Don't Be Fooled by All the Bullish Setups

 | Sep 05, 2012 | 3:30 PM EDT  | Comments
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Stock quotes in this article:

gra

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kors

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panw

I get emails and tweets all the time from people asking about my opinion on a stock's chart. Most of the time, my answer goes something like this: "great chart but questionable fundamentals."

For example, someone asked me recently about specialty chemicals firm W.R. Grace (GRA). Its main positive qualities are that the stock remains under accumulation, and it's continued to set up in a bullish cup-with-handle pattern. Leadership is broad in W.R. Grace's industry group -- a good sign -- but I can't get excited about three straight quarters of decelerating sales growth.

This is perfect example of a strong chart with so-so fundamentals -- not the type of stock I target for my Ultimate Growth Stocks newsletter or my model portfolio. The stock could soon try to break out above $60.11 -- and, if it does, it can rise without me. Strong technicals and compelling growth story must be in place in order for me to consider the stock.

W.R. Grace (GRA) -- Weekly
Source: StockCharts.com

On the other hand, Michael Kors (KORS) -- a current holding in my model portfolio -- is one of my favorite growth names at the moment because of its bullish chart and outstanding fundamentals.

The "affordable luxury" brand went public in December at $20 a share. Even though it's appreciated considerably since then, I still believe the stock is in the early stages of a move after a recent breakout from a first-stage initial-public-offering base. Earnings growth fuels price performance, and Michael Kors has that in spades.

In its latest reported quarter, profit soared 162% from a year earlier to $0.34 a share, well above the consensus estimate of $0.20 a share. Even better, top-line growth accelerated from the prior quarter, with sales rising 71% to $414.9 million. Same-store sales rose an impressive 37.3%. Growth like this results in a premium multiple for Michael Kors, but it's also a big reason behind its recent strong price performance.

Michael Kors (KORS) -- Weekly
Source: StockCharts.com

Away from that pick, triple-digit sales growth in recent quarters has been fueling price gains for recent new issue Palo Alto Networks (PANW), a network-security name that has the look of an emerging leader. The company went public in July at $42. Shares soared 9% Tuesday to $70.21, clearing a recent high of $68.50.

Palo Alto Networks (PANW) -- Daily
Source: StockCharts.com

Bullish technical setups are a dime a dozen right now, but it takes more than just a bullish setup for me to buy a stock. Price momentum is important, but fundamentals matter too. My goal is not to buy a stock and sell it a few days later for a couple of points of profit. That is one way to make money on Wall Street, but it's a short-term strategy that involves hitting a lot of singles as opposed to staying patient for a home run. I prefer the latter strategy. Keep in mind that the real home runs are in stocks that not only have strong bullish charts, but have also shown explosive earnings and sales growth in recent quarters.

The big money is made in the market by buying at the right time -- when institutional investors are putting money to work -- and sitting tight. Of course, it's hard to sit tight during volatile markets and whipsaw trading. Thankfully, those times are in the rear-view mirror -- at least for now.

Finally, I learned several years ago not to believe everything you hear from the financial media, including the commonly held perception that September tends to be a bad month for stocks.

In fact, the S&P 500 and Nasdaq Composite have delivered monthly gains in four of the past eight Septembers. While it's true that sellers have been in the market in four out of the past five Septembers, it wasn't very long ago when the S&P 500 and Nasdaq climbed in September for five straight years, between 2002 and 2006.

So what's the main takeaway? Simply put, it's too early to say that September could be tough sledding for stocks, especially since the market's technical picture looks pretty darn good at the moment. Don't start selling stocks because the headlines are telling you to do so. Sell when sell signals arise. They're not here yet.

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