Market Comment

April 13, 2014

April 14, 2014

It’s what you learn after you know it all that counts.”

— John Wooden

Of note last week was the character of the third rally since the Mar. 6 Nasdaq top. Whereas the first two rallies lasted four days each, last week’s rally lasted just two days before another round of selling kicked in. This is an objective sign that the urgency of market participants to dump positions increases.

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The Nasdaq has fallen as much as 8.7%. This now qualifies as an intermediate-term correction, defined here as at least 8%-12% down over a period of at least several weeks. It should not be a surprise to anyone, seeing as how the index had gone 16 months without a 7% decline or greater.

How far the market goes down is not something that we spend much time thinking about. As previously mentioned, a market will usually see the breadth of its advance peak some months ahead of the Dow Industrials and S&P 500. This divergence between bigger stocks and the average stock has best been measured historically by seeing if highs by the Industrials or S&P have been confirmed by highs in the New York Stock Exchange cumulative advance-decline line.

As the below chart shows, the a-d line confirmed the recent S&P high with a high of its own. This suggests the recent high in the S&P was not its last for this bull market.

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However, as Mark Douglas once said: “The market can do anything at any time.” This means one should never cling to preconceived notions of what a market might do.

For the intermediate-term speculator, the long-term timeframe is immaterial. After all, what counts is the intermediate-term. And on that score, averages and leaders are obviously in downtrends. This is all that is necessary to know.

By adopting this mindset, one will never be long and wrong, holding a favorite title that descends the slope of hope. Relying on hopium is never a good way to invest one’s precious capital.

Two points: One should be looking for names that hold up amid the selling. One technique is to find those issues that did not print a lower low late last week along with the averages.

Also, the biotechs and social medias led the ’12-’13 move up. These two groups are leading the market down. It would follow, then, that those bios and social medias that are able to hold up may become prominent outperformers on the next leg up. These are being accorded special attention.

Among the names, Aercap Holdings (AER) was noted here in a recent report: “An aggressive speculator could consider using the 43.69 high of 2/28 as an entrance pivot for a standard breakout.” The comment stands. This would assume general market tone had improved.

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Agios Pharmaceuticals (AGIO) came public at 18 last summer. After nearly touching 50 recently, it has been consolidating its prior gains. The company has lost money for the past three years and is expected to lose more this year and next. Therefore, one would be “trading off the chart” with no fundamentals to support the technicals.

Despite the wide-and-loose chart pattern, we are watching AGIO in the event its price action tightens up in coming weeks/months. Any stock that nearly triples in eight months, and then holds its own despite its industry group getting smashed is worth monitoring.

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Auspex Pharmaceuticals (ASPX) is a development-stage biotech company that went public just two months ago and promptly tripled in its first six weeks. It was discussed in last week’s report: “This is worth watching, but does not offer attractive entrance yet due to the sketchy market climate.” Since then, it outperformed the S&P last week. This is higher risk, what with average daily dollar volume of $8.8MM. Worth watching for aggressive speculators.

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Ctrip.com (CTRP) is the Chinese online travel booking outfit. Most analysts look for earnings to decline 41% in ’14 before increasing 49% in ’15. Revenue has been growing in the low- to mid-30% range in the past three quarters. After tripling in a six-month period, CTRP has spent the past six months forming a head-and-shoulders continuation pattern. This is worth watching, as the stock has put in the time basing that other former leaders have yet to do. CTRP would be something to consider in the event the averages firm up and show some resilience.

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Depomed (DEPO) develops prescription drugs for solutions related to pain and central nervous system issues. Most analysts see earnings growing from 8 cents a share in ’13 to 31 cents in ’14 and 45 cents in ’15. DEPO forms a four-week consolidation and price thus far holds above the top of the previous shelf at around 13. If the overall market continues to sell off, DEPO can also be expected to decline. But this is one to watch, as it holds up decently despite its group, ethical drugs, being hammered along with other healthcare sector issues. A 97 rs stock in a 99 rs group.

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Diamondback Energy (FANG) was discussed in last week’s report: “…worth watching, as it shows it has leadership credentials in what is otherwise a very tough market.”

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Flotek Industries (FTK) is an oil & gas equipment play with estimates of 47%/37% in ‘14/’15, per most analysts. Last week the stock poked out of a little two-week shelf on volume 23% above average, with its rs line moving into new high ground also. The stock is under extreme accumulation. This is one to watch, but given the general market’s downdraft we would be watchers here, not buyers.

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Globe Specialty Metals (GSM) is a cyclical issue with earnings estimates of 35%/61% in the June ‘14/’15 fiscal years. The stock forms a three-week shelf and found support at its 50-day moving average line last week. Globe is just 8% off its high, which is respectable for a name with a 92 rs. Again, something to monitor, but not one to enter due to the general market correction.

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GT Advanced Technology (GTAT) makes equipment used to make polysilicon for the solar energy industry. This is a cyclical company expected to see per-share earnings go from a 35-cent loss in ’13 to forecasts of a 10-cent profit in ’14 and an 83-cent profit in ’15. GTAT has been a big winner, going from 3 last summer to a recent high of 19.44.

This is a 99 rs stock in a 97 rs group. Price is three weeks into a flat basing formation and is under solid accumulation. This is another to watch in the event the averages find their footing amid good action by higher-relative strength issues.

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Pacira Pharmaceuticals (PCRX) is expected to go from a per-share loss of $1.93 in ’13 to a 33-cent deficit in ’14 and a $2.27 profit in ’15. The company has strung together five quarters in a row of excellent sequential revenue growth. Technically, price is six weeks into a basing process. We like the ability of price to outperform the market marginally over the past two weeks. For a high-expectation vehicle like PCRX, and despite the heavy selling of many of its group constituents recently, this is notable.

Based on the estimates, excellent sequential revenue growth recently, and the stock’s inability to print substantially lower lows like many growth stocks have done over the past fortnight, PCRX deserves to be monitored.

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Plug Power (PLUG) makes fuel cell systems with a focus on the off-road material-handling industry. Per-share net goes from an 83-cent deficit in ’13 to a projected 9-cent loss in ’14 and a profit of a nickel in ’15, per most analysts that follow the company. In five months, the stock has gone from 53 cents to as much as 11.72, a 2,111% gain.

This is a very speculative title. Just 24 mutual funds owned it at the beginning of this month. Despite PLUG being a $7 stock, liquidity is extreme at $366MM in average daily dollar volume.

In the Gilmo Report Facebook page on Apr. 1, we spoke about a possible long idea in PLUG, mentioning two stop-loss points, one more conservative than the other. The analysis is here. Subsequently, we took the trade. Price moved up about 5% after entrance before being stopped out in the wake of a negative report published by a short-seller. Those using the conservative stop-loss that was suggested did not come close to exiting.

We are looking at the 4/2 high of 8.10 as a potential long entrance in PLUG. The stock has obviously been marching to the beat of its own drummer. It has printed two higher lows along with two lower highs. Volume has been below average for 11 of the past dozen sessions, a moderate plus, as price successfully rids itself of the froth related to its move of as much as 160% in seven days

(While a high cash position is warranted by both the behavior of the averages and the poor action in most issues with excellent earnings prospects, an isolated long in a name that is bucking the bearish tide can be considered, we believe.)

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Ultragenyx Pharmaceutical (RARE) went public at 21 ten weeks ago, tripling in its first six weeks before backing off. This is a development stage company, with no earnings or revenue. RARE is of interest due to its jumping 16% last week when the Naz lost 3%, its tripling during its first six weeks post-IPO, and its ability to show some life when most others in its heavily-sold group, the bios, have fallen. Worth watching on the back burner.

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U.S. Silica Holdings (SLCA) makes commercial silica for different uses, one of them being as a proppant for hydraulic fracturing in oil & gas exploration. Most analysts see earnings growth of 27%/37% in ‘14/’15. The stock is slightly extended, which speaks to its ability to gain ground recently even amid the harsh market for former leaders.

We have once or twice commented on how a straighter, flatter relative strength line is preferable over a choppy rs line. SLCA is a good example of the former. Even if SLCA does not offer attractive entrance at present, it is worth monitoring.

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58.com (WUBA) operates a Chinese online marketplace. Most seers on Wall Street predict earnings growth of 104%/100% in ‘14/’15. Sequential revenue growth has been impressive over the past few quarters. After going public at 17 on Halloween, price rose to 59 in early March before backing off along with the general market. This is one to keep on a watch list based on its lofty expected growth rate and its ability to outperform the market over the past two weeks.

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In summation, the long-only, intermediate-term momentum player should remain in a high cash position. One should not be complacent. This means always maintaining an up-to-date watch list of names basing and/or holding up despite the selling. The names listed above meet our fundamental criteria and best hold up amid the Nasdaq correction. Some, like ASPX, DEPO, RARE, GTAT, PCRX, and WUBA, are 15%-20% from their recent 52-week high: They are mentioned because they have stopped going down – temporarily perhaps – despite the Nasdaq printing two lower lows recently. Generally, titles that held up by printing higher lows while the Naz made two recent lower lows are favored.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

Charts created using TradeStation. ©TradeStation Technologies, 2001-2014. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Gil Morales & Company LLC (“GMC”), Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held a position in PLUG, though positions are subject to change at any time and without notice.
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.