“Just win, baby.”
– Al Davis
Shares continue higher. Leading growth stocks generally act well. The backdrop is quite positive, as low interest rates and low inflation combine with an expanding economy.
The market is long overdue for an intermediate-term correction. No one should be surprised when one arrives. In fact, it has been over a year since the last 7% pullback in the Nasdaq.
It is to be remembered that leading growth stocks tend to correct by 1.5 to 2.5 times the extent of a correction in the averages. Often it is more. Though by no means assured, we would expect the liquid glamours to hold up best, and secondary and tertiary issues to bear the brunt of any correction in the averages.
Among the names, Biogen (BIIB) was mentioned in the 9/30 report: “An aggressive speculator may consider taking the stock as a second attempt entrance above the 9/19 high of 248.95.” We are not usually fans of holding positions through earnings. But if one had bought the stock when it broke out three weeks later right around earnings, it turned out to be an earnings-inspired stop-out.
Most analysts eye 36% earnings growth in ’13 and 30% in ’14. This is extremely impressive in light of the very high rate of earnings stability, a level that is normally associated with staid, low-expectation issues. The industry group rs is 98 and the stock is under extreme accumulation. Last week, the stock put in two major accumulation days on Wednesday and Friday.
Friday saw price barely clear a seven-week flat base. BIIB is potentially buyable around Friday’s closing level of 299.31. A stop below Friday’s low would amount to 4.3% risk or a de facto 2.2% if a junior position was put on initially.
Envestnet (ENV) was mentioned in the report written Dec. 29: “At this juncture, a standard base breakout above 11/25’s high of 41.11 makes more sense as a potential entrance pivot.” Last week, price broke out, but follow-through has been minimal. It is now forming a tight ledge, and we will watch to see if it clears the ledge top, which may provide an add-on entrance pivot.
ExOne (XONE) was discussed in the 12/30 report: “…we would monitor this for a pullback entrance or a possible breakout above 64.70 if price forms a handle or moves sideways.” On 1/02, it was noted on the Twitter feed: “Sets up for breakout of midlevel 7w double-bottom base. Big estimate, seq rev growth.” On 1/03, price broke out of the base on volume 167% more than usual. Since then, it has yo-yoed back and forth in a seven-day pennant. An aggressive speculator can use the top of this pennant (the 1/06 high of 68.20) as a potential entrance pivot. Fundamentally, most analysts look for a per-share loss of 13 cents in ’13 and a profit of 43 cents in ’14.
Gilead Sciences (GILD) is one of the big three leading biotech names. Earnings are expected to jump from a forecasted 3% in ’13 to 65% in ’14. Price has been marking time as it forms a five-week base that looks like a gun. Last week’s slight dip created a second handle for the gun. A takeout of the 12/09 high of 76.11 would represent a potential entrance for the speculator.
Harman International Industries (HAR) shows significant earnings estimates at 30%/26% for the June ‘14/’15 fiscal years. Price last week broke out of a nine-week base on volume 60% above average. The following day, Friday, price added another 2.8% on volume 104% above normal. Based on Friday’s close, price is 3.2% past the base top, is not considered materially extended, and represents a potentially attractive entrance.
NPS Pharmaceuticals (NPSP) was mentioned in the 12/30 report, written 12/29: “We would watch NPSP for a pullback here or sideways action for at least another day before contemplating Thursday’s high as a potential cheater entrance.” Price moved up six of the next seven days.
Earnings are expected to jump from a loss of 20 cents a share in ‘13 to a profit of 43 cents a share in ’14, per most analysts on the Street. Sequential revenue growth has been very solid in recent quarters. At this juncture, due to the recent strength, we would prefer to allow price to form a handle or pull back, as opposed to using further strength from here as an entrance.
Organovo Holdings (ONVO) was mentioned 1/08 on the Twitter feed: “Aggressive speculators should b keeping an i on this, as 2day saw material vol increase on +7% price; preparing 4 assault on cheater entrance of 1/02 hi of 12.05.”
ONVO has the potential to be a game changer in the healthcare industry. The company produces 3-D bioprinting technology that creates living human tissues for research and therapeutic applications. This holds the promise of dramatically reducing the time and cost needed to develop new drugs.
ONVO is a development stage company, and thus has no real revenue and no earnings. Losses are projected for the March ’14 and ’15 fiscal years. Therefore, one is “trading off the chart” alone here. Accordingly, risk is very high.
Technically, price forms a cup-with-low-handle. A moderate plus is the ability of the handle to find support just below the high of a five-week trading range and beneath the 10 level. The 1/02 high of 12.05 may represent a potential entrance pivot for the very aggressive speculator.
Relypsa (RLYP) went public 11/15 at 11, moving up to 30 in four weeks. Since then, price forms its first base, a cup-shaped pattern. The biotech company is development stage, so it has no earnings and is not expected to during ’14. Price is four weeks into its base. We are monitoring this one to see whether it stages a breakout attempt above its 30.45 high of 12/16 or decides to put in some time backing and filling. It might be something that is commented on in the Twitter feed as its pattern ripens. Clearly very high risk, as one is forced to trade off the chart exclusively, with nothing else of import.
Salix Pharmaceuticals (SLXP), an ethical drug maker with a gastrointestinal focus, was noted in the 12/30 report as “…a potential entrance exists on a takeout of the base top of 90.73, the 11/18 high.” The stock broke out on 1/03, but unimpressively, as volume was roughly average that day. Since then, price moved sideways for a few days before getting a lift on Friday. We are attracted to SLXP by the accelerating ’14 estimate of 57% vs. the ’13 estimate of 23%, its presence in the 97 rs ranked ethical drug group, and its status as a big leader in this bull market. This is one we will continue to monitor for its next entrance.
Twitter (TWTR). In the 12/6 MarketWatch column written 12/5, it was noted that “A potential entrance may present itself should price pull back over the next session or sessions.” Price then pulled back over the next session and broke out the following day, rising 61% over the next three weeks.
In the 12/17 MarketWatch column, it was noted that “One-day pullbacks may not be for everyone, and are likely embraced by very few speculators. Yet the volume on that day, the highest since the day after the stock’s debut, showed a lot of players keying on that particular pivot point. TWTR’s 19% advance in seven trading days prior to the pullback day would be expected to have elicited more than just a 1.5% decline. That it didn’t, and instead broke out, said something to the very aggressive operator in momentum names. Again, the unexpected is what was important.”
On 12/27 we noted on the Twitter feed two minutes prior to the open that: “Thurs showed spinning top, a candle pattern that indicates indecision & often the start of a topping sequence.” Did we know that this was the top? No. Speculation is a game of probabilities. One pieces together various clues to come up with a probable scenario. One then lets price confirm that scenario. Of critical import: Volume was the second-highest in the stock’s seven-week life, and yet following the gap open could muster very little energy and ended up inching ahead. This was a clear loss of momentum. The next day, price confirmed that.
On 12/30, we noted on the Twitter feed that “Issues that form witches-hat peaks like this tend to take months to recover and re-set their base.” In other words, it was unlikely that TWTR would pause for only a few days or a week or two before rocketing higher. More time is likely needed. Volume drying up constructively amid range contraction (daily hi-lo range) would be a sign that the speculative frenzy and attention heaped on the stock may be dissipating. To be continued.
Valeant Pharmaceuticals (VRX). In our report of 9/30, we noted that “A takeout of VRX’s 9/19 high of 106.98 would constitute a second attempt entrance, and could be taken by an aggressive speculator.”
In our report of 11/25, we noted that “Price forms a five-week cup which can be monitored for a potential entrance above the base top at 115.40, the 10/21 high.”
On 12/30, price broke out of what was then a 10-week base, and we noted on the Twitter feed that “It is not extended, and is therefore potentially buyable.”
Last week’s breakout of what was a weeklong high handle leaves the stock at 133.50, extended, and without an attractive entrance. The big selling point for the stock, in our view, is the estimate acceleration, from 36% in ’13 to 40% in ’14. This combined with revenue acceleration, a 97 rs group rank, and high liquidity makes this a name to watch for another entrance.
Voxeljet (VJET). On 1/07, in the MarketWatch column, it was noted that “A potential entrance may present itself in coming days should price continue to move sideways in the interim and then break out of this handle.”
On 1/08, it was noted on the Twitter feed that VJET is “Attractive in here as pullback entrance after bounce off 40-41 support. Lots of new issues doubled in 1st 4w. This one quintupled.” Of constructive note is the volume dry-up and range contraction in December as the hot money left the stock.
Jan. 2 and 3 saw a change of character in that volume expanded and price put in two substantial daily gains. Price is now digesting those gains in sound fashion. After a 438% gain in four weeks, that volume and price went through such a brief period of consolidation – essentially the month of December – speaks.
A potential entrance would be a takeout of the 1/06 high of 47.98. The 1/09 high of 45.55 might be used as a pivot by a very aggressive speculator. Liquidity is very good at $100MM in daily volume. One of the highest potential titles in the glamour complex.
Yelp (YELP) was noted 1/02 on the Twitter feed: “Potentially buyable above 12/26 high of 69.24, using 12/30 lo of 63.63 as a stop, using smaller position so risk is 6%-7%.” Two days later on 1/06, the stock broke out to a seven-week high, which caused us to add to the Twitter feed: “Shows it is serious about assaulting the top of its 11w base, +5%.”
This was pretty clear. You had a change in character from what had been a low-volume prior two weeks into a breakout to a seven-week high on the highest volume in six weeks. And while the company has no earnings, it is expected to earn 19 cents a share in ’14 from an expected loss of 13 cents a share in ’13. Also, sequential quarterly revenue growth has exceeded 10% for several periods. Net-net, this is a happening company even though a reliance on past earnings would tell you otherwise.
At present, YELP is extended above its closest area of support and does not offer attractive entrance.
YY (YY) was noted 1/02 on the Twitter feed “Potentially buyable here.” This was similar to YELP in that price had just gone through a post-Thanksgiving period of rest and relaxation. Price had tightened up bullishly and volume had dried up noticeably. Then on 1/02, price rose 4% as volume was 90% above average. The character of the stock had changed.
The next day, 1/03, this was added to the Twitter feed: “Now a stone’s throw away from breaking out of 7w base. Big volume today.” YY is currently extended and does not offer attractive entrance. This is certainly one to monitor, however, as most analysts forecast 42% earnings growth in ’14, plus sequential revenue growth is on fire over the past seven quarters.
Zillow (Z). This provider of real estate data shows strong sequential revenue growth in recent quarters, and is expected to grow earnings to 48 cents a share in ’14 from an estimated 4 cents a share in ’13. This is a 94 rs issue in a 99 rs group. The stock can put points on the board in a hurry, doubling in nine weeks last summer, for example. Price is in a four-month cup pattern and began to come alive on 1/06 when it rose 7% on volume 69% above normal. A very aggressive speculator seeking to preempt a possible base breakout might consider entering on a clearing of the 1/08 high of 91.27, using a junior position initially in order to mitigate risk. Otherwise, a less-aggressive player will monitor Z in the weeks ahead for a potential entrance.
In summation, leading growth stocks benefit from the positive speculative sentiment. Meanwhile, the probability of a correction in the averages mounts. There is no way of knowing the exact timing of this, its extent, or its duration. As always, a speculator must take things one day at a time, making sure he is not getting too far ahead of himself with prediction or personal opinion.
A correction will happen when it happens.
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