By Tim Lutts
We’ve got absolutely horrible economic news: High unemployment, the risk that the U.S. will default on its national debt and the risk that Greece/Italy/Spain will poison the euro and set off a global financial crisis. On the other hand, the stock market in recent weeks (with the exception of today) has performed superbly, fueled by buying power matched only a few times in the past decade.
So which should you believe, the news or the market? You should believe the market, because the market reflects the opinions of all players with real skin in the game, and the market looks ahead.
And what could the market be so happy about? My personal hope is that the market sees a new trend toward cutting the national debt that will improve balance sheets, lead to smaller government and proportionally more market-based solutions. But what I hope for is irrelevant, and hope is not an investment system.
Chart-reading, on the other hand, is one leg of the very successful investment system used by Cabot Market Letter and Cabot Top Ten Report, and when a strong market uptrend is interrupted by a haymaker like the market threw today, I like to scan my list of favorite growth stories and see which stocks are behaving best.
Today, I like the action of Sequans Communications (NYSE:SQNS), which was featured in Cabot Market Letter back on June 1, when editor Michael Cintolo wrote this:
Sequans represents the cutting edge of chip technology, with a product line confined to 4G circuits that run smart phones, routers, USB dongles and embedded wireless modems. Virtually all of the company’s revenue comes from sales of chips that run the WiMAX system, which is essentially a WI-FI system on steroids. WiMAX systems bring high-speed Internet access to mobile devices and the global system is growing at an enormous rate. SQNS came public on April 18 at 10, and rocketed to as high as 19 when analysts added coverage with buy ratings. Sequans puts 26.3% of sales back into R&D, sports triple digit revenue growth and earnings are just picking up steam. Volatility is high, with big gains and big corrections, but SQNS is very hot.
Since then, the stock has behaved in a very constructive manner for a small, fast-growing technology stock. Buying volume has continued to outweigh selling volume, and the stock has calmed down as it consolidates its late-May blast-off. Earnings will be released before the market opens on July 28, and the only question is how wonderful they’ll be.
I think buying between here and the stock’s 50-day moving average, now at 13, could work out very well.