Market Comment

Gentlemen Prefer Bonds

August 11, 2011

“Gold and silver are money. Everything else is credit.”

— J.P. Morgan

Supply/demand quotients are unfavorable for intermediate-term speculation. Leadership was ample out of the July 1 low and contributed to a playable move. But the glamours that took the reins are now extended. Very little is rolling onto the runway to take their place.

Add this to the majors, only one of which has printed any major accumulation days in the six-week move, and shares need to put in more time to represent anything close to an attractive campaign.

The showdown between bonds and shares that had been building for weeks rendered its verdict last Friday (6) when the d-crowd blew a hole in 10s’ July 1 low of 2.88%. This was the demarcation point, the line in the sand that had held for five weeks, that upped the ante. Shares, for their part, failed to blink Friday, putting in a wash-and-rinse day and going out in the 93 percentile of the Naz’s range.

Monday (9) was quiet, as players studied their hands. But on Tuesday (10), the d-crowd upped the ante anew, with 10s moving down to 2.78%. Shares took this in stride, giving back 1%+. Wednesday was the clincher, however, as shares walked away from the table in disgust, ceding victory to the d-crowd, as 10s went out at a gruesome 2.68%.

Although some may place more emphasis on the action of the leaders, there is only so far a market can go when the majors do not confirm. This is not problematic for the first several weeks of a new advance. Once a non-confirmation extends past eight weeks or so, however, the rally is on thin ice.

With nearly every other country outperforming the US on this advance, save for Canada, Mexico, and Vietnam, one might think the long-awaited decoupling is at hand. If this is true, we suspect it will not last for long.

Small-capitalization issues are leading the way…

Besides the trend on yields, this chart is the most worrisome…

This chart takes runner-up honors…

Among the glamours, technology bellwethers Netapp (NTAP), VMware (VMW), and Salesforce.com (CRM), have all failed after breakout. When they raid the bar, they get everyone, including the piano player.

Green Mountain (GMCR) may be the most dynamic medium-capitalization title in today’s market, with ’10/’11 estimates of 87%/66% in a market in which it is hard to find 20%/20%. Worth watching for when the averages firm up again.

Another name to watch in case the general market firms up…

Ditto…

Baidu (BIDU). We have been watching this with interest. Precedent indicates stocks often top after a large run-up is followed by a split of 3:1 or greater, let alone a 10:1 split such as BIDU’s.

Given the extended, and now crumbling, nature of the current leadership, the next wave of leadership may emanate from pockets that have not been attracted attention in recent months. One such area may be the fertilizers, which proved in the ’04-’05 and ’06-’08 periods that they can lead. Agrium (AGU) is the top title in the group.

Other leaders holding up include F5 Networks (FFIV) and Chipotle Mexican Grill (CMG), the latter one of the only genuine bases inside the growth sector.

 

Webmd Health (WBMD). 75% growth estimate for ’11. Not the most liquid stock in the world, WBMD broke out of a four-month base and is lingering just above its pivot. This is not anything to get too excited over, but warrants watching.

Sina (SINA). ’10/’11 estimates are 42%/22%. Worth watching.

Aruba Networks (ARUN). Does not offer attractive entry. Should be watched due to the next 24 months showing big estimates, which may offer leadership credentials that last longer than a stock whose growth is expected to slow in ’11.

Mercadolibre (MELI). A fundamental favorite, but should not be touched in light of the sketchy general market.

In summation, even before the majors began to break down this week, leadership was too thin and extended to afford a campaign of high-probability fresh-money buys. Historically, schismatic behavior of shares and bonds has usually been resolved in favor of the former, as is the case now.

Gentlemen prefer bonds.

Kevin N. 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.