Don't Get Too Excited Yet

 | Oct 05, 2011 | 12:00 PM EDT
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You have to give the market credit. It's been consistent as far as volatility is concerned, and there was no shortage of it during Tuesday's session.

The Nasdaq had a good shakeout on Tuesday, as the tech index finally undercut its Aug. 9 intraday low of 2,331. It hit a low of 2,299, then reversed and ended sharply higher at 2,404, up 2.95%. With about 50 minutes left to go in the session, the index was down 1.4%. Volume was also impressive with just more than three billion shares, nicely above Monday's heightened level of 2.5 billion shares.

The bulls have to be encouraged by the performance, but in the end, it was only the first day of a rally attempt for the Nasdaq and the other major indices. In other words, don't get too excited yet. Wait a few more days and let the short-covering run its course. After that, watch for signs that new institutional investors are coming in from the sidelines. This usually happens in the form of big percentage gains in higher volume (similar to Tuesday), which is what will drive a true market rally.

Keep in mind that the market has experienced a lot of technical damage. Waves of institutional selling seen in several growth names in recent days will most likely result in a shift in leadership, but this leadership needs more time to take shape.

The leadership will basically come from the stocks that are the first to re-test their prior highs. Expanding volume will be important as this happens because it will signal that institutions are buying.

I've written in recent days that I'm not expecting former leaders like Priceline (PCLN), Baidu (BIDU) and Fossil (FOSL) to resume their leadership roles anytime soon. But, one retail name that is setting up nicely is Nordstrom (JWN). Shares outperformed on Tuesday, rising 6.8% to $48.44 in fast trade.

Nordstrom operates 115 full-line department stores and 97 Nordstrom Racks in 29 states. The company will report September same-store sales on Wednesday, along with many other retailers. The company reported an impressive 6.7% jump in August same-store sales and an impressive quarter with earnings up 25% from a year ago to $0.85 a share. Sales rose 12% to $2.8 billion, driven by a 7.3% increase in same-store sales. Gross profit as a percentage of sales improved 135 basis points to 37.4%.

JWN has been consolidating gains since July and is close to a potential breakout above $49.25, its Sept. 27 intraday high. It currently sells at 16x trailing and 14x forward earnings.



Meanwhile, Genesco (GCO) soared 9.7% to $54.84 in strong trade. The Nashville-based specialty retailer sells footwear, headwear, sports apparel and accessories in more than 2,375 retail stores in the U.S., Canada and the U.K. However, I'm not as keen on Genesco as I am on Nordstrom. Short interest is relatively high in the stock, and it's arguably a later-stage base due to a big price run already. Still, the company has plenty of positive traits.



I like the fact that sales growth has been accelerating in recent quarters at Genesco. In August, the company reversed a year-ago loss with a second-quarter profit of $0.22 a share. Sales rose 29% to $470.6 million from a year ago . Same-store sales in the quarter rose 14%. Fiscal 2012 profit is expected to rise 38% from 2011 and fiscal 2013 profit should be up 18% from 2012.

Headed into Wednesday, Genesco was sitting just below a swing point of $55.53. Breakouts from later-stage bases can still having staying power, especially if the fundamentals are still intact, and that appears to be the case with Genesco.



Even though Nordstrom and Genesco continue to act well in the retail sector, both charts are anomalies in the market. I scan about 200 charts on daily basis. Very few stocks are in a position to break out at the moment, which is not surprising since most sectors are filled with damaged charts that need more time to repair. If a new market uptrend begins in earnest, it won't be long before the next crop of leaders makes their presence felt. Be patient though, because the process doesn't happen overnight.






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