Market Comment

Biding Time

November 6, 2011

“If you cannot make money out of the leading active issues, you are not going to make money out of the stock market. That is where the action is and where the money is to be made.”

                    — Jesse Livermore
               

Shares backed and filled last week in response to the European crisis. On a very short-term basis, the bias appears up. This based upon price knocking on the top of the wedging pattern shown below, as well as a few days of good closes.

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The trend remains up over the intermediate term. Leadership is not there in any great numbers yet, but at the same time one should not be lulled to sleep. If a new bull market began with the Oct. 4 low, no one rang a bell. That will not be known until sometime down the road. Some bull markets present little opportunity for growth speculation months after they begin (’02), while others present opportunity almost immediately (’98). This one may be more the former.

Market participants are slowly becoming increasingly anesthetized to any bad news out of Europe. This does not mean the volatility has gone away or that the next piece of bad news will not cause shares to shudder. It does mean that the sensitivity is reduced, so that the same news two months ago does not produce the same reaction today, all else equal.

Among the names, Chipotle Mexican Grill (CMG), mentioned last week and the week before, broke out of a six-week staging area last week on average volume. There was no follow-through, as the move occurred on a down day for the market. Stocks like this may appear to be going nowhere fast, yet at the same time may represent the next leadership in the event that the averages make another run for the roses.

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Recent new issue Fusion-Io (FIO) was mentioned last week as a stock that had possibly gotten ahead of itself on its recent five-week run of 139%. The data-storage solutions developer came out with earnings, followed by a 10% rise Thursday on volume 347% above average. Price tacked on another 6% on Friday. Both days saw price back off from the session high by the close. This, along with the expanded volatility (Thursday showed a 23% hi-lo range), suggests a cooling off period should be needed before FIO can mount another ascent. Handles of one-week duration that are 18% deep do not normally shake the attention of speculators enough to provide a launch pad for the next ascent.

FIO has perhaps the best potential of any recent IPO to be a big-winning stock. It has that “something new” which historically has accompanied the biggest winners. Earnings estimates for the June ’12/’13 fiscal years are 130%/57%, uncommonly rich for any recent new issue, let alone other publicly-traded issues, period. Any position initiated here would not be considered low-risk. Yet many of history’s best actors make it very difficult to enter prior to lifting off. An aggressive speculator could initiate a junior-sized position with a wider-than-normal stop (placed a couple of points below the high of the handle), the combination of which would equate to a total risk of 5%-6% max if this had been a normal-sized position. Using the high of the handle (designated by the horizontal line below)

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may not be the most durable stop area, which explains why we would drop that by a couple of points. A less-aggressive speculator could simply wait for the stock to eventually pull back and build a base.

Rackspace Hosting (RAX), was mentioned last week as worth watching ahead of its earnings report, due out after today’s close of trading. RAX has prodigious estimates (49%/52% for ’11/’12), good earnings stability, leadership capability (up over 1000% since the ’09 bull market launched), and a constructive six-month base. For the moment, there is no clear entry point that makes sense ahead of the report.

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Ulta Salon (ULTA) broke out of a seven-week base on volume 48% above average on Friday. Together with Tuesday’s strong-volume up day, the stock’s history as a market leader, its extreme accumulation over the intermediate-term, its earnings estimates of 45%/25% for the January ’12/’13 years, and its membership in a strong group (specialty retailers), ULTA could be entered at current levels, using a standard stop-loss of 6%-7% below the 70 area. Using a junior-sized entry would be preferred, which could be added to if price moves in the desired direction.

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Netsuite (N) broke out on volume 165% above average on Friday. The software developer is expected to growth earnings by 8% this year and 100% next. We would wait for a pullback to consider entry.

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Gold and silver ETFs represent the single segment with the highest potential over the medium-term, as mentioned in recent reports. Last week’s move in SPDR Gold Trust (GLD) came right down to the top of the prior shelf, as shown by the blue circle below. This new swing low of 163.61, then, represents a suitable place for a protective sell stop, replacing the prior swing low of 156.05 set Oct. 20.

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Silver, not shown here, has a slightly similar basing pattern to gold, but is much farther away from its high than gold, and hence has more resistance to cut through before reaching new-high ground. Silver generally has more volatility, which may mitigate this disadvantage to a certain extent. Like GLD, the iShares Silver Trust (SLV) dipped last week to around the high of its previous shelf, printing a new swing low which can serve as a suitable place for a protective sell stop. An aggressive long can be taken here, using this Nov. 1 low of 31.50 as a possible stop. A junior position is suggested, which can be added to if price moves in the right direction.

Confirming the move in gold and silver are mining titles, the best-acting among them being Royal Gold (RGLD) and Randgold Resources (GOLD). The preference here is to simply play the ETFs, which tend to move with more persistence and are more deliberate than the stocks.

Under Armour (UA) spent last week digesting recent gains. The apparel maker is expected to record ’11/’12 earnings growth of 37%/27%, is under extreme accumulation, is in a top-decile group for relative price strength, and, for those who are not yet in the stock, could be considered for purchase on a volume-backed takeout of the Nov. 1 high of 83.68.

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Elsewhere, Hansen Natural (HANS) on Friday cleared some resistance on big volume to move to a new high, but the lack of a solid base to support price in the event of a pullback does not allow for attractive entry.

Baidu (BIDU) has been quiet lately, but we are not counting this one out yet, and would see the Aug. 31 high of 151.11 as a potential entry point for a junior position. This level is 9% below its all-time high of 165.96, and lends itself to a starter position which could be added to if price moves in the right direction post-entry.

Lululemon Athletica (LULU) is similar to BIDU in its lethargy, but this is viewed more as a positive than negative. Stock had a giant move in the ’09-’11 bull market and is entitled to a rest. Its basing pattern appears sound for a prior big leader, in terms of extent and duration. Worth watching.

Among recent new issues, Pandora Media (P) and Zillow (Z) are two that might bear fruit down the line, while Linkedin (LNKD) dropped 12% last week and is out of contention for now.

In summation, the averages are doing what they must in order to work off the excesses of their October romp and prepare for another leg higher. Leadership is not ubiquitous, but considered ample in the event the averages gear up for a run. Gold and silver are the best vehicles for position traders.

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.