Amid much skepticism about the health of the U.S. economy, the major averages broke out to the upside last week in heavy volume. Some called it more short-covering, but I don't agree with that. It was fresh money coming in from the sidelines, ready to move out of bonds and into stocks.
Buyers have the upper hand, and they'll mostly likely maintain that edge for the next few days. There's not much of a chance the bears will take meaningful short positions ahead of the two-day Federal Reserve meeting set for Sept. 12-13.
After Friday's disappointing jobs report, the odds have increased that we'll see some form of additional stimulus from Ben Bernanke and the Federal Open Market Committee Thursday. It's not a slam dunk, but it is more likely after the numbers revealed the economy created a disappointing 96,000 jobs in August.
When it comes to the action in individual stocks, leadership has broadened out nicely. Several growth names are doing exactly what they should be doing in the early stages of a market uptrend: breaking out in heavy volume.
The new-issue pipeline isn't exactly vibrant right now. However, several recently debuted stocks that have the potential to be new market leaders are acting well. Organic and natural foods distributor Annie's (BNNY) cleared a base last week; affordable luxury brand Michael Kors (KORS) continues to hold gains nicely after its recent breakout; and online professional network Linkedin (LNKD) broke out in heavy volume above $113.
Earnings season is pretty much over, but two innovative new issues that have enjoyed strong buying demand since their July initial public offerings are slated to report earnings Monday. Shares of specialty retailer Five Below (FIVE), with a market capitalization of $1.9 billion, have doubled in price since their July 19 IPO at $17. At the beginning of this year, the company operated 192 stores in 17 states, with plans to open an additional 50 stores in 2012.
It sells merchandise priced at $5 and below to the pre-teen and teen crowd, and business is booming. The stock currently sells at a rich valuation, but the company's growth prospects make it worthy of a premium multiple. Annual profit this fiscal year is seen rising 47% to $0.44 a share. Next year, the consensus estimate calls for profit of $0.64 a share, up 45% from this year's targets.
On Monday, analysts expect it to report a profit of $0.01 a share, with sales expected up 32% from a year earlier to $81.95 million.
Meanwhile, another red-hot new issue -- Palo Alto Networks (PANW) -- is also set to report Monday. The network-security firm went public July 20 at $42, nicely above an initially proposed range of $34 to $37.
The stock has market capitalization of $4.8 billion, and it continues to hold near highs. Quarterly earnings are expected to be flat compared with a year-earlier loss of $0.09 a share. Sales are seen rising 77% to $71.3 million.
New issues are the lifeblood of any market rally. The fact that several are acting well doesn't mean a rip-roaring bull market is about to take hold, but it's a definitely a good sign, and a reason to be optimistic about a solid rally into the end of the year.