Market Comment

Averages Firm Up

July 29, 2012

“Lose your opinion – not your money”

Shares put in two major accumulations days at the end of last week. Of note was the volume, Friday’s range expansion, and Friday’s good close.


In our last report a week ago, it was noted that “…despite the up trends in the major averages, last week’s loud breakdowns in a number of leading growth stocks tells the whole story. The speculator who operates in the intermediate-term should be in a full cash position.”

Obviously, the Thursday/Friday action improved things at the surface. Beneath the surface, however, there are not many high relative-strength titles that approach attractive entry points, in our view. This augurs for a high cash position on the part of a speculator.

As for the backdrop, it shows a global slowdown, from China to Europe to the US. Whether or not the US drops into recession is less important than what the averages and leading stocks are doing. We would urge the speculator to spend more time analyzing the price/volume behavior of the averages and the action of leading stocks.

As one example that illustrates why, the ’90-’91 US recession lasted from July ’90-March ’91. The first three months of this nine-month recession saw shares endure a bear market. In October ’90, the averages bottomed, though of course no one rang a bell then, and only in ’91 did it become apparent that a brand-new bull market had begun.

We were newbie traders then. Despite moving to cash just before the bear began, we did not heed the market’s message at the start of the bull in the fall of ’90. Only in January-February of ’91 after it became obvious did we begin buying the leadership.

Lesson learned. The market is going to lead the fundamentals. A focus on the market’s behavior will serve a speculator much better than a preoccupation with the fundamentals.

Among the names, Equinix
(EQIX) was about as impressive as any other growth stock leader in the Q1 move. More recently, as the chart below shows, price tried to break out of a decent-looking pattern in June, before pulling back and spending more time backing and filling.

Thursday’s breakout came out of a five-week-plus pattern, and occurred on volume 189% above average. If only every breakout was accompanied by this level of conviction, the world would surely be a better place. Given the lack of attractive setups among leading issues, instead of entering EQIX here we would prefer to wait for it to pull back, which would also allow us to better assess institutional interest in this market and its leadership.

(EQIX) Gilmo Report Stock Chart

For all of the news surrounding its recent earnings report, Apple (AAPL) had a chance to sell off but hasn’t, at least as of this report. Its technical pattern is intact, and the July 10 high of 619.87 could potentially be used as a pivot for entry. This would depend upon general market behavior and leading stock action between now and then. So, for example, if a number of other growth-stock glamours break down, but AAPL looks like it is going to break out, it would suggest more caution and perhaps passing on the breakout.

Apple (AAPL) Gilmo Report Stock Chart

Netsuite (N) came out of a four-week shelf Friday on almost four times average volume. Given the brevity of the basing pattern, this is not something to be entered right here. A pullback and perhaps some additional consolidation would be in order before a better entry would be indicated.

Netsuite (N) Gilmo Report Stock Chart

Ellie Mae (ELLI) is small-capitalization ($506MM), with 83%/34% earnings growth estimates for ’12/’13 and a small but growing institutional ownership base. Earnings are due to be released Wednesday. This is one to watch, but the pattern is not one that interests, as it is less than three weeks in length and appears obvious to the crowd.

Ellie Mae (ELLI) Gilmo Report Stock Chart

Petsmart (PETM) has one of the most constructive bases in the growth sector, about 7% from top to bottom. The June 20 high of 69.97, which is the top of its pattern, serves as a potential entry point. Earnings are expected in mid-August.

Petsmart (PETM) Gilmo Report Stock Chart

Panera Bread (PNRA) has expected earnings growth of 24%/19% for ’12/’13, and its estimates were recently revised upward. The stability of its past earnings stream has been about as high as can be found among publicly-traded companies, with a standard deviation of just 4%.

Technically, the stock has been going through a normal consolidation period for the past several months. We like bases that show much less time spent on the right side of the pattern vs. the left side. PNRA is one such example. Attractive entry is not available at present, but this is worth monitoring to see how its pattern develops.

Panera Bread (PNRA) Gilmo Report Stock Chart

Interxion Holding (INXN) is one of the more interesting newer situations to emerge. The provider of managed hosting services is expected to show growth of 25%/28% for ’12/’13. This should be allowed time to further develop its base before entry can be considered. Worth watching. Good leadership potential here. Earnings expected out next week.

Interxion Holding (INXN) Gilmo Report Stock Chart

Pharmacyclics (PCYC) is a cancer-drug developer which has been the big star among the speculative growth-stock glamours since its breakout in early June. Mutual fund ownership has risen steadily in recent quarters. The pick-up Thursday and Friday in its price has it within distance of its base-top. Aggressive players might choose to enter on a takeout of its high at 60.05, set July 9. However, it is worth noting that, being a biotech stock, this carries a high amount of risk. The earnings release appears to be some weeks away, so there appears time for a breakout before the risk of an earnings-related blow-up increases.

Pharmacyclics (PCYC) Gilmo Report Stock Chart

In summation, despite the strength of Thursday and Friday, this is still a go-slow market. The averages may have an upward bias, but there are not lots of pattern setups screaming for the attention of a speculator in growth stocks. In all, this is not especially surprising given a market ready to enter the month of August. The technically-based participant who operates in the intermediate-term would do well to remain in a generous cash position. In the meantime, we will be open-minded to new technical developments as they occur.

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.