Market Overview

Base Reset Shakes Out Sellers

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The bull market that started in March 2009 has yielded several big winners. Be careful, though, because many growth names are forming late-stage bases after massive price gains. Names like Mastercard (NYSE: MA) and Ulta Beauty (Nasdaq: ULTA) come to mind.

Why are late-stage bases riskier than early-stage bases? After a stock breaks out from a series of bases, or consolidation areas, its growth story is already known. In many cases, it's too late to buy. Late-stage bases should generally be avoided because in most cases, the big money has already been made. After a huge price run, Apple (Nasdaq: AAPL) tried to break out from a late-stage base in August and didn't get far. Institutional investors have been dumping the stock since early October.

Some growth names currently might look like late-stage bases, but they're not because they reset their base counts. What does a base reset look like? It's not hard to recognize. It happens when sellers come into a stock in spades. The stock pulls back sharply, and the ultimate low of the pullback undercuts the low of a prior base. The thinking is that when enough sellers get shaken out of a stock, it paves the way for a new uptrend.

Since the start of the bull market, shares of Netsuite (NYSE: N) have gained nearly 500 percent, but it reset its base count in October 2011. Shares hit an intraday low of $25.32, undercutting the low of a prior base that formed earlier in the year. The new base that formed yielded a fresh, first-stage breakout in December. A second-stage breakout followed earlier this year in July.

The stock is currently working on the right side of a third-stage base. Headed into Monday, it had climbed to within 4 percent of a 52-week high. Last week was bullish accumulation week for the stock. Shares popped 8.2 percent on volume of 3.4 million shares. In a normal week, Netsuite trades about 2.3 million shares. It's always good to see institutional buying when a stock starts to re-test a prior high. Netsuite showed it last week.

The company is a provider of on-demand customer relationship management (CRM) and enterprise resource planning (ERP) software. It shows consistent bottom-line and top-line growth in recent quarters and strong growth is expected to continue as demand remains strong for the company's products and services. Full-year profit is seen rising 60 percent this year to $0.24 a share and 33 percent in 2013 to $0.32 a share.

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