AMG as they report net cash outflows, and TrimTabs which claims mutual funds took in $1.9 billion.

We now need to watch the volume on down days (assuming we’ll have them). If we see down volume dry up it will give us a sign this market is thought well of.

If we see selling volume pick up it will give us a clue their is little love for this market.

On the leadership front, our list of top stocks in breakout mode were on a tear for the week. This is no doubt a great sign, though we need to see this list expand. Unfortunately we do not have many good names setting up.

Key chart action for the week:

Charts courtesy of Stockcharts.com.

We are seeing a clear preference for Consumer Staples ($CMR) over Consumer Cyclicals ($CYC). We mentioned the growing divergence here a few weeks ago, and saw real strength the past few days in related industry groups.

The Semiconductor Index ($SOX) put in another good week, though the index is lagging the overall market.

Banks ($BKX) came to life with the rest of the market, though remain technically weak as the sectors 50-day average remains below its 200-day average.

Retail ($RLX) and Internet ($IIX) outperformed the averages, though are also in a state of weakness with their 50-day averages below their 200-day averages.

Healthcare ($HCX) and Drugs ($DRG) were quiet, though are still strong.

Biotech (BTK) is poised to breakout and is looking technically strong .

REIT’s ($DJR) hit new highs for the year. Gads!

Airlines ($XAL) were big movers and have come off off what may be the bottom of a new base.

Defense ($DFX) has been consolidating very nicely for the year and is poised for new highs.

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

1. GROCERY STORES
2. RESIDENTIAL CONSTRUCTI
3. DEPARTMENT STORES
4. CONSUMER SERVICES
5. SEMICONDUCTOR-SPECIALI
6. DATA STORAGE DEVICES
7. LONG-TERM CARE FACILIT
8. PROPERTY MANAGEMENT
9. HOSPITALS
10. HEALTH CARE PLANS

New Highs & Lows: Highs took control as the week progressed, with the Lows not exactly quiet as they continued show a presence.

What We Like:

We are no longer stalking short opportunities.

Because we are not seeing many quality stocks setting up, we’re not looking to buy either.

It’s not easy to sit tight and do nothing, but we’d rather keep our money than be gamblers.

However, we do allocate a small portion of our portfolio to aggressive plays. As mentioned last week we saw opportunity in the airlines ($XAL) and they have rewarded us nicely.

Top fundamental names in the airline group include JetBlue (JBLU) RyanAir (RYYA), and Southwest (LUV).

We are essentially anticipating these stocks to begin carving out the right side of a base.

As always, we use a two tier money-management system where we take 20% profits with the first half of the position, and let the second half ride until conditions tell us to get out. WE ALWAYS TAKE THE SMALL LOSS, which is usually no more than 5%, and often breakeven.

We still like Healthcare, Drugs, and Biotech as a group. Sector ETF’s are an option here.

Action from our open positions:

RyanAir (RYAAY), First Target = 51.06. Original Buy Point = 42.55.

Southwest Airlines (LUV), First Target 18.06. = Original Buy Point = 15.05.

LCA Vision (LCAV), We came just a few pennies short of our First Target of 43.26. Original Buy Point = 36.5.

What Was Important About Last Week:

STOCKS:

• Lowe’s (LOW) earned 74 cents, up 32% vs. a year ago, with sales rising 14% to $9.91 bil. Same-store sales were below internal targets and profits were 2 cents below expectations.
• Hewlett-Packard (HPQ) reported first earnings at 33 cents a share for its fiscal second quarter,, up 9% from a year ago. Earnings beat Wall Street forecasts but guidance for the third-quarter earnings is slightly below estimates.
• Home Depot (HD) , said its profit in the first quarter, was 14% higher than a year ago, beating the consensus estimate by two cents a share.
• J.C. Penney (JCP) announced its first-quarter profit was four times higher than a year ago as it beat forecasts by two cents.
• Merrill Lynch upgraded the whole technology sector. “Tech looks better technically,” strategist Steven Milunovich announced, though his call was only for the short term.

ECONOMY:

• The Empire State Manufacturing Index slid to -11.1 in May from 2.03 in April and 20.18 in March. This is the first contraction in the index since April ’03 (the U.S. invasion of Iraq.)
• The Treasury Department said that, in March, foreign investment in U.S. securities posted its lowest monthly gain since October 2003.
• The producer price index came in higher than economists expected.
• The Fed said industrial production was slowee in April, complimenting other signs of trouble in the factory sector.
• The consumer price index rose 0.5% in April, on the heels of the biggest monthly gain in energy prices in more than two years. The “core” CPI, which excludes food and energy costs, was unchanged to give the index only its fifth 0.0% reading in 32 years.
• The Philadelphia Fed’s index offell to its lowest level in 23 months in May.
• China’s cheap textile exports have inspired protectionist moves by the U.S.

What We Are Watching For This Week:

• Key earnings releases:
• MONDAY: Campbell Soup (CPB), Engineered Support Systems (EASI).
• TUESDAY: Computer Sciences Corporation (CSC), Network Appliance (NTAP). Williams-Sonoma (WSM).
• WEDNESDAY: AutoZone Inc. (AZO), Michaels Stores (MIK).
• THURSDAY: Chico’s FAS, Inc. (CHS), Dollar General Corp. (DG), H.J. Heinz Company (HNZ), Patterson Dental (PDCO), Toll Brothers (TOL).
• FRIDAY: none

• On the economic front we have potential market movers with:

• MONDAY: none
• TUESDAY: Existing Home Sales, FOMC Minutes,
• WEDNESDAY: Durable Orders, New Home Sales
• THURSDAY: Chain Deflator-Prel., GDP-Prel., Initial Claims, Help-Wanted Index,
• FRIDAY: Personal Income, Mich Sentiment-Rev.

This Week’s Scans:

BREAKOUTS

READY TO BREAK OUT

BASES

SHORTS

This Week’s Word On Discipline:

“The greater danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it.” – Michelangelo

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