Market Comment

Daylight

June 17, 2012

“I never try to predict or anticipate. I only try to react to what the market is telling me by its behavior.”

–Jesse Livermore

The week-ago report of June 10 spoke of the market beginning to ignore bad news, the S&P putting in a major accumulation day, and leading stocks forming 5-week-plus bases. The price/volume sequence as the averages tested the May 18 low was also favorable. The bottom line was that aggressive speculators following this strategy could begin buying a few of the breakouts ahead of further strength in the averages.

The best conditions for a market bottom feature dour news and negative investor sentiment. In other words, enough reasons for the last participant who wants to get out of the pool to get out. It is this selling that creates the bottom. In retrospect, this dumping occurred the week ended May 18.

What was most interesting at the time of the week-ago report was the market’s refusal to sell off despite whiffs here and there about a slowing economy, and, of course, the Greek and Spanish situations.

Forward to last week, when Spanish 10s, the market’s best gauge of Spain’s solvency, rose from 6.22% at the start of the week to 6.87% by Friday’s close. Despite this worsening backdrop, shares refused to go down, bobbing up and down within a range, before breaking out on Friday.

The below chart shows Friday’s Nasdaq accumulation day, which carries less weight due to it occurring on a quarterly witching day.

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Friday’s technical action in the Industrials and S&P was notable, as it represented the first higher high for months, and confirmed a new trend.

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As noted last time, the largest positive has been the basing action by the glamours. Indeed, some of the patterns have virtually been gifts. This in light of some intermediate advances beginning with few, if any, leaders pausing long enough to build the five-week-plus patterns that offer lower-risk entries for the speculator.

Among the names, Pharmacyclics (PCYC) and Petsmart (PETM), the first two out of the chute, continue to act well. These names will be of less importance as the market advance progresses, as there are now other glamours that have chimed in with their own breakouts.

Pharmacyclics (PCYC) Gilmo Report Stock Chart

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Under Armour (UA) was noted in the last report as “potentially buyable at current levels [of 103.31] for those aggressive participants who seek some exposure to the glamours in advance of any firming in the averages.”

As UA still acts well and is not extended above the top of its base, it could potentially be entered around Friday’s closing level of 105.75, using a 5%-7% sell stop as protection in case the breakout fails and price re-enters the base.

One key thing the apparel maker has in its favor is high expected earnings growth of 28% in each of the ’12 and ’13 fiscal years. Couple this with a good earnings stability factor and average dollar volume of about $105MM, and it is easy to see why institutions have liked the issue in the past.

Under Armour (UA) Gilmo Report Stock Chart


Dollar Tree (DLTR) was noted in the last report of a week ago (“price is 2.5% above the May 2 top of the pattern at 104.08, and is therefore not yet extended above the base, and is potentially buyable.”).

Based on Friday’s close of 110.34, price is 6% beyond the base top, and is therefore “extended,” and does not represent a low-risk entry. If there is a time to bend/break the rules of this strategy by entering a stock that is marginally extended, it is in the early stage of an intermediate-term advance. If one is inclined to enter here, it is recommended that a junior-sized position be used initially in order to reduce risk. A half-sized position with a 7% stop equates to a 3.5% stop loss on a full-sized position.

The thing that DLTR has going in its favor is that it is one of the first of the breakouts on this move. The first breakouts tend to be your leaders on the ensuing market advance. At the same time, a number of other glamours set up in bases, and there is no shortage of opportunities at this time. Ultimately, the decision whether to enter DLTR right here comes down to whether a trader is conservative or aggressive.

Dollar Tree (DLTR) Gilmo Report Stock Chart


Equinix (EQIX) was noted in the week-ago report as “potentially buyable above the Apr. 26 high of 172.44. This was one that we missed when it originally broke out on Jan. 5 due to the averages not yet showing enough accumulation. It then was perhaps the most impressive of the glamours in the Q1 run.”

Friday, price broke out on volume 75% above normal. The below chart is out of a textbook. Price spent a considerable amount of time building its first base, before breaking out and running up 65% in less than four months. When a stock moves up 65% in less than four months and then spends only seven weeks basing, and that base is only 15% deep, that is a stock that wants to go higher.

At Friday’s close, price was 1.8% above the top of its base, is therefore not extended, and can potentially be entered here, using a standard 5%-7% stop loss in case proven incorrect.

Equinix (EQIX) Gilmo Report Stock Chart


Whole Foods Market (WFM) came out of a six-week base Friday, with volume 68% above normal. Based on Friday’s close of 94.47, price is 3.2% above the base top, is therefore not extended, and can potentially be entered as long as the entry price is within 5% or so of the base top.

Whole Foods Market (WFM) Gilmo Report Stock Chart


Alexion Pharmaceuticals (ALXN) was noted last week as appearing “close to putting the finishing touches on an 11-week base. The May 22 high of 94.36 could be used as a potential entry pivot.”

Price exceeded this level by two cents on Friday amid witching-related volume 80% above average. Friday’s high of 94.38 could potentially be used as an entry point.

Alexion Pharmaceuticals (ALXN) Gilmo Report Stock Chart


Questcor Pharmaceuticals (QCOR) moved to a new high Friday on volume 64% above normal. The stock could potentially be entered by an aggressive player at these levels, using a 5%-7% stop loss, and a junior-sized position used due to its being a few percent past its pivot point of 46.84 (theMay 1 high). This would not be suitable for a less-aggressive speculator.

The chart below is based on weekly bars.

Questcor Pharmaceuticals (QCOR) Gilmo Report Stock Chart


Home Depot (HD) was perhaps one of the top two or three liquid glamours in the early ‘Nineties, back when earnings grew 30%/year. The stock is not expected to be the biggest leader of the pack in light of its more-modest growth estimates of 18%/14% for the January ’13/’14 fiscal years. However, the pattern is classic and it has a good shot at outperformance, nonetheless.

For the conservative speculator, potential entry would be above the May 3 high of 52.88, using a stop loss just below the 50-day moving average, currently at 50.50.

Home Depot (HD Gilmo Report Stock Chart


Netsuite (N) was a leader from mid-’10 to mid-’11, but has spent the past year chopping around as it digests its prior gains. The earnings estimates of 40%/62% for ’12/’13 have had our attention for some time. But the stock has been like the mermaid-on-the-rocks, luring one in but then not following through post-breakout. The March 27 high of 51.78 could be used as a launch point potentially, but more evidence will be needed before that area can be played with confidence.

Netsuite (N) Gilmo Report Stock Chart


SXC Health Solutions (SXCI) has a lot going for it. Fundamentally, earnings are expected to grow by 45%/25% in ’12/’13. Earnings stability is high for a company growing at this pace, with the standard deviation of the annual growth rate over the past few years at 12%. Its group is in the upper decile of relative strength.

Technically, a position trader can potentially use the June 14 high of 96.20 as an entry pivot, with a 5%-7% stop loss. A plus is that the stock went up 52% from its Feb. 23 breakout above 65.95 to its Apr. 20 high of 100.50, and then gave back just 14% in its most recent base. A 52% move in eight weeks followed by a 14% pullback is considered tame.

This speaks well of the underlying interest on the part of institutions. Average dollar volume, at $117MM, is attractive to large investors. This is a plus as it can help mitigate the risk of a stock simply falling apart and losing 20% in a day. Of course, a 20% blow-up can happen to any stock, but tends to happen less to institutionally-sponsored names.

SXCI is one of the most attractive glamours out there at present.

SXC Health Solutions (SXCI) Gilmo Report Stock Chart


Linkedin (LNKD) perked up on Thursday and Friday and we will see how it builds the right side of its base.

Linkedin (LNKD) Gilmo Report Stock Chart


Monster Beverage (MNST) is roughly 5% past its most recent pivot of May 10 high of 74.92. It could potentially be entered here, using a junior-sized position and a 7% stop loss. We would not chase this beyond a level of 5% or 6% past the 74.92 point.

A big plus, as we see it, is that price corrected only 9.8% following its weighty run-up. This is exactly the type of stingy behavior that we like to see in a leader, and augurs well for future outperformance.

Monster Beverage (MNST) Gilmo Report Stock Chart


Facebook (FB) is coming to life and should be monitored to see if it pulls back to form a pivot as moves up the right side of a base.

Ulta Salon (ULTA) was noted in the week-ago report, (“The high of 97.89 could be used as an entry pivot by an aggressive speculator seeking some exposure to leading issues.”) and the comment holds.

In summation, the three things we have been watching for to recognize a bottom have all occurred. They are: one or more major accumulation days, breakouts in leading stocks, and the market’s ability to rise on negative news. More-aggressive players can continue to buy breakouts in titles mentioned in these reports, while less-aggressive speculators can move off of a 100% cash position to begin to buy the leadership.

Despite the market’s strength, an open-minded, flexible approach is maintained. The market can do anything at anytime.

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.