Archive for June, 2005|Monthly archive page

Perfectly Stupid

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

Traders,

With sellers pounding the market we raised the red flag and are in defensive mode.

We believe the market is not ripe for adding new positions, though we are still seeing potential in Energy related issues which can act counter to the overall market trend.

Our current position:

MARKET VULNERABLE TO FURTHER SELLING

In this week’s edition you will find:

Where We Are:

Taking a look at the overall markets:

It is not merely the fall in price-action that makes us Bears, it is the force of heavy selling volume in conjunction with a profound lack of leadership and technical structure that has made us doubtful ever since we rallied off the year’s lows over two months ago.

The biggest losses of late have come from Transportation and Building Materials.

Technology and Banking sectors have been suspiciously resilient, just as they were suspiciously quiet when everything was rising a week ago. We will be more than happy to shift our bias if Tech and Banks can pull it together, until then, we’re going with what we see.

Rising energy stocks are generally not good for the broader market.

Neither is it encouraging to be bullish with Investors Intelligence reporting a high number of bulls over bears.

In the bigger picture, the CBOE Volatility Index ($VIX), is at historical lows to suggest a high level of ‘complacency’ among market players. From a historical perspective, extremes in the index have corrected as ‘fear’ returns to the collective mind-set with declining prices.

A bright spot continues to be seen in Broker Dealers ($XBD) which broke out to new highs for the week. This can’t be ignored.

We have been more than happy to ring the cash register on positions, and are more than ready to pull out of current holdings should the market tell us to.

Going forward, should the market prove itself to be in full bear mode, we will have plenty of opportunities to go short. If this turns out to be the case it could take weeks to months for prime setups to present themselves.

Likewise, until the market puts in the indications we need to be bulls, we will wait and be selective.

There is no perfection in the market place. We never aim to be perfect, only profitable.

Setting your sights on selling at every top and buying at every bottom is setting yourself up for a great deal of frustration and losses.

We go by proven methods that allow us to take advantage of markets under specific circumstances. We are not right all of the time. Of course we want to be right all of the time, but know it is foolish to believe we will be.

Trading is a game of probabilities, not absolutes. To believe someone has a crystal ball or inherent gift to successfully time the market is, to us, perfectly stupid.

Technically speaking:

The Dow Industrial Average ($INDU), -3.06%, sold off to close below its 50 and 200-day moving averages, while the S&P 500 ($SPX) ,-2.09%, Nasdaq ($COMPQ), -1.76%, and Russell 2000 ($RUT), -2.15% remain above their 50 and 200-day averages.

Volume issued us a warning signal with two days of heavy distribution in a row. Heavy selling pressure in Transportation and Basic Materials accounted for the biggest Dow and S&P 500 losses.

New Highs & Lows: continue to show a healthy number of Highs over Lows.

Investors Intelligence: cites 53.9% Bulls and 20.2% Bears. This contrarily indicator is BEARISH.

Key chart action for the week:


Charts courtesy of
Stockcharts.com

Consumer Staples ($CMR) sunk below its major moving averages to the bottom of a 6-month trading range with Consumer Cyclicals ($CYC) also closing below its major moving averages.

The Semiconductor Index ($SOX) gave a head-fake in breaking out over a 4-week range only to fall apart and log a bearish key-reversal day in the books.

Banks ($BKX) were relatively quiet and remain in what is now a 5-week narrow range.


Broker Dealers ($XBD) bucked the trend and broke out to new highs.


Internet stocks ($IIX) remain quiet as they hold a five-week narrow range.

Healthcare ($HCX) was also quiet – as was Drugs ($DRG) and Biotech ($BTK). We are watching this area closely to gauge strength for new high prospects from within.

REIT’s ($DJR) pulled back modestly.

Homebuilders ($DJUSHB) declined on high volume. We are seeing a lot of variance from within the group and suspect there will be a shake-out of weaker issues.


Transportation ($TRAN) is marked by clear weakness as it forms a bearish head-and-shoulders. Though just because it formed this pattern it does not mean it will go down.


Airlines ($XAL) declined for the third week in a row. We are seeing a divergence occur between the strong and the weak in this group.

Energy ($IXE) hit new highs, though closed down from last week. We see no real signs of weakness at this juncture.

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

  1. GROCERY STORES
  2. CONSUMER SERVICES
  3. SEMICONDUCTOR-SPECIALI
  4. DEPARTMENT STORES
  5. OIL GAS DRILLING EXPLO
  6. RESIDENTIAL CONSTRUCTI
  7. INTERNET INFO PROVIDER
  8. OIL GAS REFINING MRKTN
  9. FOREIGN UTILITIES
  10. HOSPITALS

The Growth Stock Landscape:

A lack of quality stocks setting up in technical bases gives rise to our bearish stance on the overall market.

What were once nicely formed setups and bases have crumbled into nothing. If it doesn’t set up properly we won’t even think about trading it.

There has also been a lack of technology oriented names meeting our fundamental screen which is usually where we look for leadership. .

Energy remains opportune.

Elsewhere, potential lingers in a only a handful of individual names.

The “Big Daddy” of Growth Stocks, Google (GOOG), continues to prove itself very durable.

For the week:

The number of new highs from breakouts was cut down from the previous week. Most of what we did have in highs came from Energy.

Internally, Homebuilders may be shaking out weak names. MDC Holdings (MDC) has failed to breakout successfully, while Lennar (LEN) has traded back into its base on heavy volume, and DH Horton (DHI) was also hit with distribution. It’s a watch and wait game. Other breakouts in KBH, PHM, SPF, TOL appear healthy so far. We don’t expect massive gains from this group so we want to be quick with the profits and avoid losses.

Heavy distribution from Building Materials Holding Corp. (BMHC) was in tune with action elsewhere in the broader sector. However, other breakouts in top-name material related issues CX, LSS, and TS held up in decent fashion.

Despite sector strength over the past few months in healthcare issues, we are not seeing many individual names meeting our fundamental requirements. American Healthways (AMHC) and Pharmaceutical Product Development (PPDI) fell apart for the week.

Coventry Healthcare (CVH) was also taken down a notch and looks less attractive as a potential breakout candidate.

Elsewhere in Growth Stock Land there was heavy distribution evident in Asta FDG Inc. (ASFI), Chicos (CHS), Comtech Telecom (CMTL), Microsystems Inc. (MCRS),

What We Like– What We Have

With the Red Flag out we are not adding any positions outside of Energy related issues.

New Acquisitions:

none

Setting Up:

Energy names in Setup mode are: BP Prudhoe (BPT), Enterra Energy Trust (EENC), Ultra Petroleum (UPL), Cimarex Energy (CMX), and XTO Energy (XTO). These stocks are late to the Energy bonaza that has taken place over the past couple of weeks. We suspect a pullback for the sector to take place and need to be careful about committin
g capital until we can see weak names filtered out.

Tarragon Corp. (TARR) continues to hold potential as a “high risk” setup. REIT’s are technically strong.

Action from our open positions:

Pulte Homes (PHM) lost ground for the week. We took half off after a 10% gain. Original buy-point at 79.65. First target 87.61 (HIT), Second target Unknown. Stop at close below 79.65 or 78 (-2%). Last close 81.35.

Potash Corp. (POT) lost ground for the week. Original buy-point at 93.10. First target 111.72. Stop at 91.24 (-2%). Last close95.46.

Black & Decker (BDK) failed to follow through on breakout. We have taken off half of our position at break-even. Original buy-point at 89.19. First target 15.66. Stop at 87.40 (-2%). Last close 88.96.

Investment Technology Group (ITG), pulled back after hitting a key resistance mark. The stock is setup to breakout again over 21.72. We’re already aggressive buyers on this one. Original buy-point at 20.75. First target 24.9. Stop at 20.33 (-2%.) Last close 20.65.

Lojack Corp. (LOJN) managed to close with a gain for the week. Original buy-point 15.56. Stop at 15.24 (-2%.) First target is 18.67. Last closed at 17.19.

Petro China (PTR) hit a fresh high. Original buy-point 66.25. First target of 79.5. Stop at 64.92 (-2%.) Last close 73.71.

Kendle International (KNDL) cruised above our first target of 20% where we took half off. Original buy-point at 13.05. First target 15.66 (HIT). Second target unknown. Stop at 13.05 (Break Even.) Last close 15.60.

RyanAir (RYAAY) is showing resilience. Original Buy Point 42.55. First Target 49.97. Stop at 41.70 (-2%.) Last close 45.98.

LCA Vision (LCAV) lost a little though is still trend up. Original buy-point 36.05. First target 35.32 (HIT).) Second target unknown. Stop at 36.05 (Break Even.) Last close 47.89.

What Was Important About Last Week

STOCKS:

  • No. 2 U.S. auto maker Ford (F) lowered its forecast for 2005 earnings to between $1 and $1.25 a share, from a prior range of $1.25 to $1.50. No surprise to Wall Street.
  • Homebuilder Lennar (LEN) announced profits in its fiscal second quarter 21% higher than a year ago.
  • Morgan Stanley (MWD) said fiscal second quarter earnings fell 24% from a year ago.
  • Federal Express (FDX), announced fiscal fourth quarter earnings less than Wall Street forecasts. High fuels costs were to blame.

ECONOMY:

  • Sales of pre-owned homes declined slightly to an annualized rate of 7.13 million units, the second-fastest sales pace on record. The national median price for an “existing” home was $207,000, this is a 12.5% gain from a year ago.
  • New-home sales edged slightly higher in May, though revisions of April sales lowered May’s annualized sales rate to a lower level than expected. The median sales price for a new home fell 6.5% to $217,000, which is the lowest since last September, though just short of the record high set last October.
  • Durable goods made in the U.S. rose 5.5% in May for the biggest gain in more than a year. However, after adjusting for orders of Boeing planes durable goods actually fell.
  • Crude oil closed just below the $60 mark.

What We Are Watching For This Week:

Key earnings releases:

  • MONDAY: Nike (NKE), Walgreen (WAG)
  • TUESDAY: Apollo Group (APOL)
  • WEDNESDAY: Monsanto Company (MON), Oracle (ORCL), Research In Motion Limited (RIMM)
  • THURSDAY: ConAgra Foods, Inc. (CAG), Red Hat, Inc. (RHAT)
  • 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:

“The better work men do is always done under stress and at great personal cost.” — William Carlos Williams

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.


When It's Hard To Be Wrong

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

Traders,

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:

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.

Technically speaking:

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:

  1. CONSUMER SERVICES
  2. GROCERY STORES
  3. RESIDENTIAL CONSTRUCTI
  4. SEMICONDUCTOR-SPECIALI
  5. APPAREL STORES
  6. OIL GAS DRILLING EXPLO
  7. DEPARTMENT STORES
  8. INTERNET INFO PROVIDER
  9. FOREIGN UTILITIES
  10. SEMICONDUCTOR EQUIP MA

New Highs & Lows: Are showing us a positive picture for Longs.

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.

New Acquisitions:

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.

Setting Up:

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.

What Was Important About Last Week

STOCKS:

  • 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.

ECONOMY:

  • 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:

This Week’s Scans:

SETUPS

BREAKOUTS

BASE BUILDING

SHORTS

This Week’s Word On Discipline:

“Attitude is a little thing that makes a big difference.” —
Winston Churchill

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.


Lost In Translation

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

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.



How To Measure Risk

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

Traders,

We’ve seen some eye-opening moves of late, and have real conflict from market internals.

Our current position:

MARKET IN LIMBO

In this week’s edition you will find:

Where We Are:

Taking a look at the overall markets:

We’re still in limbo. We’ve had a massive rally off the year’s lows, but buyers are faced with technical obstacles and split internals.

Shorts have been burned. Most professionals will likely tell you they’ve been burned more times going short in their career than from buying. Just look at your charts. It is only in rare occasions that clear shorting opportunities expose themselves, and even then they don’t always succeed.

Looking at The Year 2000 Top it can bee seen that it took months for it to play out. Price action deceived market players into believing everything was fine, but it burned everyone as they bought into traps. Bull Traps.

We measure our risk carefully here, and only act when things are absolutely in our favor. We are not always right, but are smart enough to cut our losses short while letting the winners run.

More importantly, we know what we don’t know. We don’t see a whole lot of clarity in this market, though do see selective opportunities as discussed below.

Technically speaking:

After two weeks of solid gains, the major indexes cooled for the week. The Dow Industrial Average ($INDU), S&P 500 ($SPX) and Nasdaq ($COMPQ), despite having retraced much of the losses made for the year, are in technical limbo.

“Doji” candlestick signals in place on the weekly charts are signs of indecision which tends to go in hand with a turn in trend. We don’t take a whole lot of credence in these signs, though consider them in light of additional evidence discussed below which points to internal weakness in market.

We have no evidence to support the case for a bull market in place.

As leadership attempts to be established, we are seeing some decent names set up for potential buys, but without further evidence of a good overall market we don’t want to load the boat on them. Further discussion on leadership is in our “Growth Stock Landscape” section.

We suspect the buying for the past few weeks to be mostly short covering and also believe it can last longer while putting a floor on things.

If the market begins to fall apart in the weeks to come we will see short opportunities set up.

Volume indications for the past three weeks might suggest a bull that is running, or has ran out of steam, though is not strong enough for us to have a whole lot of conviction over it.

Watching volume going forward will be very important to see how many sellers step up on down days. If we begin to notch in distribution days it will give us reason to believe the institutions are sellers.

If we see buyers come in numbers on up days it will suggest institutions are supporting this market. We’d prefer to see accumulation after some consolidation has taken place as high volume at the end of rallies often signals the wrong way crowd coming late to the party.

Key chart action for the week:


Charts courtesy of
Stockcharts.com.

Consumer Staples ($CMR) have lost ground over the past couple of weeks, but remain in stronger technical condition over Consumer Cyclicals ($CYC) which appear vulnerable to further selling.

The Semiconductor Index ($SOX) posted a gain on the week and have been very strong. We love to watch the semis as a leading indicator, and see this action as bullish for the overall market if it can be sustained.

Banks ($BKX) could be in the process of forming the right shoulder of a topping pattern. We see the high made in this sector three weeks ago as pivotal, and until taken out, we have to be bearish here.

Broker Dealers ($XBD) have been on a tear. We are seeing some leadership trying to be established here which is great for the prospects of a bull market. It’s too early to have faith here.


In rare form, the Dollar Index ($DXC) and Gold miners ($XAU) have been trending together for the past two weeks. This won’t last. Given the Dollar to be technically extended we feel it will give way to further gains for the miners.

Healthcare ($HCX) and Drugs ($DRG) have been consolidating over the past few weeks. This gives the sectors more of a durable technical base to launch from. We’ve liked this sector for a few months now and need to see it breakout successfully to maintain our favorable outlook. Be careful. If the sectors are unable to breakout it will turn into pattern failure which often triggers a cascade of selling. Buy above the current highs.


REIT’s ($DJR) and Homebuilders ($DJUSHB) hit a fresh high for the week and look technically strong. You can hardly read anything these days without real estate and bubble being mentioned, and to sum up our stance on the REITs as a trading vehicle we say trade what is. We have a few names from our “Setups” list here and believe they could breakout successfully.

Airlines ($XAL) have moved nicely higher over the past three weeks though have much work to do before truly breaking out of what has been a prolonged technically bearish condition. We saw a rare buying opportunity here three weeks ago as mentioned in a previous report.

Energy ($IXE) has been back in the saddle over the past three weeks as the price of crude oil has been flirting with the $50 mark. We see internal strength from the sector and believe it could very well hit new highs for the year – but we’re not going to take that bet until we see conditions set up properly. We’ll keep you posted. Crude closed above $53 for the week

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

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

New Highs & Lows: The number of New Highs made for the week was up significantly as the number of New Lows has remained plateaued over the last three weeks.

The Growth Stock Landscape:

The scene in growth stock land has been encouraging. As we watch top fundamental stocks go from carving out bases, to setting up, to breaking out – we also see them increase in number. This is all an indication of a healthy market, we want to see it continue.

For the week:

New high highlights came from Google (GOOG), and Hansen’s (HANS). These have been model growth stocks to be trading in.

We had successful breakouts in Coach (COH), Legg Mason (LM), and United Health (UNH).

Retail has been hot. New highs from quality stocks Bebe Stores (BEBE), Chico’s FAS (CHS), and Urban Outfitters (URBN) have blazed the way for Coach (COH). Also hitting a new high was Gildan Activewear Inc. (GIL), which, while not new to hitting new highs, is new to our screen for stocks with top fundamentals.

Energy showed its resilience as new highs were made in Canadian Natural Resources (CNQ), Occidental Pete (OXY), Swift Energy (SFY), and Southwestern Energy (SWN).

Financial stocks Chicago Mercantile Exchange (CME), Legg Mason, and Nasdaq Stock Market (NDAQ) have also been spectacular.

And the Homebuilders put on an impressive display with new highs from DR Horton (DHI), Hovnanian (HOV), KB Home (KBH), Standard Pacific (SPF), and Toll Brothers (TOL). It should be warned that these are later stage bases which can mean they may be tired after extending themselves. We have some names from this sector poised to breakout but need to be cautious. Any sign of these breakout stocks faltering should be a warning.

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.

Always respect the proper Buy Points as cited on our “Setups” page, and always respect a 5-8% stop loss.

Stocks setting up from well supported sectors include Coventry Healthcare (CVH), and Petro China (PTR). We also have Kendle International (KNDL) which is a micro-cap from the drug sector.

On the riskier side of things, Pulte Homes (PHM) looks good to go after several hombuilders have successfully launched. Keep in mind there is technical weakness evident in later stage bases.

And for an even higher risk play look at apartment operator Tarragon Corp. (TARR). Only those who can be nimble should consider this one.

Action from our open positions:

Our move into airline stocks has been working well, while good ol’ LCAV has been stellar.

RyanAir (RYAAY), First Target = 49.97.
Original Buy Point = 42.55. NOTE: We have lowered the first target here due to technical boundaries that will inhibit our first target of 20%. If we continue to see strength in the airlines we will likely setup again in the stock.


Southwest Airlines (LUV), First Target 18.06. = Original Buy Point = 15.05. The stock is currently in a topping formation that happens to be in a base. This means if buyers come in to override the formation (by sending price above the right shoulder) it will be extremely bullish. We see a close below 14.36 to be reason to exit.

LCA Vision (LCAV), has given us a 20%+ move. We’ve hit our first target and took half off. We’re going to let this one ride on the prospects that has the potential to mature into a 100% gain. No expectations, we just do what the stock tells us to.

What Was Important About Last Week:

STOCKS:

  • No. 1 U.S. auto maker, General Motors (GM), reported its U.S. sales fell 13% in May from a year ago.
  • Ford (F) said its sales were down 11% from a year ago.
  • Chrysler, a unit of DaimlerChrysler (DCX) , announced U.S. sales fell slightly in May from a year ago. But after adjusting for the two fewer selling days sales actually rose.
  • In the retail sector Wal-Mart (WMT) met forecasts with a 2.5% gain, with Target (TGT) and Costco (COST) also edging past expectations. Apparel chain Bebe Stores (BEBE) and luxury chain Nordstrom (JWN) also outperformed, while Federated Department Stores (FD) and the Gap (GPS) were short of their targets.

ECONOMY:

  • U.S. economy added only 78,000 jobs in May, which is far less than the 274,000 added in April. The unemployment rate edged down to 5.1 percent, which is the lowest level since September 2001.
  • Dallas Fed President Richard Fisher, told The Wall Street Journal and CNBC that the Fed was in the “eighth inning” of its rate-tightening campaign and that its policy meeting later this month would represent the ninth inning. This means the Fed is close to finishing its “tightening” of the monetary policy.
  • Jobless claims rose by 25,000 to a 2-month high in the week ended May 28.
  • The Conference Board said Consumer Confidence was up as their report broke a recent downtrend while claiming consumers appeared less worried about the job market and the economy.
  • The Purchasing Management Association of Chicago’s index of business activity fell lower than economists expected. The index did not indicate recession and has reverted to its average after big gains.
  • The Institute for Supply Management reported its index fell to its slowest pace in two years, though did not reach the mark of 50 which is the break-even point between expansion and contraction Factory activity has enjoyed a 24-month expansion, which is the longest in 16 years. High energy prices, a rebound in the dollar (which takes away from demand for U.S. exports), a big inventory buildup in the first quarter and a slowdown in automobile production contributed to the slowdown.
  • The Institute for Supply Management said its index of service-sector activity fell to its lowest level in two years.
  • The Office of Federal Housing Enterprise Oversight said the average U.S. home price was 12.5% higher in the first quarter than a year ago which is nearly the biggest gain 25 years.
  • In the retail sector same-store sales were up 2.9% from a year ago, which was lighter due to unseasonably cool weather.
  • The Labor Department issued a report showing that labor costs rose faster in the first quarter than initially thought.
  • Productivity, or output per hour worked, rose 2.9%, which is an increase from an initial reading of 2.6%.

What We Are Watching For This Week:

  • MONDAY: CMGI (CMGI), Quiksilver (ZQK).
  • TUESDAY: Albertson’s (ABS), Toys R Us (TOY).
  • WEDNESDAY: H&R Block, Inc. (HRB),
  • THURSDAY: National Semiconductor (NSM), Navistar International (NAV), Shuffle Master, Inc. (SHFL).
  • FRIDAY: Polo Ralph Lauren Corporation (RL).
  • 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:

“He who lives without discipline dies without honor.” Icelandic Proverb

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.