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Daily Report December 16, 2010

|Includes: Autoliv Inc. (ALV)
Market Analysis

We experienced  a distribution day across the markets today. Over 70% of issues declined with even more volume backing it up. We also saw new lows expand beyond what it has been recently, and beyond our comfort level for a healthy bull market. While we are not call an end yet (on account of one day), this price action does line up with our previous analysis of an over-extended market. I mentioned a few days ago to tighten stops and lower total theoretical risk in order to reduce exposure. I still see the downside risk as greater than the upside potential, and until this disappear I will keep risk exposure low. Keeping risk exposure low should not be confused with the trend though... which is still up. I'll still  mostly look for longs in an uptrend, however, due to the increased risk I'll limit risk exposure.

Above is the NASDAQ Composite Index (which I like to use since it contains more growth type stocks than does the NYSE). The thick blue lines represent the major trendlines of action right now. As you can see the market has been following the lower of the thick lines quite well. Current support from the 50 SMA and trendline lie around the same place and so therefore give a good technical, initial downside target. The market is also following the cycle analysis quite well, but is a few days past due as of current. The red horizontal lines are cycle tops according to my analysis. My analysis for cycles is a proprietary, and a bit unusual, however, it seems to be more accurate (though I am still in testing). Also of note is the bearish divergence with money flow. All of this combined with the overheated status of the market, seems to be pointing to time for a much-needed rest in the indices and majority of stocks.

Sector/Industry Analysis

When it comes to the action we experienced today, one thing that was not reassuring was the relative strength of defensive sectors. We will have to keep our eye on this. If sector rotation continues, and defensive sectors (those purchased and held primarily through bear markets such as Staples, Telecom, and Health Care) keep their strength, I will be watching my trend and timing models very closely for a sell/short signal. The extreme weakness of real estate is another tug on the markets, as this has been strong and helped lead the markets higher over the last year. If this strong sector of the market is weakening, and returning to its previous state of problems, we may see the markets follow in suit. A daily watch on all of this will keep us extremely in tune with the markets and allow us to trade effectively.

Equity Analysis - ALV

There are a lot of over-extended stocks out there right now, especially in the growth stock niche. However, ALV caught my eye. It recently broke out from a three weeks tight base, and the successfully tested the top of the base. It also has successfully tested the 50 day SMA numerous times. It doesn't seem to be as week as the market and is holding its moving averages quite well. This is a stock to add to the watchlist and watch for a reversal or continuation pivot should the market turn bullish again.

Earnings have been explosive for some time now, and there are sales to back it up. The best part is that 1 year earnings are still negative, so this is considered a turnaround play still, and not yet mature in its growth cycle. Earnings surprises have been positive, and management is doing a good job at keeping expectations below actual results. It has very attractive cash flow that can keep the company liquid and expanding should lending dry up.

Valuations have little value (no pun intended) with growth stocks; however, I always glance a them to get an idea of how much it could potential run. Here, the price to sales is still hovering around 1, showing close to discount pricing on this security still, far too low for a growth stock (further substantiating that it is still in turnaround mode). It is also only 34% above the 200 SMA leaving room for more growth.

About half of the float is held by institutions leaving room for further accumulation. It current float is 84 million, so it can move much further, and do it quite quickly. The demand does slightly outweight the supply, however not extraordinarily, and up-down volume is slightly less than 1.

When it comes to rankings, I always prefer technical to fundamentals, so the fact that this stock is weak technically will hurt its chances of me carrying through. However, my special rank is often my deciding factor for security selection, and a perfect score here is the only reason for its inclusion today in our analysis. Current rankings for this stock according to our proprietary methods are:
  • Fundamental - 99
  • Technical - 37
  • Acc/Dist - 40
  • Composite - 52
  • Special - 100
Positions: None More at: Growth Stock Investor