Growth Stocks Look Fragile

 | Oct 26, 2011 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

ice

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ua

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hans

Stocks sold off hard Tuesday with growth stocks once again bearing the brunt of the selling. Growth stocks typically provide leadership in the early stages of a market uptrend rally and to see so many under pressure makes me question the quality of the recent rally.

This, plus the fact that a small crop of recent upside breakouts are having problems making headway is also cause for a concern. It indicates that the market isn't as healthy as it may seem. In the early stages of a market uptrend, growth names should be asserting themselves, breaking out of good bases in heavy volume. They have been few and far between.

Exchange operator IntercontinentalExchange (ICE) broke out over $126.46 on Friday and followed through on Monday, but as of Tuesday's close, the stock was back below its buy point. The breakout hasn't completely failed yet, but it's already facing serious headwind. Shares closed Tuesday at $124.12, down 3.2%.

 

IntercontinentalExchange (ICE) -- Daily
Source: StockCharts.com

 

And let's not forget about Under Armour (UA), which reported strong earnings on Tuesday. Early in Tuesday's session, a powerful, heavy-volume breakout over $80.80 was taking shape. Shares hit an intraday high of $83.47 but ended at $80.15, up 5%, but below the buy point. Overall though, its breakout held up pretty well despite overall market weakness.

 

Under Armour (UA) -- Weekly
Source: StockCharts.com

 

Some breakouts still have potential like Intuitive Surgical (ISRG) and Tractor Supply (TSCO), but these stocks are the exception, not the rule. Intuitive Surgical broke out over $402.35 on Oct. 19 and continues to hold above its buy point. Tractor Supply, meanwhile, is still holding above its buy point of $70.10.

Clearly, the market is jittery, and Tuesday's weak price action tells me the market might not be happy with what it hears from Europe on Wednesday. Wall Street will be looking for more color on how Europe plans to recapitalize its banks, restructure Greek debt and finally, expand the power of the European Financial Stability Facility (EFSF)

Tuesday's selling might have caught some off-guard, but the market has come a long way off its Oct. 4 lows. Selling intensified late in Tuesday's session, resulting in a close near lows for the Dow, S&P 500 and Nasdaq.

The silver lining to the session was that volume on the exchanges wasn't overwhelming to the downside. Volume on the Nasdaq and New York Stock Exchange (NYSE) remained below average. Volume on the NYSE came in higher than Monday. Nasdaq volume was lower.

It's important to keep in mind that one-day of selling won't stop a rally in its tracks. The market remains in a confirmed uptrend until institutional selling gets more pronounced. There has been very little of it since the start of the rally. Still, there are reasons to tread cautiously. What concerns me now is that the Nasdaq's 200-day moving average could be a ceiling, or resistance level, for the index in the near term, depending on the news that comes out of Europe on Wednesday.

 

Nasdaq Composite -- Monthly
Source: StockCharts.com

 

Many growth names took big hits Tuesday, but in most cases, volume wasn't overwhelming to the downside. One of the exceptions was Hansen Natural (HANS). The stock dived below its 50-day moving average, falling 8.1% to $84.47. Volume totaled nearly 3 million shares, which was much higher than its 50-day average volume of about 1.3 million shares. Clearly, there were big sellers in the stock on Tuesday. Recent erratic weekly price swings in Hansen's weekly chart indicate that Hansen's run could be nearing an end. Keep in mind that the stock has already made a major price run since the start of the bull in March 2009.

 

Hansen Natural (HANS) -- Weekly
Source: StockCharts.com

 

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