Sunday, February 02, 2014

Weekend Review - Correction Takes Hold But Leading Growth Not Falling Apart

The market continued its recent pattern of low volume rally attempts followed by higher volume selling. Friday looked like that pattern could be broken. After rallying all day long from a weak opening, a bout of late selling crushed any hope.

For the week, most indexes managed to close near the flat line except for the Dow which closed at new correction lows. The Dow is now five weeks into its correction, while the Nasdaq and S and P 500 are only two and three weeks into theirs respective corrections.

On a positive note, the NYSE advance decline line only topped along with the market recently. After threatening to lag all year long, the advance decline line continued to make new highs along with the market toward the end of the year. There is usually a period of significant lagging while the market makes new highs before we can expect a correction to turn into a deeper bear market.

Another piece of good news is we haven't seen a complete meltdown in leading growth stocks. While a good number sliced through their fifty day moving averages the previous week, many managed to stabilize near moving averages or previous week lows, and a few even broke out. The downside price and volume action has been reasonable within the context of the major advances many of these stocks have made.

The Internet group continued its hot trend. Facebook (FB) broke out of a pullback to the fifty day moving average on top of a cup shaped base, Qihoo 360 Technology's (QIHU) broke out of cup and handle base, both on well above average volume, and Twitter (TWTR) bounced off its ten week moving average ahead of its earnings report on Wednesday. Group mates YY Inc (YY), Yelp (YELP), SouFun Holdings (SFUN), and Bitauto Holdings (BITA) managed to hold key moving averages and pivot points. Amazon (AMZN) was the biggest disappointment gapping down over ten percent on earnings after getting within one percent of breaking out from a flat base.

Restaurant stocks, Chipotle Mexican Grill (CMG) broke out of double bottom base on extremely heavy volume while restaurant mate Buffalo Wild Wings (BWLD) made a strong move off the bottom of a potential double bottom base.

Oil and gas stocks continue to work on their consolidations. Cabot Oil and Gas (COG), the early leader, broke out of a later stage cup and handle base and is within the buy range, Sanchez Energy (SN) is working its way up the right side of a cup shaped base, Kodiak Oil and Gas (KOG) and Matador Resources (MTDR) are working on the bottom of their bases.

Home builders have started to break out and setup near fifty two week highs. NVR Inc (NVR) broke out of a cup and handle base on massive volume, after reporting better then expected earnings, to all time highs, Toll Brothers (TOL) attempted to break out of a cup and handle base Friday on strong volume, but finished the day below the pivot point, Standard Pacific (SPF) and Hovnanian (HOV) continued to work on their cup and handle bases.

The short ideas list has produced some nice breakdowns over the last few weeks. JC Penney (JCP) continues to break down to all time lows, Sears Holdings (SHLD) is rolling over, Target (TGT) and Gamestop (GME) have sold off for four straight weeks.

Rent-A-Center (RCII), Cirrus Logic (CRUS), and Neustar (NSR) all gapped down on high volume on earnings report after rolling over their respective fifty day moving averages a few weeks earlier.

Arch Coal (ACI), Anadarko Petroleum (APC), Denbury Resources (DNR), Lions Gate Entertainment (LGF), Rackspace Hosting (RAX), and Shutterfly (SFLY) are all consolidating at or below their respective fifty day moving averages and could suffer significant drops on poor earnings reports.

The market clearly looks to have more downside left, but every time it has looked like this over the past year, leading growth stocks have managed to stabilize, re-consolidate, and lead higher. Of course, at some point, one of these corrections will turn into an even deeper correction or bear market. Patience and extreme selectiveness is key at this juncture to insure that portfolios don't get too over exposed if the correction deepens or stays too under exposed if the market does rally.
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