“…let us be hard-boiled cynics, believing nothing but what the action of the market tells us. If we can determine the supply and demand which exists for stocks, we need not know anything else.”
— Humphrey B. Neill, 1931
A market that had partially discounted a Euro version of Armageddon moves higher as participants unwind the safety trade. This has put the dollar at or near one-month lows vs. the major currencies – a plus for shares – and left equities poised for upward revaluation.
For some time, the major weakness for shares has been the level of involvement by large participants. This is reflected in both the averages and individual leaders. The below chart shows a preponderance of accumulation days on this three-week
move, but none occurring on above-average volume, which would indicate fervent demand. Historical precedent, as well as common sense, indicates a bull market becomes durable when demand materializes in a noticeable way.
A problem rivaling Europe’s in scale will be China’s. The question is how long, in years, it will be before China can no longer prop up its economy. Unlike recessions elsewhere, this one will likely be accompanied by social unrest.
Market participants continue to discount a steady consumer.
Last week, strength was seen in defensive issues in the utility, insurance, and energy segments. Breakouts included Cubist Pharmaceuticals (CBST),
Select Comfort (SCSS),
Tractor Supply (TSCO), Chubb (CB),
Dominos Pizza (DPZ),
Grainger (GWW), and Sally Beauty Holdings (SBH).
Near-breakouts: Brown Forman (BFB), GlaxoSmithKline (GSK), Nu Skin Enterprise (NUS), Whole Foods Market (WFM).
Although it is nice to see breakouts, names of this ilk are, for the most part, not the types that typically are your big-winning titles.
Among the names, Golar LNG (GLNG) sets up in a 15-week base with a possible pivot point of July 8’s high of 39.90 for those who did not enter on the cheater entry point mentioned in our last report of a week ago. Then, it was suggested that “A potential cheater entry, for those who absolutely have to put money to work, could be on a takeout of the Sept. 20 high at 37.26. Clearly, Wednesday’s 5% advance on volume 98% above average indicates strong demand for the title. Most analysts that follow the shipper see ’10’s earnings of a penny a share jumping to 93 cents and $1.64 in ’11 and ’12.
Chipotle Mexican Grill (CMG), with Friday’s gap open, excellent close, and 8% move on volume 160% above average, could be purchased here, with a stop below Thursday’s low of 306.06. This would be about 8% below Friday’s close.
Intuitive Surgical (ISRG) broke out of a three-month base Wednesday on volume 218% above average. The stock could potentially be entered here, using last Tuesday’s low of 380 as a potential stop. This is a level about 9% below Friday’s close, and therefore a smaller-than-full-size position might be used in order to bring the overall risk down to 8% or less. It is to be noted that estimated earnings growth of 24%/19% in ’11/’12 is much less than the glory days of ’07(91%), ’08 (42%), and ’10 (60%). Thus, expectations of what is possible performance-wise should be tempered, accordingly.
Linkedin (LNKD), as mentioned in last week’s report “…is a ways away from being in buyable range, but may be worth monitoring as its base matures.” This still applies.
In summation, shares enter their strongest seasonal stretch of the year historically. This, and the extreme strength of the move off the Oct. 4 low, augur for upward revaluation. Institutions show less interest than desired, the largest negative. There are times in a cycle in which the averages move higher, but a lack of quality setups leaves a growth-stock speculator less-than-fully-invested. This is one of those times. Some of the names that are potentially buyable are listed above.
The quote at the top of this report summarizes our approach over the past two-plus decades. This means keeping an open mind and remaining flexible to technical developments as they occur.