“A good trader merely takes advantage of recognizable patterns that do occur and stays out of trouble the rest of the time.”
After eight days in a row of Nasdaq up, it is logical to expect some softness.
As noted on the Twitter feed at the time, the fourth day off the low close of 2/03 constituted an O’Neil follow-through day (FTD) for the Nasdaq Composite, using the definition in the first printing of Bill’s first book. Price rose 1.69% that day, which, based on the volatility of the past couple of months, met our minimum requirement. Volume on that day was 7% above average, better than many FTD’s of the past.
We do not place as much weight on an FTD that occurs when an average declines less than 8% of its prior high, as this one did. There is nothing magical about the 8% level. However, the view here is that anything less than that mutes the significance of an FTD.
In general, compared with others, we place less emphasis on seeing an FTD as a mechanical signal to begin buying. An analysis of the action of the leading stocks is always necessary to complete the equation. These issues acted well this time around, corroborating what was seen in the index.
The recent decline in the averages was not enough to allow for a regular correction in many leading titles. Thus, one is faced with numerous leaders showing patterns of two to four weeks. Another fly in the ointment is earnings season. This obviously complicates matters for stocks that are just approaching the buy point of a base.
As a result, there are not many issues that set up in bona fide bases that are unencumbered by a looming earnings report. And this report reflects that.
Among the names, Acadia Healthcare (ACHC) operates psychiatric service facilities. The stock was mentioned positively in the MarketWatch columns of 10/29 and 1/8. Most analysts on Wall Street look for 33% earnings growth in 2014. This comes on the heels of 61% expected growth in 2013. Revenue growth has steadied at very high levels of 77%-80% in the last three quarters. Acadia’s sector, healthcare, is the top-performing broad segment in the market.
The company is expected to release its earnings report today after the close of trading. We would be monitoring the stock for a breakout past the 1/22 high of 53.87, although given its Tuesday close just beneath this level a post-report gap up past the pivot point is likely in the event of a positive market response.
Either way, the stock should be on a watch list as it is a steady leader with gathering institutional sponsorship in the top broad sector in the market.
Aercap Holdings (AER) operates in a cyclical business and thus is not a classic growth issue that is normally targeted in these reports. The aircraft leasing company should post earnings growth of 35% in 2013 and 26% in 2014, per most Wall Street analysts.
Price broke out of a tight, six-week flat base in mid-December and nearly doubled in eight days. The stock is now forming a nine-week base just ahead of earnings, which are slated for release before Thursday’s open. Worth watching.
Calamp (CAMP) is expected to see 16%/33% earnings growth in the February ‘14/’15 fiscal years. Sequential revenue growth has been very good the last three quarters. Tuesday, price moved up 6% on volume 43% above average to poke through a three-week range.
With earnings out of the way, we would be watching CAMP for a breakout entrance above the 1/22 high of 33.59.
Chipotle Mexican Grill (CMG) is a name we have not followed for a while. According to most analysts’ estimates, the restaurant operator should record earnings growth of 24% in both ’14 and ’15. This, the high stability of earnings over the past several years (9% annual standard deviation), and the deep liquidity ($261MM in average daily dollar volume) make CMG attractive to institutions with a growth mandate.
Of bullish note is the breakout of CMG’s 11-week base on 1/31. Price jumped 12% on a 407% increase in volume. Yet post-breakout there was just a 6.7% giveback as price regained its sea legs. This has our attention and merits a potential entrance on a takeout of the 568.90 high of 1/31. Earnings are out of the way (the next report is expected in April).
Criteo (CRTO) was mentioned in our 1/26 report: “…last week formed a reference high at 38.95. This high could potentially serve as an entrance pivot for an aggressive operator, depending upon general market health in the sessions to come.” The provider of e-commerce advertising products cleared the pivot on big volume last week, then declined to a point 4.9% below the pivot before finding support at a logical place and recovering.
The big attraction here is the giant estimates of 80%/102% in ‘14/’15. Also of interest are the beefy sequential revenue growth figures in the last two quarters. (These are quarter to quarter, not year over year.) Another feather in the stock’s cap is its ability to record a big intraday rise on its first day as a public company.
This is a thin issue at just $6.2MM in average daily dollar volume. For very aggressive speculators, this is one to keep an eye on. Earnings are out of the way until April.
Gilead Sciences (GILD). This is the largest biotechnology company by market capitalization. The big attractant here is the bulky estimates of 84%/51% for ‘14/’15. This comes after three years of slight growth, and is what the market has focused on as it propelled price to a 100%+ move in ’13. The biotech group is ranked 99 for relative price strength.
The 1/13 report noted that “A takeout of the 12/09 high of 76.11 would represent a potential entrance for the speculator.” Price cleared that high on 1/16 amid heavy volume, and has been forming a sound base for the past four weeks. The 84.40 high of 1/22 represents a potential entrance for an intermediate-term speculator. Earnings are out of the way.
Green Plains Renewable Energy (GPRE) is expected to grow net by 63% in ’14, followed by -2% growth in ’15, per most analysts. In the 1/02 report it was noted that “A very aggressive speculator might consider a potential entrance in GPRE to coincide with a takeout of the 12/24 high of 20.” Price cleared the 20 level on 1/10, then suffered a 5% drawdown before recovering and staging a heavy-volume breakout four days later.
GPRE outperformed in six days of the Nasdaq’s recent eight-day correction. We would be watching GPRE for a pullback opportunity. Earnings are out of the way.
Insy Therapeutics (INSY) is a recent new issue that came out at 8 and now trades near 60 nine months later. The company develops solutions for alleviating “breakthrough cancer pain.” Most analysts look for ’13 net to have come in at 1.33 a share, a big improvement over ‘12’s loss of 95 cents a share. Meanwhile, the analysts spot ’14 net at 1.95 a share, a gain of 47% over that of ’13. Sequential revenue growth explodes over the past six quarters.
Earnings are expected on 3/04. Numerous growth stocks have moved past clear pivot points ahead of their earnings releases. A very aggressive player might use the 59.99 high of 2/03 as a potential entrance for a junior position. A less-aggressive speculator may choose to wait until after earnings come out.
This is one to watch, in either case. The cancer and auto-immune segments of the biotechnology area are especially hot, and have contributed to a number of winning bio stock moves.
Priceline.com (PCLN) was last mentioned here on 1/26/14: “PCLN can be monitored for a takeout of the 1/22 high of 1214.19.” We are now waiting for a pullback entrance. The view here is that PCLN is a rarity in that its earnings growth estimate for ‘14 is a very-healthy 25%, its earnings stability is very high at just a 7% annual standard deviation over the past several years, and its liquidity is extreme at $817MM in average daily dollar volume. All of this adds up to a name that is very popular among institutions that pursue a growth mandate. And titles like this are more apt to be leaders than otherwise. Earnings are expected later this week.
SolarCity (SCTY) is not an earnings story, as there are no positive estimates through ’14 for this marketer and installer of solar energy systems. Instead, the market is believed to be focusing on quarterly sequential revenue growth which has been 19%+ for the past three periods, respectively.
Price is working on the fifth week of a base. We would wait for the earnings report, expected out later this month, before considering an entrance, which presently would consist of a breakout above the base high. This is a 98 rs stock in a 99 group.
Like GILD, PCLN, and CMG listed above, Under Armor (UA) offers the same three criteria that growth-oriented institutions find irresistible: attractive earnings growth, high stability of that earnings growth, and deep liquidity which allows them to build and tear down positions.
We are impressed with UA’s ability to show an up-and-tight price pattern of just 6.4% depth over the past three weeks following a 23% move on volume 755% above average. While price is extended, this is one to watch for a subsequent entrance. Earnings are out of the way.
Elsewhere, since last summer we have believed the bear market is over. We hold a position in Market Vectors Junior Gold Miner ETF (GDXJ) from late January – as noted on the Twitter feed at the time – and seek to add to it or possibly its 3x equivalent (Direxion Junior Gold Bull ETF (JNUG)) on a pullback or other attractive entrance, if one materializes. In ’11 and ’12, the better performer was the metal, not the miners. This time, it has been the other way around. This accounts for the usage of GDXJ and not something like SPDR Gold Trust (GLD) or a levered variant such as Direxion Gold Miners 3x ETF (NUGT), which we used to play the summer rally.
In summation, trend, volume, leadership, and speculative sentiment are positive, while breadth is negative.
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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., Kevin Marder, or an affiliate thereof held a position in GDXJ, though positions are subject to change at any time and without notice.