Market Comment

Improvement

September 9, 2010

“Risk more than you can afford to lose, and you will understand the game.”

— Sir Winston Churchill

The major averages’ digestive activity of the past three days is desirable following the 5.7% run-up.in the three days’ previous. Of note are the three major accumulation days in the Nasdaq out of the past nine sessions. A Naz takeout of the 2,309 August 9 high would likely grab people’s attention and bring money off the sidelines.

The current cycle’s speculative growth stock glamours remain in healthy shape, with scant distribution seen. Given the overheated run-ups in some names, it would be normal for some to pull back.

Technically, the advance has been a reaction to the highest negative investor sentiment since the March ’09 lows. Fundamentally, the catalysts have been a better ISM report, improvement in August results from major retailers, and jobless claims. Also, market participants are believed to be discounting the November election results.

The market has entered what might be the most interesting two-month period of the year, historically. The backdrop is far from settled in Europe, and may worsen, given the rising cost of insuring sovereign debt in Greece, Ireland, and other countries. A single default would likely rough up the markets liberally. Our Greek proxy, National Bank of Greece (NBG), is in short-, intermediate-, and long-term downtrends.

Contrast Europe and the US with Asia ex-Japan. There, most economies buzz along with 5%-7% growth, topped by Singapore, which just clocked a 19% growth rate in Q2.

Among the glamours, Netezza (NZ) speaks to our fondness for big estimates, with the Street eyeing 58%/53% for the January ’11/’12 fiscal years. The stock is quite extended, but given its two recent massive-volume updays, when the stock rose 33% and 12%, respectively, and the aforementioned earnings estimates, this one is worth watching to see if it can consolidate, if even for just a few days, before relaunching. Definitely new merchandise to get excited about.

Netapp (NTAP), like most glamours, cannot be bought here, but it is shown as an example of the market’s percolating speculative sentiment. That this is occurring in an institutional favorite is a plus for general market health.

F5 Networks (FFIV). Volume on the breakout of its 3 ½-week triangle was 26% below average. This makes sense, as a pattern like this, in which the low of the pattern is made early (i.e. toward the left side of the pattern), is often too obvious to produce a high-volume breakout that runs.

Informatica (INFA) is extended and does not offer attractive entry.

Isilon Systems (ISLN). The same setup shown above in INFA, appears on the below chart of ISLN. There is the gap (1), followed by the short consolidation, and then the new high (2).

Cognizant Technology Solutions (CTSH). This is a high-quality technology stock (above-average earnings growth with high stability) forming a five-week base on light volume. The base is one of the most-typical looking in the current crop, and could be found in a textbook. We think there might be better opportunities, however, given CTSH’s ’11 estimate of 14%. This is light for our taste, when compared with other names available.

Baidu (BIDU) is building a constructive base on dimming volume after finding support at the 50-day.

Qlik Technologies (QLIK) is a recent new issue that priced at $10 on July 16, opened at $13.20, and was last at 18.59. Estimates for ’11/’12 are 58%/39%, right up our alley. This enterprise software developer is extended. Given its prodigious growth estimates and high performance post-IPO, it is worth watching to see if it resets.

Makemytrip (MMYT) is an Indian online travel services specialist. Estimates: 178%/143% for the March ’11/’12 years. This is a recent new issue that priced at $14 on August 12, opened at $26, and broke out to a new high on Monday (9). The thick earnings estimates suggest there is plenty of time ahead in which to make a big move.

Green Mountain Coffee Roasters (GMCR). With a 67% earnings estimate for the September ’11 fiscal year, we could be persuaded to overlook the base, which is the most obvious in the entire growth sector.

Acme Packet (APKT), Akamai (AKAM), Aruba Networks (ARUN), Netflix (NFLX), Riverbed Technology (RVBD), and Salesforce.com (CRM) are extended and do not offer attractive entry.

In summation, shares are digesting last week’s advance in constructive fashion. We would prefer to see either the SPX or Industrials print a major accumulation day soon, as a market can only go so far on the strength of its leaders without confirming demand at the surface of the averages. Most leading stocks are extended and do not offer low-risk entry.

Kevin Marder

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