KORS Forming Double Bottom Base?

Market corrections serve a productive purpose other than giving you a tax write-off: they help leading stocks form basing patterns. These consolidations allow institutions to build positions in a stock as weaker holders get out, readying it for another potential run higher.

Michael Kors (KORS) is forming such a consolidation. Not all consolidations are created equal. Some actually show distribution, meaning institutions may quietly be dumping shares within a price range. Detecting this takes a closer look at the daily and weekly price and volume action of a stock.

KORS so far suggests slightly more distribution than accumulation, although it isn't alarming (and for me is a secondary indicator). Also, it is still winding its way through its current pattern, so there is time to increase accumulation. Look for volume spikes as it builds the right side of this double bottom.

In the weekly chart below, the arrows point to each bottom of the base. We may be in the middle of forming the 2nd bottom.

KORS has solid fundamentals, with 87% EPS growth in the most recent quarter, and 68% sales growth. These are fantastic numbers you want to see. The only downside is that the EPS numbers have decelerated for two quarters in a row and actually show a negative number only four quarters ago, suggesting some lumpy/bumpy action.

Its 83% return on equity and projected 84% earnings growth this year are exactly the kinds of numbers you want to see. Supporting secondary criteria are encouraging as well such as the 15% growth in the number of funds taking positions in the stock and the decent cash flow, which is helpful in serving its debt load. KORS also has a 96 relative strength rating, as reported by the Investor's Business Daily, meaning it has outperformed most stocks, a key ingrediant to going higher.

The industry group KORS is in, Apparel-Clothing Manufacturing, is a bit of a dog, however. Although there are a couple other decent stocks in this group, the technical performance of the group has lagged of late, ranking as number 98 in IBD's 197 industry group rankings. Sometimes it takes a strong move in a leading stock to get the group moving again. It bears watching as industry group performance helps determine the appreciation of a stock.

KORS sells high-end apparel, accessories and footwear and appears to be well-run. Also, management owns 13% of shares, indicating those who run the company have a heavy interest in seeing the stock price appreciate.

Another feature I favor in this stock is that it's relatively new to the stock market, having become publicly traded last December. Research shows winning stocks make their big runs in the early years of their going public.

Look for Stock Market Retracement

Six straight down days on the S&P 500 and 11 down days out of 13. Ouch, that hurt. I attempted buying a couple of breakout stocks as well as the SPY, which tracks the S&P 500, thinking we might pop higher then go down and boy was I wrong. Thankfully I had stops in place that protected my capital.

The chart below is a daily chart of the S&P 500 Index. That drop is not going to last at that rate, so watch for it to blow back.

Remember, no market goes straight down forever (or up), and after six down days, I'm expecting to see the market rebound a little. The big question is should we get short after some retracement? I'm waiting to see how strong the market looks at that point.

After going through two bear markets (defined as the markets going down 20% or more) in the past four years (and almost a third), I'm a little gun shy and always on the look out for a way to make quick money to the downside.

But looking at the weekly chart of the S&P 500 below, visually you can see the trend has been higher - even with a bear market along the way. The current market correction in this context doesn't look like anything extreme. It looks like many market corrections. The S&P has correction about 9% so far, which is healthy for creating new bases in top performing stocks.

Keep an eye out for top quality stocks that are forming bases. I'll be updating this all week with stocks that I'm watching. As always, let the market tell you where it's going, and when a rally begins, look to see how leaders do, and wait for your favorite stocks to break out on high volume.

Wait For Gold To Retrace, Then....

It's the incredible reserve, er, the amazing flight to safety, uh, it's the anti-inflation, hum, what the heck is gold as far as a trader is concerned? Stop listening to Coast to Coast and Gold Bugs who also have nuclear bunkers reserved for them in Baker, California (who'd have known all these years of driving to Vegas from LA there were nuclear bunkers in the ground there that people actually paid for).

Gold is just another instrument that can be traded, and it should be analyzed like everything else. Right now, Gold's major long term uptrend has been broken, at least for now (see earlier post below). It's been in a choppy sideways phase and recently sold off.

Gold, represented below through the ETF, GLD, dove down and has started retracing. I am keeping an eye on this retracement to see if I can jump in on the short side when the time is right. I like to use Fibonacci (Fibs) retracement levels to do this. To be clear, this is not an IBD style trade. I love IBD trades but while markets are in corrections, I like to stay engaged in other short term set ups.

Often times, markets retrace from definitive moves. In this case, gold has clearly been going down the past several days. Nothing ever goes down or up forever. Therefore, there is a good chance gold retraces to the 50% to 61.8% as something of a relief rally from the selling, only to start going down again. That's the thought process anyhow. Like any trade, it isn't always right so I place a stop on the order to protect my capital.

The retracement levels described above that I'm waiting on roughly correspond to between $1600 and $1615 or so.

If you do this trade, don't be greedy. If you find after you short that the trade is working out, take an appropriate profit. At least take off have your position once a decent amount has been made and then consider where you are at at that point to decide how long to hold the rest of it.

And as always, if the trade doesn't work out, let the stop take care of it and move on and find another good looking set up.

Facebook: Buy Today or, Gasp, Wait?

"To hell with investing rules, buy me some Facebook!" This is the sort of attitude I am getting from people - usually retail invetors - who follow the market. Seems like it will obviously be bid up in price, so buy it, right? To quote Indiana Jones, that's what scares me.
Well that and the fact that Facebook (ticker: FB) doesn't meet the Investor's Business Daily criteria for buying a stock. I'm a big fan of the IBD way as it has worked for me the best.

The full list of IBD ratings don't show yet on their proprietary Market Smith system, but FB's sales and earnings per share do.

And that's all it takes for me to pause. The most recent quarter's earnings per share (EPS) show a -9% change over the same quarter last year. Ouch, not what you'd expect from a star tech standout. It's best for a company to have 25% EPS growth or much more. Facebook did show this several quarters ago, perhaps it will return to form.

Projections for EPS growth next quarter, according to Yahoo finance, suggest a 20% EPS growth, suddenly back in the ballpark. (I've since looked back over this number and IBD suggests analysts forecast only 9% growth next quarter. Not good enough for me.)

Sales growth is much more encouraging with a 45% growth in the most recent quarter (compared to the same quarter a year ago). Projections suggest a 64% growth for next quarter. Pretty darn good for a beheameth of a company. Heck, great for any company.

One troubling note is that EPS has been decelerating or flat for 5 quarters straight, albeit next quarter will end this trend. This goes for sales as well.

Another consideration is that Facebook will be valued at just shy of $80billion at the $38 opening price and 2.1 billion shares outstanding (man that's a lot of shares). Apple is the world's largest company by market capitalization, at nearly $500billion, just to give a point of reference.

The point is that Facebook is already huge, and even though it's a world-wide company with more potential world-wide growth, it's one of the biggest stocks in the market. How much can we expect it to appreciate? This is one of my concerns as an investor. I wish Facebook went public when it was worth a mere $10billion. We'd have earned a knock-out return.

The other issue that concerns me is that this is a brand new stock. It's always best to wait and let the stock demonstrate what the market thinks of it - that is, how it trades. Does it go up in strong volume? Does it tank on volume? Or does it settle into a nice consolidation? That's what I wait for, a solid consolidation which is the market's version of a gestation period before hatching a winner, launched by a break out.

If you are hot to trot for Facebook, go click "like" on your Facebook page and buy one share to participate in this historic IPO, but for the love of your E-Trade account, wait before putting serious money into it. FB isn't going anywhere. If you wait a little, FB could still be your BFF.