“If you have an approach that makes money, then money management can make the difference between success and failure.”
— Monroe Trout, Market Wizard
Shares give a good account of themselves in light of the backdrop, only slightly less murky than that of a week ago. Progress is being made in Greece and Italy, however small. Risk is still large that the balancing act by the ECB, Merkozy, Italian bond market, etc. will come undone. Given this, and in light of the market sitting just 2.7% from its October high, participants are viewing the glass as more half-full than half-empty.
Technically, shares remain in an intermediate-term advance. This has not changed in weeks. The wedge pattern highlighted in the below chart is more pronounced in
the S&P 500 (not shown). Either way, it is a consolidation pattern that was sorely needed by a market breathless following its steep October ascent. A wedge pattern normally resolves itself in the direction by which it was preceded, in this case up.
Leadership among growth issues is thin. Not all bull markets are led by growth. Some are led by cyclical and others by defensive titles. Some, like ’02, begin by the most beaten-down shares racking up the biggest gains. In that bull, it took six to seven months before dynamic growers took over leadership.
At this juncture, it is unclear which segment will lead. Things could change in short order. One scenario might see the market stage a rebound on the idea that domestic economic growth will still be there even if Europe goes into recession. In this case, the relative strength leaders might finally break out and follow through.
This is the idea behind constantly monitoring the leading lights. You never know when the roof may come off the top of the market averages.
Among the names, Golar LNG (GLNG) is a shipper, and not strictly a growth stock in the true sense of the word. However, the jump in expected earnings growth, the top percentile relative strength, and GLNG’s constructive base have our attention. Earnings were $0.01 a share in ’10, with forecasts of $0.92 in ’11, and $1.75 in ’12. The market’s focus is on ’12’s numbers since ’11 is almost a closed book. The 90% estimated earnings growth, then, is the excitement here. A plus is the fact that GLNG has already shown its propensity to lead by going from 2-and-change in ’09 to a recent high of 41. Stocks that have already been-there-done-that are preferred.
Technically, there was a shakeout in the handle portion of the base, with Wednesday’s low undercutting the Nov. 1 low. This was followed by Thursday’s low slightly undercutting Wednesday’s low. Friday’s surge on a gap open and good close brought price a bit more than 1% from the high of the handle set on Oct. 28 at 41.42. The pivot point for a potential entry, then, would be above the 41.42 level. The bottom of the handle is 9.8% away from this pivot, and below this area would be the most logical place to put a stop. A junior-sized starter position would reduce the risk to about 5%.
It is easy to see why Ulta Salon (ULTA) is, and has been, a popular choice among large investors. The operator of beauty supply stores and salons is in a business that is fairly steady and should hold up if economic growth falters, as ULTA did in the last recession. The weekly chart, not shown, shows solid institutional demand going back to the beginning of the last bull market in early ’09. The daily chart below also shows this. The actual numbers bear this out: Mutual funds that own the stock have risen steadily over the past few quarters. Earnings growth is estimated to increase 45%/25% in the January ’12/’13 fiscal years, qualifying this as a bona fide growth stock. The stock is under extreme accumulation and the group is top-tier for relative strength. Long-term debt is nil, and return on equity is 21%. For someone who likes to tick off as many boxes as possible, ULTA fits the bill.
Technically, the stock broke out of a seven-week staging area a week ago. In the last report, we suggested entering the stock “at current levels, using a standard stop-loss of 6%-7% below the 70 area.” A junior-sized position, if used on a starter position, would reduce risk to one-half of that mentioned. Last Monday’s high of 75.69 could now be used as an area for an add-on position.
There are a number of other growth stocks that, like ULTA, cleared a base, but have not followed through for much in the way of further gain. This believed to be a symptom of the general market, not the individual titles.
Enterprise software specialist Netsuite (N) was mentioned last week as holding some interest, but that we would “wait for a pullback to consider entry.” A handle has now been formed that is 10.3% deep. Preferably, the stock does nothing but move sideways for the next week or so before breaking out. This would serve to take more attention away from the stock. For now, a potential pivot point for entry would be the top of the handle at 43.36. Mutual funds that own the stock have slowly increased over the past seven weeks. Group strength surpasses all other technology sector segments.
Chipotle Mexican Grill (CMG) remains on the watch list as it is believed to be a prime contender if and when the lid over this market comes off. It is considered a plus that the stock is backing and filling – and not coming under intense selling pressure – following its breakout attempt of Oct. 31. Earnings estimates of 21%/26% for ’11/’12 and very high earnings stability keep this on the institutional radar screen, and ours. Potential entry would be above the Halloween high of 347.94.
Priceline.com (PCLN), considered to be an institutional must-own by virtue of its big earnings growth (57% annualized growth rate over past five years, 71%/30% estimates for ’11/’12), high liquidity ($27B in capitalization), and rich earnings stability, moved up 1,144% from late ’08 to its May 2 high. Since then, the stock has digested this major gain in somewhat erratic fashion, though a move of this extent cannot be expected to yield a perfectly-shaped base seen in a textbook.
More recently, the stock showed institutional demand kick in on Tuesday, up 8.6% on volume 175% above normal. Tuesday’s high of 553.33 could potentially be used as a pivot for entry as a starter position.
Rackspace Hosting (RAX) is similar to others mentioned here in that it had a major move since the last bull market began (+1,062% to April 29 high) and has been basing constructively since then. Earnings estimates are beefy (51%/51% for ’11/’12) and earnings stability is good for a technology concern. Mutual funds that own RAX have increased in recent quarters. Like N and PCLN, the stock showed big demand kick in recently as it neared the top of its base, always a plus. Traditional entry would potentially be above the Nov. 8 high of 45.46, which appears to be a handle to go with its multi-month base. This could change over the next week or more, as a possible cheat point may emerge that might offer a better entry, but one does not appear presently.
Apple (AAPL) is worrisome as a bellwether for the market in general. Institutions have been exiting the stock for some time, as is evident in the below chart. The direction of least resistance is clearly down after two attempts at breaking to new highs (Sept. 19, Oct. 14) failed in the past.
Elsewhere, Tractor Supply (TSCO), Intuitive Surgical (ISRG), Under Armour (UA), and Fusion-Io (FIO) are expected to lead any meaningful rally in the averages. The latter may have the most intermediate-term potential of any in the growth sector, especially among recent new issues. One to watch.
In summation, the market remains hamstrung by the European drama. Near-term direction may be defined upon a break of the wedge pattern – either up or down – shown in the chart on page one. Should large investors return to the market in a measurable manner, the position trader has opportunities via some of the names listed above and in recent reports. Gold and silver remain solid vehicles for nimble position traders.