Market Comment

A Methodical Market

January 17, 2012

“As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods.”

— Ralph Waldo Emerson

Shares ignore negative news to plough ahead in steady, systematic fashion. Nasdaq accumulation days now number four in the past 10 sessions, the best showing in months. As the below chart shows, intraday volatility has contracted, a plus, which correlates with what is historically seen as a market embarks on a sustained upward tilt.


Defensive stocks underperform high-expectation issues, with consumer discretionary outdoing consumer staples, and the Nasdaq bettering the S&P since the last few days of ’11. Copper outperforms, as do the financials for over two months. Even small-capitalization titles are showing relative strength. Brazil and China have both picked up solidly in the new year.

The background factors, then, line up for further upward revaluation for shares.

For the intermediate-term growth-stock specialist, the missing link, besides stronger institutional belief in this market, is a deeper pool of leadership candidates. This is not especially unusual for a three-month-old bull market, if that is what this is.

Among the names, Monster Beverage (MNST) (fka Hansen Natural) Tuesday broke out of a base on major volume. The base began in sloppy fashion in November, but tightened up over the past few weeks, finding support at its 50-day line, a plus. The number of mutual funds owning the stock has increased handily over the past year. This is borne out by the below chart showing numerous days in which large investors had their mitts all over the tape. The stock could be entered here with a stop loss placed below the 50-day, which is about 8% below Tuesday’s closing level. As usual, a half-sized position could be started with, which if stopped out, would result in just a 4% loss. This could be added to if the stock follows through on its breakout.

Monster Beverage (MNST)  Gilmo Report Chart

Alexion Pharmaceuticals (ALXN), spoken about favorably here for some time, and noted last week as “…one of the foremost candidates …if the general market environment were more conducive to a campaign of speculation” continues to power ahead. The group, biotech, is at the top of the relative strength table. The stock is extended here beyond its most recent base and should therefore not be entered here, but can be monitored for a lower-risk entry in the days/weeks ahead.

Alexion Pharmaceuticals (ALXN) Gilmo Report Chart

Dollar Tree (DLTR) could be entered on a breakout of its seven-week base, preferably on strong volume. Its group, discount retail, is a top decile relative strength segment, and fits with the vogue for early-cycle issues. Estimates are for 24%/18% for the January ’12/’13 fiscal years.

Dollar Tree (DLTR)  Gilmo Report Chart

Apple (AAPL), a week ago cleared the top of its three-month base, however the stock closed down for the day on volume that was only 9% above average. The below chart shows how there has been no real accumulation to speak of in the past several weeks as price moved up the right side of its base. Its RS line, not shown, has lagged price’s move to a new high, another yellow flag. Things could change at any time, of course, but at present there is not enough interest by institutions for this to become a market leader, and is best avoided.

Apple (AAPL) Gilmo Report Chart

Ulta Salon (ULTA), with its earnings growth estimated at 54%/26% for the January ’12/’13 fiscal years, its rich price-earnings multiple of 45, and its increasing levels of institutional sponsorship, possesses fundamentals that resemble a market-leading stock more than most of its growth-stock leader peers.

Technically, the stock has shown a good amount of institutional buying on the right side of its base, as shown in the below chart. Similar to MNST and ALXN, this accumulation stretches back a number of months. An aggressive speculator might consider entry on a breakout above its Dec. 5 high of 75.70, preferably on volume at least 40% or 50% above average daily volume. A 7% sell stop could be used in case the breakout does not follow through. With a half-sized position, this would amount to a 3.5% risk (based upon normal position size).

Ulta Salon (ULTA),  Gilmo Report Chart

Lululemon Athletica (LULU) possesses the big-winning stock characteristics more than some other leaders, similar to ULTA. The multiple is an elevated 57, expected earnings growth is 59%/27 for the January ’12/’13 fiscal years, the company’s athletic apparel stores represent “something new,” revenue has grown at 31%+ over the past eight quarters, return on equity is very high at 36%, and long-term debt is virtually nil.

Technically, Jan. 10’s 12% leap on volume 254% above average, and the stock’s ability to stay above this gap, suggests a breakout may be in the cards. A potential entry point for a starter position might be above Tuesday’s high of 62.68, though the stock may need some time to digest its 50% rise over the past five weeks.

Lululemon Athletica (LULU)  Gilmo Report Chart

SXC Health Solutions (SXCI) deserves a spot on our watch list despite its erratic base of six months’ duration. The expected growth is there (48%/40% for ’11/’12), the multiple is high (43), earnings stability is good, top- and bottom-line growth have both accelerated over each of the past three quarters, and accumulation has picked up somewhat since November. The pattern reminds us of Peoplesoft’s from the ‘Nineties. Nowhere near perfect, but merits a place on the back burner for monitoring, given its prodigious growth and high expectations. As seen with MNST, bases can begin by being roughshod affairs, only to tighten up constructively in a fairly brief period of time. A breakout above Jan. 12’s high of 64.87 could potentially be used for a starter position in SXCI, assuming solid volume on the breakout day.

SXC Health Solutions (SXCI)  Gilmo Report Chart

Following last Thursday’s thunderous breakout on volume 377% above average, Tractor Supply (TSCO) could be entered at current levels using a starter position (half normal) and a tight stop loss of below the low of the breakout day. Alternatively, a more traditional stop could be used below Dec. 9’s high of 75.48.

Tractor Supply (TSCO)  Gilmo Report Chart

The above titles represent some of the market’s better-acting growth stocks. These have either broken out yet still within a short distance of recent bases, or are moving up the right sides of yet-to-be-completed patterns. Regrettably, for the speculator, there are not dozens more like these.

Equally so, the speculative flavor of these is generally not what it normally is in the early stages of a bull phase. That is, the market favors lower-expectation titles such as Whole Foods (WFMI), Starbucks (SBUX), and Monster. Good companies all, but not the type that usually correlate to big-winning stocks.

In summation, institutional interest in this market increases gradually, a positive. Dynamic growth stock leaders are few in number compared with other bull phases. Moving off of a cash position makes sense for the speculator. This is more a market to be waded into, not dived into – a function not of the averages, but of the leaders, or lack thereof.

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.