By Sean Udall, courtesy of Minyanville
MEMC Electronics, Sunpower Outshine the Solars
The slow melt higher continues as we’re seeing solid chart confirmation in many stocks after fairly sharp pullbacks to various support levels last week. Yesterday’s surprise moonshot came out of nowhere and shouldn’t be discounted, as it’s exactly how large down days would manifest last year, even after steep vicious declines had many convinced the worst was priced in at various points. Now we’re seeing the polar opposite as doubts in this rally grow, while many feel that “all the good news” is already priced in.
As far as the good news being priced in – that’s only true unless we start seeing real signs of economic activity. If we see that and it’s sustained in any way, stocks are still extremely historically cheap. The overriding question is simple: By the time we see real first-derivative, economic growth, where will stocks be?
On specific names, a few solars have reported ugly numbers today, and I was hoping to catch some negative action in MEMC Electronics (WFR) and/or Sunpower (SPWRA). But evidently, so were plenty of others, and both names are higher – MEMC nicely so. These continue to be my 2 favorite names in the group by a long shot.
With respect to other sectors including Tech – I think we might see mini-bullish spikes, similar to what we’ve seen in the bank group. Generally, Tech has been hammered during this last market crash, and most companies have no debt. Many names still sport positive earnings (versus 2002-2003 where most had massive losses), and even the Tech companies with minor losses aren’t burning cash. This is a 180-degree difference in setup than 2002/2003 lows, where the stocks ramped huge – even though they were still doing terribly and burning stockpiles of cash. Basically, you had to put blinders on and believe a sustained economic turn was coming to buy much of the group. This setup is multitudes better, and as it expands, companies like Apple (AAPL) will start showing 15-20% EPS growth again with P/Es below its growth rate.
As many know, the charts are okay – meaning at best, they’re in a consolidation pattern, and at worst (what most pundits are saying), they’re in the beginning of a large rollover move, where we may retrace half or more of the current advance. I differ on a number of points.
First, if you look at a mass of shorter- and medium-term MAs, you’ll see they’re curling up and heading north again. So a perfect retracement pattern is one where a stock falls to meet a "rising" MA. These usually precede powerful reversals that catch people hugely off guard. Note Apple yesterday and today. For those that remember the 1997-1999 period, this is how many stocks would pull back 5-15% and then spike 20-35% on the bullish reversals. You also get formations that momentum and algorithm traders love, like a 40-day MA crossing the 89, 100 or 200 day MA. Many times these moves are huge, while most won’t buy the strength. These sorts of technical moves usually represent the largest runs with little supporting fundamental explanation.
Lastly, most people don’t even look at weekly or monthly charts anymore, and these are still the most powerful. Looking at weekly/monthly charts, I’m seeing many names are just now firing first-line bullish breaks on RSI, Macd’s and MAs. So pullbacks are being aggressively bought and many folks are trying to find a positive story where few exist just yet. Goldman Sachs (GS) has turned its analyst bullpen into upgrade champions of late, as I believe it sees the relative value of many stocks combined with where the macro economy is likely heading. This is no coincidence.
To use Apple again: Even as the stock pulled back last week, it crossed a descending 50-week moving average, and that equals bullish. Google (GOOG) is also approaching its 50-week MA around the $430 level. So at a price at which many will be taking gains, I’ll likely be adding another leg and waiting for a fundamental catalyst to support the technical move. I think once GOOG approaches and then busts through $430, we’ll finally see a “Google like” move out of them – likely something initially to my $485-$500 area I buzzed on a week or 2 ago. It has been lagging the climb thus far.
Bottom line, pick a great company, pull up a weekly or monthly chart and take a look. The whole market of "good to great" companies pretty much have this same chart pattern. Further, most of these names have lagged badly on the way up. The Q’s just crossed the 40-week MA and are approaching the 50-week, which sits at $36. We cross that and a lot more buying comes in. Lastly, 40- and 50-week MA coincide with the 200-day, and sometimes you see a turbo-charged MA break when it happens. We may have to fight this level for a bit as it’s currently resistance, but once we’re through, I think we can see the Q’s move to the high $40s or low $50s. And if that happens, you know where the other "best of breeds" will be trading.
