US Markets were closed on Monday in observance of the MLK holiday. Buyers showed up on Tuesday and sent stocks soaring in anticipation of a Republican win in Massachusetts. However, volume was lower than the prior session which suggested that large institutions were not aggressively buying stocks. This notion was confirmed on Wednesday when stocks fell in heavy volume. Over the past few days, several high profile companies released lackluster Q4 results which sent stocks lower. For the week, over 60 companies in the S&P 500 reported their fourth quarter results and the fact that the major averages are lower suggests investors are not happy with the results. The latest estimates suggest that earnings rose +67% last quarter which will snap a record nine quarter losing streak. Analysts believe that first quarter earnings will rise +30% as the economy continues to improve. The benchmark S&P 500 Index's valuation rose 25 times its companies’ reported operating profits, which is the highest level since 2002. It will be very interesting to see how stocks react over the next few weeks as companies continue reporting their Q4 results.

On the economic front, China said it will begin taking aggressive measures to curb its explosive economy. On Wednesday, China said that it will restrict overall credit growth to 7.5 trillion yuan ($1.1 trillion) in 2010. China's banking regulator, Liu Mingkang, said some lenders were asked to curb their lending practices because they failed to meet regulatory requirements. On Thursday, China said that its economy surged +10.7% in the fourth quarter which topped the Street's +10.5% estimate. On Friday, investors feared that China's central bank may begin raising rates to curb its uncomfortably strong economy. The fundamental concern here is that if China's economy begins to slow than the global recovery will be adversely affected which increases the odds for a double dip recession.

Domestically, a slew of economic data was released during the shortened holiday week: a weaker than expected Producer Price Index (PPI), a mixed reading from the ailing housing market and weakness in retail sales. Producer prices slowed sharply in December which helped relieve inflation woes and ease pressure on the Fed to begin raising rates in the near future. Housing starts fell but building permits rose which helped offset the negative reading. Meanwhile, the Redbook, which measures sales at chain stores, discounters, and department stores, fell last week which suggests that retailers are having a tough start to the new year. Perhaps the most ominous data point occurred on Thursday when President Obama slapped banks with new regulations on their proprietary trading. Prop desks are some of the most profitable components of these large banks and the threat of new regulation sent a slew of financial shares tumbling.

The major averages and leading stocks are now in a correction, as the major averages sliced and closed below their respective 50-day moving average (DMA) lines on Friday. So far, the market's reaction has been tepid at best to the latest round of economic and earnings data. However, the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks.  The market just ended its 46th week since the March lows.  Disciplined investors will now wait for a new follow-through day to be produced before resuming any buying efforts. Until that occurs, patience is key.

PICTURED:The Nasdaq Composite Index sliced below its well defined upward trendline and violated its 50 DMA line on Friday.

Charts courtesy www.stockcharts.com

PICTURED: The Semiconductor Index ($SOX -5.29%) suffered a large loss, and its deterioration under its 50-day moving average (DMA) line and prior highs raises concerns that strength in the tech sector is quickly eroding. 

Intuitive Surgical Inc. (ISRG +$35.86 or +11.78% to $340.35) gapped up today and hit a new 52-week high which could be considered a "breakaway gap" following 4-weeks of tight consolidation. It just reported accelerating sales revenues and earnings increases for the period ended Dec 31, 2009, making its turnaround story all the more impressive. The explosive action exemplifies that stocks often have swift reactions to substantial fundamental news, so investors can expect to encounter greater volume and volatility during earnings season. ISRG has rebounded impressively from its March low ($84.86) and is quickly approaching all-time high ($359 in 2007). Its annual earnings history (the A criteria) has been very impressive, and although quarterly comparisons have not shown perfectly steady increases above the +25% guideline, the latest period ended December 31, 2009 showed an impressive acceleration in sales revenues and earnings growth. 

Breakaway gaps are a rare exception in which chasing a stock as much as +10% above prior highs is permitted under the investment system's guidelines, however patience may allow investors to accumulate shares on ordinary pullbacks toward recent chart highs. This is why its color code is yellow as of the mid-day report (read here) appearance earlier today, even while it rallied above the prior chart highs by more than +5%. The heavy volume behind the considerable gain indicates institutional (the I criteria) accumulation.

Prior notes outlined its technical deterioration when ISRG was last dropped from the Featured Stocks list on 6/10/08. A proper buy signal was not triggered on or after its appearance in yellow in the 4/10/08 CANSLIM.net Mid-Day BreakOuts Report (read here), however ISRG had returned to the Featured Stock list at that time after having been a previously featured leader that traded up more than 13-fold after first featured in yellow in CANSLIM.net reports in mid-2004. 

Keep in mind that distribution days have recently been hurting the market outlook (M criteria), and 3 out of 4 stocks are likely to follow the direction of the major averages.  Always limit losses by selling any stock that falls moire than -7% from your purchase price, following Rule #1 of the investment system - keep your losses small!

Color Codes Explained :
Y - Better candidates highlighted by our staff of experts.
G - Previously featured in past reports as yellow but may no longer be buyable under the guidelines.