Michael Kors Sets Up For More Upside

Michael Kors Holdings (KORS), a marketer of designer apparel, accessories and footwear under the Michael Kors name, went public in December at $20 and ran sharply higher to the $50 area by mid-March where it is now forming a constructive consolidation. A break over $50 on heavy volume would trigger a buy signal.

In its latest fiscal quarter, the company reported earnings per share (eps) grew by 87% year/year and sales increased by 68% year/year. Analysts see 79% growth in eps for fiscal year 2012, giving the company a forward P/E of 69 and a PEG ratio of 0.87 — a reasonable number. I would follow any purchase with an initial stop loss in the 7% area.

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Zillow Over Resistance On Volume

Zillow Inc (Z), a provider of online real estate data that connects homebuyers with sellers and mortgage professionals via www.Zillow.com, rose over resistance today in a bottoming base on volume 137% over 50 day average volume. The following chart shows the daily trading action in the stock over the past eight months.

An initial public offering (ipo) in July, in its recent quarter, it reported an earnings increase of 108% year/year and sales up 250% year/year. With a forward P/E of 60 on 2013 estimates, and eps growth forecast up 130% in fiscal year 2013, the PEG ratio sits at 0.46 — not too bad for hyper-growth. Ipo’s have been showing strong relative strength lately. I like the security at the current price (around 37) with a 7% initial stop loss.

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Johnson & Johnson Upside

While the stock of Johnson & Johnson (JNJ) has the same value it had ten years ago, the company has doubled sales and increased earnings per share 116% over  the same time period. Perhaps more importantly, they have increased their dividend by 221%, boosting it every year; the stock now yields 3.5%.

The stock has traded very tightly since December 2011 and looks ready to clear resistance in the 66 area. The healthcare sector also looks strong recently on a relative strength basis.

A riskier way to play JNJ is with call options. The deep-in-the-money January 19, 2013 50-strike call options have hardly any premium in them and offer a leveraged way to participate in JNJ price appreciation, albeit with no dividends.

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Massive Opportunity In 2012, But Then Look Out Below

There are several long-term cross currents in the current U.S. stock market environment. On the negative side, measures of volume and participation of “smart-money” have been woefully lacking since the October 2011 bottom, and really since the March 2009 bottom. In his weekly column in FuturesMag.com, technical analyst Robert McCurtain maintains close tabs on several market indicators including cumulative volume, most actives advance/decline line, and the call/put dollar value flow line. His indicators do not support the long-term sustainability of these market levels and suggest some future massive bear market.

Shorter-term, there is no arguing the fact the market needs a rest after the S&P 500 index has run nearly straight up 18% from its mid-December bottom. The number of stocks participating in the rally has fallen off since early February, clearly evident in the performance of the broad Russell 2000 index verses the S&P 100 index.

Investor’s Business Daily notes the rally is under pressure following a recent cluster of high volume down days and stalling days in the major averages. From a fundamental standpoint, short-term weakness is also supported by recent declines in the Citigroup Economic Surprise Index, which shows economists became too optimistic into January and February and are now tempering their GDP growth views. A decline in this index often precedes a decline in the market. On a short-term basis, traders are well-advised to take some profits off the table at this juncture.

On the long-term positive side, four fundamental items support robust prices: the U.S. treasury yield curve is positive, the U.S. leading indicators index is sloping upwards, equity prices are somewhat undervalued looking at historic earnings multiples of the S&P500 and deeply undervalued using the Fed Model, and the availability of cheap credit is improving (see my recent blog “Is A Bear Market Around The Corner?“). Looking at sector leadership, the aggressive sectors — technology (XLK), consumer discretionary (XLY), and financial (XLF) — are leading the market higher and show little sign of rolling over.  The chart below illustrates the strength in these sectors versus the S&P500. This is a sign of market strength and trend sustainability.

The early 1950s also offer some precedent: when long-dated Treasury yields started to rise in that era, stocks surged as investors fled falling bond prices for equities. The same may happen today.

While a focus on the chart behavior of individual securities leads to trading success, my current thinking is that aggressive positioning in new plays could pay off once the market consolidates its recent 14-week run. When the general positive factors discussed above degenerate (perhaps by the end 2012), I’d expect another generational bear market. After all, the federal reserve is out of bullets — they cannot lower short-term rates any further to help in the next (and inevitable) economic downturn.

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Nifty Stock-Market Timing Indicator

No indicator works all the time in predicting stock market corrections. But some work better than others, and this obscure indicator from Yong Pan at www.cobrasmarketview.com has a high percentage success rate. The indicator is the Percentage Price Oscillator (PPO) of the relative movement of the equal-weighted S&P500 index (normally the S&P 500 index is a market-capitalization weighted average) versus the Chicago Board Options Exchange (CBOE) options equity put/call ratio.

In the chart above, when the blue indicator line crosses below the zero boundary, a sell signal is generated.

Intuitively, the indicator makes sense. First of all, the put/call ratio serves as a reasonable real-time measure of complacency and fear in the market. When investors are fearful, they load up on put options for protection, sending the put/call ratio higher, and when they are complacent, they buy less puts and the put/call ratio drops. The indicator line displays the PPO (a measure similar to the rate of change) of the relative movement of the equal-weighted S&P 500 index (the numerator) and the put/call ratio (denominator). When the market begins a new downtrend, the numerator falls and the denominator rises, so the PPO heads down. The interesting point is that the indicator has worked for a long time through various market environments. The data I have starts in 2004, so it has worked for at least eight years.

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Chart Industries Sets Up For Another Up Leg

Chart Industries (GTLS) currently trades tightly over its 20 ema (daily exponential moving average) as it digests its recent three-week up move and sets up for another possible leg higher.

As a leading supplier of cryogenic distribution and storage equipment, the company provides the backbone for building out the natural gas fueling stations set to populate the United States (see Clean Energy Fuels (CLNE)) over the next ten years. More and more trucking companies are replacing their diesel engines with natural gas engines (see Westport Innovations (WPRT)) since the conversion pays for itself in six months with the savings from using cheap natural gas versus diesel. Thousands of new natural gas fueling stations are planned to meet the growing demand by truckers.

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Is A Bear Market Around The Corner?

A bear market may be some distance off. Probably the most important element supporting a sustainable rally in the U.S. stock market is the availability of credit. When credit is getting cheaper, it becomes easier and cheaper to apply leverage for the purchase of stocks, and it becomes easier and cheaper for corporate America to borrow and invest to boost earnings power.

Guess what? Credit is becoming easier and cheaper to get. The chart below shows the BofA Merrill Lynch U.S. High Yield BB Spread over U.S. Treasuries for the past 10 years. I use the BB-spread as it serves as a sensitive proxy for credit availability across the American economy. When the spread declines, credit availability is improving.

The next chart illustrates how stocks perform relative to the availability of credit. The chart shows the percentage performance, year over year, in the S&P 500 stock index versus the percentage performance, year over year, in the spread index just described. When credit availability improves, the stock market rises.

Three more things add to the bullish picture: 1. the stock market looks undervalued (according to the Fed Model), 2. money flows into stock mutual funds switched from negative to positive within the past few months, 3. central banks worldwide have primed the asset-bubble pump with trillions of dollars. Eventually, central bank funny-money printing will catch up to us and inflation in the general economy will accelerate, undermining economic progress; but right now, take advantage of a robust environment for stocks.

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