Weekend Update – Uptrend Under Pressure

Nasdaq 04-07013

The Nasdaq Recap

The Nasdaq struggled again this week losing 1.9% in volume that was 7% lighter than average, but still much stronger than last week. The index logged distribution days on Wednesday and Friday with big losses in strong volume. Although Friday’s close was the lowest close of the week, the index did close at a the top of the day’s range after plummeting in the morning and fighting back all day. With the amount of distribution we have seen in the market lately, it makes sense to be very cautious moving forward. If we continue along this path into a correction, cash will be the safest place to be. However, if the market is able to regain its footing next week, we might find some solid buying opportunities. Much of what happens next week will be a result of first quarter earnings reports, which could move the market in either direction.

Leading Stocks

Celgene (CELG)

CELG was up 0.4% this week in volume that was 7% below average. The stock is still well extended from the first stage flat base that it broke out of at the beginning of the year. Despite the struggles of the overall market this week, CELG was able to post positive days in every session except Wednesday. The stock also managed to hold its 10 day moving average. Stocks that hold up well during market pullbacks are often the strongest leaders when the market regains its footing.

CELG has a long record of good, but not great earnings. Over the past three quarters, the company has posted earnings growth of 37%, 26%, and 26% as well as sales growth of 16%, 14%, and 13%. Annual earnings are projected to grow 15% this year and another 20% next year, although both of those estimates have been revised down. The company has a very strong return on equity of 39%, has increased fund ownership over the past year, and is in a very strong industry group.

Fleetcor Technologies (FLT)

FLT lost 1.9% this week in volume that was 37% above average. The stock started out the week with two positive days in above average volume, but then fell on increasing volume on Wednesday and Thursday. On Friday, the stock crashed through its 10 day moving average on its biggest volume of the week. The stock has not formed a base since it broke out of a first stage cup pattern in August.

In its most recent quarter, FLT posted earnings growth of 46% and sales growth of 45%. This was the second straight quarter of at least 45% earnings growth, and it was the third straight quarter of accelerating sales growth. Annual earnings are expected to be up 21% this year and another 16% next year. The company has an outstanding return on equity of 30% and has increased fund ownership in each of the past four quarters, but is in an underperforming industry group.

Fiesta Restaurant Group (FRGI)

FRGI dropped 4.1% this week in volume that was just a touch above average. The stock is extended from a first stage cup with handle pattern that it broke out of at the beginning of the year. Since that breakout, the stock has logged six weeks of accumulation, and this was only the first week of distribution.

Over the past three quarters, FRGI has reported earnings growth of 6%, 60%, and 50% as well as sales growth of 6%, 6%, and 8%. While the double digit growth numbers are encouraging, the single digit numbers are big red flags. The company expects annual earnings to grow 103% this year and then another 20% next year. FRGI is also in a strong industry group and has seen increasing fund ownership.

Top Performing Sectors

We can see that there was some rotation into more defensive sectors this week. Both Utilities and Consumer Staples have popped up on the lists this week, which indicated that investors are shifting their focus into safer options. Transports and Health Care remain very strong though, which further emphasizes that this market could go either way over the next few weeks. At points like this, it is much easier to roll with the market than it is to predict where the market is heading.

Top Five Sectors

1. Office, 2. Media, 3. Transport, 4. Finance, 5. Misc

Top Five Fidelity Sector Funds

1. Biotech, 2. Health Care, 3. Transport, 4. Utility, 5. Insurance

Top Five SPDR Sector Funds

1. Aerospace, 2. Health Care, 3. Utilities, 4. International Telecom, 5. Consumer Staples

Stock Setups To Watch This Week

Proto Labs (PRLB)

PRLB was down 5.8% this week, but volume was slightly below average. The stock is currently in a second stage consolidation that is seven weeks long and has a picot point of 53.91. During that consolidation, the stock has recorded one week of accumulation and one week of distribution.

Over the past three quarters, PRLB has reported earnings growth of 26%, 32%, and 121% as well as sales growth of 25%, 21%, and 31%. The accelerating earnings growth and the big numbers reported in the most recent quarter are the driving force behind this stock.The company expects earnings growth to continue at a rate of over 20% through next year. PRLB has a vert strong return on equity of 38% and has increased fund ownership over the past year, but its industry group in currently underperforming the market.

Resmed (RMD)

RMD has formed a second stage cup pattern that is 10 weeks long and has a pivot point of 48.47. The pattern contains four weeks of distribution compared to only two weeks of accumulation. The stock did hold up well this week, improving 0.9% in volume that was just slightly lighter than average.

In its most recent quarter, RMD reported earnings growth of 23% and sales growth of 13%. The earnings growth was much slower than the previous two quarters, and the sales growth was only slightly better than the single digit numbers the company had put up in previous quarters. While fund ownership has been increasing, the company has an average return on equity of 17% and its industry group is underperforming.