The last month has been a true rollercoaster for the stock market. Here is what happened over the past four weeks in the momentum universe viewed from the point of the St50 list: a 6% down week, followed by a 5% up week, followed by a 5% down week and we just closed a 4.4% up week. It has been a “running to stand still” exercise for most stocks ever since Europe reappeared on the front pages.
The negative correlation between U.S. Treasuries and equities remains intact. $TLT dropped 4% as investors finally pulled their heads from the sand and started to allocate capital to stocks. Only time will show if this was just a temporary blip in the uptrend of Treasuries and a real inflection point. In financial markets, appetite comes with eating and it doesn’t take much to transform a fear of losing into fear of missing out.
The good news is that individual catalysts are starting to matter again. Cyberonis ($CYBX) reported better than expected earnings and it broke out to new 5-year high from a long base. Lululemon also beat the estimates, but warned about the rest of the year’s sales. This is not the first time $LULU provided cautious guidance. The yoga retailer continues to grow revenue at the impressive 50% q/q pace. Its stock dropped 6% for the week. The long-term trend is still intact, but nevertheless it lost its place on the St50 list, at least for now. $TITN suffered a similar fate as it missed the estimates and dropped quickly to its 200dma.
The stock market is a forward-looking mechanism and as such it doesn’t discount the present, but the future. As a result it might discount events and processes that will never happen. Sometimes the market makes sense, sometimes it doesn’t. What we know for sure is that prices don’t change unless expectations change.
The U.S. consumer continues to be an enigma. Credit for big ticket items like cars and educations continues to grow at a solid base, while revolving credit (credit cards) is declining.
How does the market read all this? Look no further than price action. Discount retailers are massively making multi-year high. Dollar General ($DG) broke out to new all-time high despite announcing a secondary offering of 30 million shares. In the meantime, on the other side of the consumer spectrum, Whole Foods ($WFM) is hovering near major highs.
The best performing St50 for the week again was $PCYC, which gained 30%. Another lesson in the importance of relative strength as an equity selection criteria. $PCYC was one of the very few stocks making an all-time high while the market averages were getting clobbered three weeks ago. When a stock is bid up in a strikingly weak market, it is accumulated for its individual characteristics, not for market exposure.
The number of proper setups is gradually increasing. The 52-week high list is expanding. A good start, but the truth is that the market averages are still in a downtrend. All trends come to an end at some point and high-growth stocks typically lead market recoveries. This is why I focus on the price action in St50 stocks. Some of the setups that stand out in risk-to-reward terms: include: $UA $ALLT $SXCI $MLNX $SYNT $PKT $ZUMZ $LQDT $CERN $ULTA $WWWW.
Keep in mind that nothing in Europe has been resolved. Spain is a ticking bomb and it will certainly be a source of headline risk for the rest of the summer. Greek elections are next week, but it seems that the market has become somehow agnostic as it has a bigger fish to fry.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!
~ Ivan Hoff (@ivanhoff)
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