Archive for June, 2005|Monthly archive page
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
- The Growth Stock Landscape
- What We Like – What We Have
- What Was Important About Last Week
- What We Are Watching For This Week
- This Week’s Scans
- A Word On Discipline
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.
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.
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:
- GROCERY STORES
- CONSUMER SERVICES
- DEPARTMENT STORES
- OIL GAS DRILLING EXPLO
- RESIDENTIAL CONSTRUCTI
- INTERNET INFO PROVIDER
- OIL GAS REFINING MRKTN
- FOREIGN UTILITIES
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.
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 committing 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.
- 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.
- 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:
- MONDAY: none
- TUESDAY: Consumer Confidence,
- WEDNESDAY: Chain Deflator-Final, GDP-Final
- THURSDAY: Initial Claims, Personal Income, Chicago PMI, Help-Wanted Index, FOMC policy announcement
- FRIDAY: Auto Sales, Truck Sales, Mich Sentiment-Rev., Construction Spending, ISM Index
This Week’s Scans:
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