Market Comment

A Half-Empty Glass

December 18, 2011

“Risk is a no-fooling around game; it does not allow for mistakes. If you do not manage the risk, eventually they will carry you out.”

                — Larry Hite, Market Wizard

Market participants came to their senses last week, choosing to look at the European glass as half-empty rather than the previous Friday’s half-full. Tuesday’s outside day, while not on convincing volume, neatly put the coup de gras on the late-Nov/early-Dec rally attempt.

This was followed by the action of the past few days, in which each session closed on the soggy side.


Last week’s change of heart on the part of participants appeared to be a case of buy-the-rumor-sell-the-news. The much-ballyhooed fiscal pact among the various EU members initially produced a substantial, 1.9% Nasdaq advance two Friday’s ago. But the next session, last Monday, saw participants unloading anything risk-oriented, from copper to coal to gold to the euro, aussie, kiwi, and looney. As usual, the dollar and Treasurys benefited.


The implication of the move to risk-off – especially the comedown in gold – is that the ECB will not engage in quantitative easing, global growth will decelerate, and deflation concerns will dominate.

Meanwhile, all of this would be expected to douse leading growth stocks in more red ink. As things turned out, a few caught a bid on Friday, as the below charts indicate, though the quarterly expiration of futures and options made things less clear.



Rackspace Hosting (RAX) has been forming a two-week handle to go with a miniature, 3.5-week cup, both of which combined appear to be a five-week handle to go with a larger pattern going back to July. A cup-with-handle within a cup-with-handle. The two-week handle formed during the last two weeks shows a tightening up of the intraday range. This reduction in volatility can many times lead to a breakout, as volatility is mean-reverting.

Rackspace Hosting (RAX)  Gilmo Report Chart

The simmering of RAX’s volatility is particularly evident on the weekly chart below.


We remain of the opinion that, for the aggressive speculator who absolutely must have some long exposure, the Nov. 8 high of 45.46 could be used as a potential entry pivot for RAX. It is likely, however, that follow-through to any breakout by RAX will be limited, that is if the breakout does not fail shortly after launch. This is due to the fact that virtually nothing in the growth sector has broken out of a base in recent weeks/months and followed through for a 20%+ gain.

Alexion Pharmaceuticals (ALXN). Institutions increasingly love this issue. With big quarterly increases in mutual fund sponsorship, expected earnings growth of 46%/32% for ’11/’12, next to no debt, solid return on equity, and big top-line growth, this would be one to watch as a potential leadership candidate on the next substantial advance in the averages.

Alexion Pharmaceuticals (ALXN).  Gilmo Report Chart


Beyond the above names, and others discussed in recent reports, including Chipotle Mexican Grill (CMG), Starbucks (SBUX), Golar LNG (GLNG), Ulta Salon (ULTA), Dollar Tree (DLTR), Intuitive Surgical (ISRG), Questcor Pharmaceutical (QCOR), and Tractor Supply (TSCO), there are precious few growth stocks that are poised to take the leadership reins should the averages right themselves and cobble together a legitimate advance anytime soon.

At the same time, important institutional titles wallow, (PCLN) being one.


 Cerner (CERN), a very high-quality growth stock by virtue of its extremely stable earnings growth of 22% annually compounded over the past several years, its earnings growth of 25%, 26%, and 26% over the past three quarters, and its expected earnings growth of 24%/22% for ’11/’12, is being offed by institutions on every rally.

Cerner (CERN),  Gilmo Report Chart (AMZN), similar to CERN, meets up with sellers on each rally. (AMZN),  Gilmo Report Chart

Institutional must-owns, like Baidu (BIDU), can take an extended period of time to form a primary top. BIDU, after attracting dip-buyers on its October rebound, seemed to rise on not much more than thin air on its last advance, as yellow-highlighted in the below chart.

Baidu (BIDU),  Gilmo Report Chart

It is be noted that the distributive behavior in the liquid glamours like Apple, Amazon, Baidu, Cerner, Priceline, Vmware, and is not abnormal. It is what occurs at the end of a bull market cycle after major gains – the least of these was CERN’s move of 389% since late ’08 – have been racked up. Such selling is necessary in order to allow the market for each of these titles to adjust to a different speculative appetite.

Some of these will spend months if not years doing nothing but going sideways. It is probable that some of these large favorites will never come back to become future market leaders. A look back in history at the ’00-’02 bear market, in which the Nasdaq Composite lost an incredible 78%, shows very few of the ‘Nineties’ liquid glamours assuming leadership again thereafter. Cisco Systems (CSCO) may be the most memorable example.

Cisco Systems (CSCO) Gilmo Report Chart

In summation, the behavior of the averages indicates shares are in need of a further “reset” following a 26-week bull market in which leading growth titles moved up by multiples. Institutions, continuing to unwind positions in the liquid glamours, appear in no urgency to return to the feeding trough.

Neither should the long-only speculator.

Kevin Marder

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.