Market Comment

August 11, 2013

August 12, 2013


Trading is not an intellectual game. You can’t ‘out-think’ the market.”


–Linda Raschke


Shares remain in good shape. The advance is broad and leadership quite impressive. Strong volume between now and Labor Day cannot be expected. For this reason, there are certain setups that we would not take until after Labor Day, when activity should pick up.


In a nutshell, as noted in the Twitter feed last Thursday, there are numerous glamours forming one-week flag patterns, but few bases of five-plus weeks’ duration.

In terms of leadership, the little pullback of this past week succeeded in weeding out a few of the pretenders, further exposing the contenders. From our vantage point, it would have been preferable to see more of a retracement by the averages. This would have induced a bit more selling in some of the glamours, so as to produce a slingshot effect once the averages began to rebound.

Of course, this could still happen.

The advance feels more early- to mid-‘Nineties than any other move of this decade. Europe, led by the northern bourses of Germany, Norway, Sweden, and especially the Netherlands, has outperformed stateside averages since the June 24 low, and knocks at new highs. This is a plus, as it suggests the continent’s drag on global economic growth should dissipate, and not swell, in ’14. And emerging markets are mixed, but improving generally.

It is not ideal, however, because it does not yet have technology behind it. This may change in time. Capital equipment spending cycles tend to begin only after corporate profits improve materially. This explains technology’s tendency to outperform late in a cycle.

Most everything else lines up. Small-capitalization outperformance. Growth-stock leadership. Financial sector leadership.

While we stopped paying attention to sentiment indicators over 10 years ago, there is still a good deal of denial despite the move thus far. This is what occurred in the mid-‘Eighties following two recessions in three years. It is a reason why the ‘Eighties bull market lasted as long as it did (five-plus years).

In Thursday’s Dow Jones MarketWatch column entitled “The beginning of the end,” we discussed how the two most-reliable leading indicators of a primary bull market top have recently begun to give signals. The story is here.

Please note that these indicators are “interesting” to follow, as they normally give one a rough signpost of where we are in a bull market. But because they are long-term indicators, these have zero influence on our intermediate-term speculation campaign. As a speculator, we are interested in the intermediate-term trend, which we have always defined as “from several weeks to several months,” “a few weeks to a few months,” or “weeks to months.”

A bull market is nothing more than several intermediate-term advances interrupted by a few intermediate-term corrections which are often in the range of 8% to 12%. By focusing on just the intermediate-term trends, then, we have no need to forecast or spend time worrying about the extent or duration of a bull market.

Among the names, gold and silver may begin to look interesting before long. As noted Sunday evening on the Twitter feed (@mardermarket), commercial hedgers recently held the least-net short position they have held in gold in over 11 years. This implies they are the most bullish they have been in over 11 years. Commercials are professionals that deal in physical gold, day in and day out, including miners. It follows that they would know the market for physical better than anyone. Since they are long the metal, they offset their risk by holding short positions as a hedge. Over the years, the degree to which commercials are net short has proven an excellent indicator.

Technically, we would like to see more of a trend develop in SPDR Gold Trust (GLD).


The picture is also positive for iShares Silver Trust (SLV), which has printed a series of higher highs and higher lows.


Facebook (FB) has seen volume dry up bullishly this past week, as price forms a tight ledge. Earnings estimates were most recently raised upward to 34%/34% for ‘13/’14. We would be cautious about taking a position on a break of this ledge. We would prefer to let price pull back or track sideways for a spell before considering entrance.


With FB, Tesla Motors, and Netflix, LinkedIn (LNKD) comprises what we might refer to as the Gang of Four of this cycle’s liquid glamours, the titles that growth-mandated institutions “must own.” Whereas FB’s gap was 29.6%, LNKD’s was 10.6%. As a result, LNKD is less overheated. We would consider entrance above the high of its one-week ledge at 237.96. Since this is August, an entrance like this may not receive the same volume that might occur if this was to happen, say, in mid-September. The probability of a successful follow-through post-breakout would rise if price remained within this tight range over the coming week, while volume continued to dry up.


Tesla Motors (TSLA), the glamour of glamours, just saw its earnings estimates for ‘13/’14 lifted. The stock is going to need to do some backing-and-filling. It is obviously extended. Any pullback would receive consideration as a potential entrance depending upon the general market at that time and also what transpires in TSLA between now and then. The definition of a glamour.


Netflix (NFLX) most recently has seen its earnings growth estimates for ‘13/’14 lifted to 414%/121%. A potential entrance would be on a takeout of the 270.31 high of its three-week shelf pattern.


Pandora Media (P) is a turnaround story, with an 8-cent-a-share net loss in the January ’13 fiscal year expected to go to a 5-cent profit in ’14 and 30 cents in ’15. This is one of the best-looking bases in the growth sector. While accumulation is minimal in the base, volume did ease in the middle of the pattern. This is more readily apparent on a weekly chart (not shown). A good-volume breakout above the 20.54 high of 7/8 is worthy of a speculator’s entrance. Earnings are expected out soon.


Fleetcor Technologies (FLT) is expected to grow earnings by 30%/16% in ‘13/’14. The stock cleared a six-week base a couple of weeks ago, idled, then re-engaged on powerful volume six sessions ago. Price is now forming a tight ledge just beneath its high. Worth watching to see if the general market shows renewed strength, and if so, a potential entrance above the 8/2 high of 100.87 might be considered.


Green Mountain Coffee Roasters (GMCR) has a rare commodity for today’s growth sector: a five-week-plus base. The base is allowing the stock to wipe away the excesses related to its 28% gap up on 5/9. A minus is the overall lack of accumulation in the base. Price moved up 55% in about six weeks. This is strength, and makes this worth watching to see if it attempts a vault above the base top.


Alnylam Pharmaceuticals (ALNY) is not expected to make money this year or next. Nevertheless, this is a 99 stock in a 99 group, and is deserving of our attention for this fact alone. The stock forms a four-week shelf and shows extreme accumulation. A takeout of the 51 high of 7/16 would provide a speculator with a potential entrance.


In summation, a raft of glamours form one-week flag patterns, but very few five-week-plus bases. One-week flag breakouts, as discussed recently, can be used as potential entrances for aggressive intermediate-term speculators – however, this should only be attempted in a powerful actor. The risk is higher, as these pivot points do not usually have as many orders stacked around them as those around the high of a five-week-plus base. Ergo, a follow-through from a flag may not be what it is with a base breakout. As well, the presence of slower volume through Labor Day may make it more challenging for a leader to follow through after breaking out of an abbreviated pattern.

It is important to look at each situation in its own context. Along these lines, flexibility in real-time is key.

Kevin Marder

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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., or an affiliate thereof held a position in LNKD, though positions are subject to change at any time and without notice.
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