Market Comment

June 2, 2014

June 2, 2014

When nothing seems to help, I go look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow, it will split in two, and I know it was not that blow that did it, but all that had gone before.”

                                                                            — Jacob Riis

Volume in the Nasdaq market remains low. While not a hard-and-fast rule, we generally like to give a market 10 weeks or so to prove itself from a volume standpoint before getting too anxious. The current advance is seven weeks old.

As mentioned on the Twitter feed last week, since 1990 there is precedent for the low-volume Naz advance. In July-September ’96, the index went nine weeks with only one accumulation day on above-average volume. The current situation is that the Nasdaq Composite has gone almost seven weeks with just one accumulation day on above-average activity.

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Sub-surface, a decent assortment of names are in the process of setting up. Last week, starter positions were taken in Netflix (NFLX), Priceline Group (PCLN), Biogen (BIIB), and Facebook (FB). None of these offer attractive entrance at this point. We are watching these for a pullback or other entrance for add-on buys.

Among the names, Anika Therapeutics (ANIK) is a biotech and has a 98 rs rank. We do not like the ’14 estimate of 68% dropping to -26% in ’15. However, there is enough time between now and the end of this year for the stock to make a move before the market discounts the reduced net for ’15. Of course, estimates are only estimates, and they are always subject to change.  But they are what the market focuses on.

ANIK nearly vaulted a frying-pan-with handle on Thursday, with volume 190% above average. Friday, price and volume eased. The 5/06 handle high of 49.37 can be used as standard breakout entrance.

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Bitauto Holdings (BITA) is a rare growth stock setting up in a decent enough base. This is a Chinese issue, so risk is higher due to accounting and governance risk being higher for Chinese shares. Earnings estimates are 50% for both ‘14/’15. The stock is two days into a handle to go with its three-month base. We like the stability of the rs line over the past three weeks. A standard breakout entrance presents itself above the 5/28 handle high of 45.35.

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Cavium (CAVM) designs semiconductors for networking, storage, wireless, and other markets. Street analysts eye earnings growth of 38%/28% in ‘14/’15. Price came out of a nine-week base last Tuesday, up 6% on volume 126% above average, and going out near the top of its intraday range. The last few days have seen price and volume settle down. CAVM can be entered around Monday’s closing level of 48.41, with a stop placed below the 5/23 high of 46.49. This represents 4% risk, and 2% if a junior position is used for the starter position.

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Cheetah Mobile (CMCM), discussed two weeks ago on the Twitter feed and also in last week’s report, came public three weeks ago. The Chinese security software developer did not move explosively post-IPO, however its sequential revenue growth has been excellent in recent quarters. Last week, however, price came out of its first consolidation, a three-week affair. One to monitor for very aggressive speculators.

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Illumina (ILMN) was noted here last week (“Late last week, price cleared the midpoint of the pattern on soft, pre-holiday volume. Worth watching for attractive entrance in the days/weeks to come.”). Since then, price has gone nowhere, a positive as this has allowed for the formation of a handle. An aggressive speculator might consider an entrance above the 5/27 high of 161.00 which is the handle high. Given the lack of follow-through when price last week cleared the base’s midpoint – not to mention five weeks of soft volume – we would want to see volume pick up appreciably on any takeout of the 161.00 level prior to entrance.

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Live Nation Entertainment (LYV) was noted in the last report that “The three-month base itself is one of the best in the entire market. A standard breakout entrance above the base top of 24.80 presents itself, unless a handle or pullback ensues in the interim.” Since then, price has formed a four-day handle and the handle high of 24.71 set on Tuesday can be used as an entrance pivot. We would insist that volume be well above average on the breakout day.

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Michael Kors Holdings (KORS) was discussed in the last report (“The stock could be entered around Friday’s closing level of 96.40 with a stop just below the last swing low of 90.53 of 5/16. This would amount to about 6% below Friday’s close. For the more-conservative speculator, simply waiting for price to get closer to the base top to trigger a standard breakout entrance is an alternative.”). KORS saw some volatility during midweek after the 96.40 entrance was triggered. The mentioned stop of 90.53 did not get hit.

Last week’s action allowed price to form a four-day handle, a not uncommon occurrence for a number of issues. The handle high of 98.96 now presents an additional entrance pivot.

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Pacira Pharmaceuticals (PCRX) was discussed in last week’s report (“Price forms a cup-with-low-handle. The 5/21 high of 77.99 can be used as a cheater entrance by an aggressive player. Again, using junior position sizes for the starter position reduces initial risk by one-half.”). Price crossed the pivot point last Tuesday, the day after the Memorial Day holiday. Volume was predictably light and price idled the rest of last week before poking its nose above 80 today on the highest volume in three weeks. PCRX can be monitored to see how it acts around its all-time high of 83.41.

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Palo Alto Networks (PANW) is a network security provider with excellent estimates of 60%/63% for the July ‘14/’15 fiscal years. While we do not pay much attention to P/E ratios, we prefer to see a stock sell at a multiple that is higher than its forward growth rate, as it suggests something special is going on with the company. In PANW’s case, the stock sells for a 66% premium to its forward growth rate, a plus.

On Thursday, price was up 5% on volume of +359%. This takes the stock to within 7% of its record high. While attractive entrance is not present, we would watch to see if Friday’s inside day and Monday’s decline lead to a few days of handle-building which might then offer an entry opportunity.

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Salix Pharmaceuticals (SLXP) was noted here last week (“The 3/19 high of 116.72 could potentially be used as a cheater entrance ahead of a possible pattern breakout.”). Price barely exceeded this level on Tuesday before running into sellers. That was the day after the Memorial Day holiday, and volume was just 34% below normal. Then on Wednesday, price followed through on volume of 41% above average, but sellers again emerged and price closed the day in the middle of the intraday range. Price is now 2% below the 116.72 pivot. We would not be eager to take a new long above the Wednesday high of 118.00 unless solid volume coincided with the breakout.

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Travel content provider TripAdvisor (TRIP) was noted here last week (“The stock can be monitored for attractive entrance. TRIP is quite attractive to large investors given its robust estimated earnings growth, its deep liquidity ($247MM in average daily dollar volume), and its high stability of earnings.”). This is a favored glamour. Note the high price persistency of the past two weeks. Price does not set up. We would continue to watch this one.

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Vipshop Holdings (VIPS) was mentioned in the last report (“…has lots of raw octane for a move [estimates of 145%/69% for ‘14/’15 and big top-line growth]. Price is one day into a handle to go with its 11-week base. The 5/22 high of 175.16 could serve as an entrance.). The comment stands. Price has formed a one-week handle and the 175.16 level that was mentioned is the handle high. Of note is the rough look of the base. This adds to the risk, but does not disqualify the stock from consideration. Of note is the fairly shallow 8.6% depth of the one-week handle. This is a 99 rs stock. A plus is the volume dry-up of the handle.

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Weatherford International (WFT) is a 95 rs oil & gas – machinery issue that the Street expects to show earnings growth of 80%/54% in ‘14/’15. Friday WFT cleared a five-week, micro, head-and-shoulders continuation pattern to a nearly three-year high. At 14% above average, volume was unimpressive, yet it is to be noted that many stocks traded lightly a day ahead of the ISM report for Monday.

Price has found support twice recently at its 20 ma. An entrance above Friday’s high of 21.90 would be 1.9% above the pattern top, thus being potentially buyable. In light of today’s breakout failures of two oil & gas explorers, Rice Energy (RICE) and Diamondback Energy (FANG), a significant volume increase should be a requirement on a move above 21.90 in order for an entrance to be considered.

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Zendesk (ZEN) is a recent new issue, and for the truly aggressive speculator. Last week we noted that “Either the 5/20 high of 18.17 or Friday’s high of 16.46 can be considered as a very aggressive entrance.” The 18.17 pivot was exceeded and was stopped out. The 16.46 pivot is slightly more than 2% above Friday’s close. The major attraction here is 1) the ability of price to more than double by its third day of trading, 2) the correction of “only” 18.5% subsequent to this double (in last week’s report it was incorrectly stated that it corrected by 9.4%), and 3) the excellent sequential revenue growth over the past seven quarters. Liquidity is reasonable at $23.9MM in average daily dollar volume. Worth watching.

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In summation, to expect the market to always follow a script from a textbook is unrealistic. Thus, the low-volume Nasdaq advance of seven weeks should not come as a complete surprise. Speculators need to adapt to the environment like a chameleon adapts to his. For some, this might mean sitting in cash until a higher comfort level is reached. For others, this could involve buying some of the cyclical leaders. We remain intrigued by the action of some of the liquid glamours. However, there is nothing that says these titles cannot complete their cups and then run into abnormal liquidation by institutions, creating primary tops on their charts.

The focus is on the day-to-day.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

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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 positions in FB, NFLX, PCLN, and BIIB, though positions are subject to change at any time and without notice.
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.