Market Comment

A Go-Slow Market

February 9, 2011

 “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
— Mark Twain

        
Shares remain firmly under the trance of rotation out of bonds and EM, with a dash of good data here and a pinch of good earnings there. The disappointing January jobs data was explained away by the weather, and the Chinese rate hike was roundly ignored.

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In one-way markets like this, the last thing we do is try to get cute by predicting an intermediate-term top. A long time ago, we learned that using popular measures of investor sentiment to time tops and bottoms in the intermediate-term trend cost us more than they benefited us.

We recall in ’93 the presence of a strong, intermediate-term move in the averages. Bullish sentiment was thick. Instead of letting the market take us out of our winning positions, we sold everything based upon an extreme bullish reading in one of the widely-followed surveys of investment advisor sentiment. We then watched as the averages – and the stocks we had just offed – advance for another three weeks before rolling over. Those three agonizing weeks taught us a valuable lesson about when to pay attention to sentiment indicators in intermediate-term speculation.

The answer: never.

Nineteen ninety-eight was a fabulous year in many ways. It was a great year for learning about and experiencing the market. An average year may have two particularly auspicious times in which to accumulate stock. Ninety-eight had 2 ½. In addition, there was the brief ’98 bear market replete with the Russian debt default and the Long-Term blowup. Late in the year, some stocks jumped 50% in a single session after unveiling press releases that announced the impending launch of their Internet stores – a new concept at the time.

It was during the ’98 bear market that we stopped looking at another favored sentiment indicator of ours, the equity put/call ratio. The 1.0 level was purported to be an elixir of sorts, a magical level that often coincided with a low in the averages. But during the bear, the put/call exceeded the much-talked-about 1.0 level about six or seven times without putting in a low.

Besides the investor sentiment surveys and put/call ratio, the only other sentiment indicator that we ever paid attention to was the CBOE volatility index (VIX). This, too, was discarded years ago.

Using the price/volume behavior of the major averages and action of the leading stocks to guide your way through the various stages of a market cycle has its advantages. What it does not provide is a fail-safe means of forecasting an intermediate-term market top.

An intermediate-term top in the averages will not usually be announced by the sound of trumpets. If one is holding positions when a correction begins, one will likely give back some of the paper profits built up during the advance.

This is a cost of doing business.

Words to the wise: Look at each of your positions and note where you are likely to want to sell in order to lock in gains or limit losses. It is easier to do this now, with the averages at new highs, than in the middle of a correction, when your emotions will likely be much different.

Otherwise, shares do not exhibit the signs normally associated with a long-term top. As for an intermediate-term top, these take much less time to form, and can begin at a moment’s notice.

Among the names, Baidu (BIDU) was mentioned in last week’s report as offering attractive entry. Though we expect the stock to be a leader over time, at this point we would not initiate a fresh-money buy.

Riverbed Technology (RVBD) is one of the better setups in the growth sector as it rounds out its five-week base. The stock is under moderate accumulation, is in one of the strongest groups (networking), and has Street earnings growth estimates of 44%/34% for ’11/’12. A logical entry would be above the 1/14 high of 39.94.

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Chipotle Mexican Grill (CMG) is forming a double-bottom base following a strong, prior uptrend. Of note is the accumulation seen over the past week. We like CMG’s earnings growth estimates of 21% for ’11, revenue growth acceleration over the past three quarters, extreme accumulation, and its strong group. Earnings are expected to come out on Friday.

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We continue to watch Priceline.com (PCLN). Today’s breakout had the volume, but not the close. Earnings are released next week, which may explain its reticence lately.

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Las Vegas Sands (LVS) is in a constructive base that has been tightening up lately. Earnings estimates for ’11/’12 are 76%/24%. The 2/3 high at 50.65 offers a near-term entry point for a junior position, in our opinion.

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Wynn Resorts (WYNN) came out of a three-month cup-with-handle yesterday (8) on more than double average volume but went out below the pivot. Today’s advance was tepid. Worth watching.

Lululemon Athletica (LULU) broke out of the base we had referred to last week. The stock could easily pull back to below the top of its base (see chart below) if the averages begin to correct.

It is to be noted that minor gains in any of the recent breakouts could quickly evaporate in the event of a 5%+ pullback in the averages. Leading stocks can correct twice as much as the averages correct, if not more, in a market pullback.

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Molycorp (MCP). We continue to watch this. Showing extreme accumulation and in a top group. Very speculative.

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Leading coals like Walter Energy (WLT),
Patriot Coal (PCX), Arch Coal (ACI), and Teck Resources (TCK) are beginning to show distribution, as participants begin to weigh a China slowdown into the group fabric.

Fertilizers like Agrium (AGU) and CF Industries Holdings (CF) cleared abbreviated patterns on volume, but we would not be tempted to chase these due to the extended nature of the averages and the higher risk that such formations hold.

In summation, this is believed to be a go-slow market, for despite the overall good tone of the averages and generally sound tape of the leaders, the historically extended nature of the averages (SPX > its 50-day for 111 straight days) and lack of high-expectation stocks building bases of five weeks or more augur for caution in terms of fresh-money buys. Participants in a generous cash position should not feel any urgency to become invested so as to not miss out on the advance.

That time has come and gone.

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.