Dallas, TX
March 3, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Growth Stocks Lead A Quiet Stampede On Wall Street
What's Hot Today:
U.S. stock index futures were pointing to a flat opening on Wednesday. The S & P 500 has shown some improvement of late but the big action has been in the small and midcap stocks.
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  • Challenger Job-Cut Report 7:30 AM ET

  • ADP Employment Report 8:15 AM ET

  • ISM Non-Mfg Index 10:00 AM ET

  • EIA Petroleum Status Report 10:30 AM ET

  • Beige Book 2:00 PM ET
News For Thought

Report: Greece's problems are self inflicted. Goldman Sachs is getting investigated with regard to its involvement in Greece's fiscal problems. But a new report suggests that Greece is mostly to blame for its own problems.

According to The Wall Street Journal: "Europeans are blaming financial transactions arranged by Wall Street for bringing Greece to the brink of needing a bailout. But a close look at the country's finances over the nearly 10 years since it adopted the euro shows not only that Greece was the principal author of its debt problems, but also that fellow European governments repeatedly turned a blind eye to its flouting of rules."

But the reality is different than the intent as "an examination of budget reports to the EU shows Greece hasn't met the deficit rule in any year except 2006. It has never been within 30 percentage points of the debt ceiling." In fact "Greece has revised its deficit figures, always upward, every year since 1997—often considerably. Several times, the final figure was quadruple what was first reported. Late last year, the Greek government set in motion its current crisis by increasing its 2009 budget-deficit estimate, initially 3.7% of GDP, to nearly 13% of GDP."

So what may be the bottom line? "The Greek problem has shown that EU financial institutions don't have enough teeth or expertise to rein in renegade member states, said Jean-Pierre Jouyet, chairman of France's stock-market watchdog and former chief of staff to a president of the European Commission, Jacques Delors. "We need new tools to manage these disequilibriums, because a pact without sanctions is not enough," said Mr. Jouyet."

What a shocker? Governments cooking the books and putting off the pain of difficult decisions for decades. If it sounds familiar, it's because Washington has been playing the same games for the past 30 years, and the U.S. could well find itself in a more difficult position in the not too distant future unless something changes.

Growth Stocks Lead A Quiet Stampede On Wall Street
Small Seems To Be Beautiful In This Market
There is a great deal of pessimism on Main Street and to some degree when you hear Wall Street types in the media. Yet, the charts suggest that something entirely different is taking place in the market where small and midcap stocks are in a rip roaring bull market.



Chart Courtesy of StockCharts.com


Indeed, as the S & P 500 struggles to get above the 1120 area, the Russell 2000 Index (RUT) of small stocks made a new high on 3-2, with little media fanfare, which is great. More important, the NYSE advance decline line confirmed the new high in the Russell, while the number of stocks making 52 week highs on the NYSE and the Nasdaq Composite also made new highs. That is what technical analysts call a confirmation of the underlying strength of the market, which is being highlighted, by the new highs in the Russell 2000 and the S & P Midcap 400. Confirmations make us more comfortable with what the charts are showing us.



Chart Courtesy of StockCharts.com


So what it looks like at this point is what most of old guys that have seen a few of them call a "stealth bull market." Oh, sure, we're probably early in calling it that. And we may be wrong by Friday if the employment report leads to a big down day. But, today is today, and that's all we've got. And today, the action in growth stocks looks very appealing.



Chart Courtesy of StockCharts.com


The Russell 2000 index is home to a large group of small capitalization stocks, while the S &P 400 Index is where the mid cap stocks are gauged. These are the stocks of the future, as they represent smaller companies than those, for example, in the Dow Jones Industrial Average, both in terms of the amount of money that they market has put into them, market capitalization, and in the size of the companies themselves. More important for investors, these two indexes are a general storehouse of tomorrow’s blue chip companies, and thus where most of the future growth in the stock market will likely come from.

Let's look at this from a slightly different viewpoint. When the small and midcap stocks made a new high from the March 2009 bottom in the stock market and the better-known indexes such as the Dow Jones Industrial Average and the S & P 500 didn’t, it means money is moving into the lesser known stocks, and that's the big reason for the bullish action in the advance decline line. This is what technicians call excellent market breadth.

Think about it, the Russell and the Midcap 400 indexes house 2400 stocks while the Dow and the S & P 500 house only 530 stocks. That means that when the Russell and the Midcap 400 make new highs as an index chances are that more stocks are moving higher. And that means that individual investors have a better chance of picking winning stocks.

What’s the take home message? Barring a major turnaround in the market’s fortunes, the number of stocks that is rising is higher than those that are falling. Most of the stocks that are rising are small to midcap stocks. Those are commonly known as growth stocks. When growth stocks rise, the chances of making money tend to be greater for investors who recognize the trend and make growth stocks part of their portfolio.

What’s the big worry? In the short term, Friday’s employment report could deliver a negative surprise and derail the rally. Over the longer term, bad policy from Washington could lead to double dip recession. Otherwise, the charts seem to be pointing to higher prices for stocks for at least a few more weeks to perhaps a few more months.

Conclusion

Polls show that Americans are sour on the goings on in Washington. And they are right to be negative on the actions of politicians who are ever more disconnected to the public as each day passes.

But the charts are suggesting that forward looking Wall Street is starting to factor in a positive change of some sort ahead. Whether that means a change in the Washington power structure or something more bullish in the economy is hard to predict or know.

What is clear is that money is moving into growth stocks. And that's usually a sign that the economy is likely to strengthen at some point in the future.

We may be wrong. But right now, it seems foolish to fight momentum.

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Market Moves - Stock Of The Day
Nike (NYSE: NKE) Looks Stronger Than Under Armor (NYSE: UA) and Dick's Sporting Goods (NYSE: DKS)
Under Armor (NYSE: UA) and Dick’s Sporting Goods (NYSE: DKS) are lagging shares of Nike (NYSE: NKE) in the sports apparel sector.



Chart Courtesy of StockCharts.com


We recently noted that Nike shares were rallying on expectations of bullish sales this summer, as the World Cup hits the airwaves. Thus, we thought we'd look at the general status of the sports apparel sector more closely.

And although it's not easy to find publicly traded sports apparel companies, we did find Under Armor and Dick's Sporting Goods as interesting examples of other stocks in the sector. Neither company, though, is showing Nike's strenght at the moment, which suggests that the Nike pop is, at least for now, Nike specific.

Still, Under Armor (NYSE: UA) is pretty good straight play and it doesn’t look as good right now as Nike, although it’s acting better than some stocks in the overall market. Dick’s Sporting Goods (NYSE: DKS), a retailer, is another way to play sports apparel. That one looks a bit better than Under Armor, but not as good as Nike.

From purely a chart analysis point of view, It’s pretty simple, really. Nike is moving higher at a better clip than the other two and the general market, when you compare it to an index like the S & P 500 or the Dow Jones Industrial average. That’s what in technical analysis is known as relative strength. It’s good to own stocks that are showing relative strength.

The bottom line is that Nike is the best of this small sample of stocks and generally, it’s best to own the strongest stock in any group. That usually maximizes your profit potential.

One word of caution, though; Nike has had a big run of late, and chasing it at this point may be dangerous.
 

 


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