High On Accumulation

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

Traders,

Our good buddy Mr. Market gave us some things to cheer about this week, but at the heart of matters we are less than confident over current index levels.

Our current position:

VERY CAUTIOUS, USE SMALL PROFIT TARGETS!

In this week’s edition you will find:

Where We Are:

SHAZAM! Energy stocks rewarded us nicely – and as highlighted in the January 30th issue of The GSR – KCS and XTO have already given us 10% moves.

We like energy long-term, though believe taking some off the table after a 20% run-up is a good habit.

Our market research this week is giving us some mixed signals.

Where the S&P 100 hit highs not seen since March of 2002, techland stocks have not been bid so well, and have struggled to match old economy strength.

Banking stocks were hit with selling and are vulnerable. With financial’s making up the largest market-cap component of the major indexes, any weakness here will weigh in accordingly for the market as a whole.

We believe the key to this market is in the Semiconductor Index. If the SOX can break trend and gather upside momentum, we will feel more at ease in buying.

Charts courtesy of Stockcharts.com.

Technically speaking, the Dow 30 and S&P 500 are giving us a bullish cup-and-handle look. This doesn’t mean the market is going to breakout and trend higher – but it does mean we are at a critical juncture.

Breakouts can lead to fake outs, and with our longer-term belief that stocks have little upside potential, we will not be surprised to see this current bullish picture shattered.

However, as experienced traders we take advantage of “what is” and not “what should be”. At the core of our decisions we try not to let our long-term speculation interfere with short-term profit potential. Therefore, small profit targets have been our credence.

Volume: Accumulation on the Dow Friday is a healthy sign for new highs to be expected. But distribution in techs have put the two indexes at odds, and with out the support of one another it makes our market world one of conflict.

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

  • RESORTS CASINOS
  • OIL GAS DRILLING EXPLO
  • HEALTH CARE PLANS
  • RESIDENTIAL CONSTRUCTI
  • STEEL IRON
  • OIL GAS EQUIPMENT SVCS
  • INDEPENDENT OIL GAS
  • INFORMATION DELIVERY S
  • MULTIMEDIA GRAPHICS SF
  • TEXTILE MANUFACTURING

New Highs vs. Lows: NYSE and Nasdaq New Highs have held up sturdily, with New Lows yet to indicate any significant downward bias.

What We Like:

Commodity stocks remain to be our preference. As listed as a potential breakout last week, STLD did in fact stage a healthy breakout, and we are watching carefully.

Ready to launch in the commodities sector are:

Metals USA, (MUSA) – a provider of value-added processed steel, aluminum and specialty metals, as well as manufactured metal components.

We are also seeing strength in Healthcare type stocks. Here we like:

Palomar Medical Technologies, Inc., (PMTI) – a researcher and developer of light-based systems for hair removal and other cosmetic procedures. We believe a key factor for this company is tattoo removal.

Also, Mannatech, Inc., (MTEX) – develops and sells nutritional supplements, topical products and weight management products, primarily through a global network marketing system operating in the United States, Canada, Australia, the United Kingdom, Japan and New Zealand.

What Was Important About Last Week:

MCI (MCIP) agreed to be purchased by Verizon (VZ) for $6.75 billion.”

American International Group, (AIG) was hit with subpoenas from Eliot Spitzer over “nontraditional insurance products and certain assumed reinsurance transactions and AIG’s accounting for such transactions.”

U.S. retail sales fell 0.3% for January. This was better than Wall Street economists expected”

Hedge fund Highfields Capital Management offered to buy Circuit City (CC) at $17 a share and take it private.

Alan Greenspan said the U.S. economy was doing fine and that key short-term interest rate was still too low.

Greenspan warned Medicare’s future financing problems were than Social Security.

New home construction for January grew at its fastest pace in more than two decades.

Housing starts grew 4.7% to a seasonally adjusted annual rate of 2.159 million units. This is the fastest increase since February 1984.

The New York Times, (NYT) – said it planned to buy tAbout.com from Primedia for about $410 million.

Wal-Mart (WMT) posted earnings of $3.16 billion (75 cents a share), for its fiscal fourth quarter, up 16% from a year ago. As the Wall Street Journal reported, “If Wal-Mart were a nation and revenue were gross domestic product, Wal-Mart would have ranked as the world’s 20th biggest economy in 2003, the latest data available from the World Bank. In the fourth quarter, its revenue jumped 10% to $83.02 billion (bigger than the 2003 GDP of Hungary).”

No. 2 U.S. retailer, Target (TGT), posted earnings of $825 million, (91 cents a share). Excluding one-time items, this is a 12% increase that beats Wall Street forecasts.

Jobless Claims fell to a four-year low.

The FDA said Merck (MRK) and Pfizer (PFE) arthritis-pain drugs may be risky, but should be allowed to stay on pharmacy shelves.

The producer price index rose 0.3% for January. Core PPI was driven higher by gains in tobacco, alcohol and cars. Also increasing were electric power, tires, railroad equipment and heavy trucks.

Mitsubishi Tokyo Financial and UFJ Holdings announced plans for merger to create the world’s biggest bank.

What We Are Watching For This Week:

Key earnings releases:

  • MONDAY: HOLIDAY
  • TUESDAY: Eastman Kodak (EK).
  • WEDNESDAY: Altria Group (MO).
  • THURSDAY: ImClone Systems (IMCL).
  • FRIDAY: Clear Channel Communications (CCU).

On the economic front we have potential U.S. market movers with:

  • MONDAY: HOLIDAY
  • TUESDAY: Consumer Confidence.
  • WEDNESDAY: Consumer Price Index.
  • THURSDAY: Durable Goods, EIA Petro Status, Jobless Claims, Money Supply.
  • FRIDAY: Existing Home Sales, U.S. Gross Domestic Product (Q4 2004).

This Week’s Scans:

SETUPS

BREAKOUT WATCH

BASE BUILDING

SHORTS We give a heavy caution to entering shorts.

This Week’s Word On Discipline:

“Endurance is one of the most difficult disciplines, but it is to the one who endures that the final victory comes.” — Siddhartha Gautama

DISCLAIMER: Past Performance Is Not Indicative of Future Returns. All commentary provided by The Growth Stock Report is for educational purposes only. The analysts and employees or affiliates of The Growth Stock Report may hold positions in the stocks or industries discussed here. This information is NOT a recommendation or solicitation to buy or sell any securities. Your use of this and all information contained in The Growth Stock Report is governed by the Terms and Conditions of Use. Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and that it should be relied upon, as such.

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