Market Comment

June 8, 2014

June 9, 2014

Many people think the object is to get out close to the top. They forget that the real object is to make money.”

— Jeffrey Cooper

Last week, shares were productive with the Nasdaq Composite stretching out of a three-day handle. Volume remains lax, though Thursday’s Naz turnover was the most in the prior 14 sessions.

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An increasing number of issues with dynamic prospects for this year and next set up. Recent new issues perform well, generally, which says something about the speculative sentiment. What it says is that a risk-on mentality expands at the margin.

Breadth is excellent. The number of 52-week highs on the New York Stock Exchange is at levels not seen since Christmas.

A couple of positives that underpin what is being seen in the averages’ uptrends and the action of leading stocks: Applied Materials (AMAT) is a behemoth in the semiconductor equipment group. Seeing it break out of an eight-week cup-with-handle base on +127% volume last week tells you institutions are feeding in the market. Ditto for Intel (INTC).

In a market like this, the pattern setups begin to outnumber available portfolio slots, at least if some value/cyclical segments are included such as the semis and oils. This is a nice problem to have. It is the hallmark of an advance with increasing opportunity. Along these lines, we switched out of Facebook (FB), which continues to act well, in favor of another name. Had we been running a portfolio of a dozen titles, we would still be holding FB.

Among the names, Aercap Holdings (AER) shows estimate acceleration from 22% in ’14 to 31% in ’15. This is a cyclical/value play that is a 99 rs stock in a 94 rs group. Price is working on a four-week consolidation, and attempted to break out Thursday on volume 17% above average. Perhaps due to caution ahead of Friday’s NFP report, price idled and did so again on Friday. The Thursday, 6/05 high of 48.81 could be used as a breakout entrance pivot.

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Anika Therapeutics (ANIK) was noted in the last report (“The 5/06 handle high of 49.37 can be used as standard breakout entrance.”). The comment stands.

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Carrizo Oil & Gas (CRZO) is an oil & gas explorer with accelerating estimates of 23%/45% for ‘14/’15. This is a 98 rs name in a 99 rs group and is under extreme accumulation. Price came out of a four-week shelf last Tuesday on volume of +73%. Volume then diminished the last three days of last week. Price is within buyable range as Friday’s close of 61.75 is 4.5% past the 59.10 pivot. Using the 20 ma as a stop loss would leave risk at about 6%.

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Cavium (CAVM) was discussed in last week’s report (“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.”). Wednesday and Thursday of this past week saw price move up 3% each day on volume of +58% and +77%, respectively. For those who do not mind using a 7.7% stop, the semiconductor designer can be entered here, using the swing low formed last week at 46.80 for a stop. The attraction here is the estimated earnings growth for ‘14/’15 of 38%/28.

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Horizon Pharma (HZNP) is a developer of ethical drugs. Most analysts see a per-share loss of $1.78 in ’14 and a per-share profit of $1.09 in ’15. This anticipated turn to profitability is what led the market to bid the title up from about 2 last August to its recent high of 18.30. A second attraction here is the major sequential revenue growth of 36%, 28%, 117%, 25%, and 72% of the past five quarters, respectively. This has not been lost on mutual funds, whose ownership ranks went from 143 funds to 202 funds over the last two quarters, respectively.

Technically, price is doing a good job of consolidating the big run-up into its March top. At present, a six-week cup-with-handle is forming inside of a larger, 11-week pattern. An aggressive speculator may use the 5/29 handle high of 15.11as a possible cheater entrance pivot. This is a 99 rs stock in a 99 rs group.

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IGI Laboratories (IG) is in the very-high risk category, as it is a micro-capitalization issue with thin liquidity ($1.28MM in average daily dollar volume) and priced at $5. Most analysts eye per-share net jumping from $0.02 in ’14 to $0.15 in ’15. Price builds an 11-week base and is three days into a handle.

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Illumina (ILMN) was mentioned in the last report (“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.”).

Wednesday price went through the suggested entrance point on average volume. The following day, Thursday, saw +192% volume as the stock gained 2%. Friday saw another 3% rise on volume near 50% above average. ILMN is currently about 5.0% past the handle high, and therefore is buyable around Friday’s close of 168.95 without being considered extended.

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Lannett (LCI) is a generic drug developer that is expected to post earnings growth of 298%/35% in the June ‘14/’15 fiscal years. Price is completed a three-month cup-with-no-handle on Thursday with volume just 4% above average. This might be explained by caution ahead of the NFP report on Friday. Then on Friday, price idled on lower volume. This is a 99 rs stock in an 81 rs group and bears monitoring for a handle or other sideways drift to be formed.

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Live Nation Entertainment (LYV) was noted in the last report that “…price has formed a four-day handle and the handle high of 24.71 set on Tuesday [5/27] can be used as an entrance pivot. We would insist that volume be well above average on the breakout day.” The comment stands. The big attraction here is the turn to expected profitability after a 4-cent-a-share loss in ’13. Per-share earnings estimates for ‘14/’15 are 21 cents and 38 cents, respectively.

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Pacira Pharmaceuticals (PCRX). In the 5/26 report, it was noted that “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.” This pivot of 77.99 was exceeded on 5/27.

Then in the 6/02 report, it was noted that “PCRX can be monitored to see how it acts around its all-time high of 83.41.” This level was exceeded Friday on volume 22% above normal. PCRX can still be entered around Friday’s close of 83.67, using the 20 ma as a stop. This represents 7.4% risk if a full position is taken, and half that, or a de facto 3.7%, if a junior starter position is deployed.

There appears to be a good amount of octane to support a move. This in the form of the move to profitability in ’15 and the high level of sequential revenue growth in recent quarters. This is a 98 rs stock.

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Palo Alto Networks (PANW) was noted here in last week’s report. (“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.”). In fact, there were a few days of handle-building last week which we took advantage of to enter a starter position. The attraction here is the 63% earnings growth estimate for the July ’15 fiscal year which would build on the estimated 60% growth of the ’14 year.

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Spirit Airlines (SAVE) has estimates of 21%/27% for ‘14/’15. This is a 96 rs stock in a 97 rs group. The 10-week, double-bottom base is constructive and shows four accumulation days in the past four weeks. (There is no requirement that this pattern have a second low that undercuts the first low in order to be called a “double-bottom base.”) In addition, price is up in 11 of the past dozen sessions, showing excellent price persistency. A standard breakout entrance above the 3/25 high of 63.89 is indicated.

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Travel content provider TripAdvisor (TRIP) was noted here last week. (“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.”). The comment stands. Price persistency over the past three weeks has been nearly as good as, if not as good as, any other glamour. We hold the stock and are looking for an add-on position. Price is now 5% from its base top, the approach of which may induce some to take profits and create a pullback.

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Under Armour (UA) is close to being a classic growth stock. Estimates: 23%/27% for ‘14/’15. The company has an exceptionally high stability of earnings over the past several years:  a microscopic 4% annual standard deviation. Top-line growth has also been steady. The stock has good liquidity at $239MM in average daily dollar volume. Price does not offer attractive entrance currently, but this is one to keep an eye on.

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United Rentals (URI) was discussed in the MarketWatch column of Apr. 24 as being buyable above the 4/01 high of 96.72. About three weeks later, price broke out above this level. In the Marder Report of 5/21, it was noted that “A potential entrance lies in a second attempt at breakout, this time above the 5/13 high of 99.25. As always, we suggest a junior position (half normal) on the initial starter position, which can then be added to should price move in the desired direction.”

Last Thursday, price broke out of a tight, six-day ledge on volume just 10% above usual. This may have been due to caution ahead of the NFP report the next day. This is a 97 rs stock in a 94 rs group. Using the 100 level as an area for a stop loss, an entrance around Friday’s close of 105.97 would represent about 6% risk. Placing the stop just below the 100 mark would allow price the chance to respect the six-day ledge + the psych level of par.

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Vipshop Holdings (VIPS) was mentioned in the report of two weeks ago (“…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.). Thursday the stock cleared the 175.16 pivot on volume of 26% above average, up 6% on the day. This was good considering the NFP report was due the following day (Friday). An alternative entrance would be on a takeout of the base top of 182.00, the 3/04 high. VIPS, while possessing good potential, also has higher risk due to the wide-and-loose look of most of its base.

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Weatherford International (WFT) was discussed in last week’s report (“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.”).

The referenced 21.90 high was exceeded last Wednesday, but not on a significant volume increase that was a requirement of our analysis from last week. In fact, volume was 46% below average. On Friday, volume finally kicked in to the tune of 52% above average as price rose 4%. Based on this level of renewed conviction, an entrance around Friday’s close of 22.84 can be taken, using a stop around the 20 ema of 21.33. This equates to risk of about 6.6%. This suggested stop level of 21.33 is just below the 21.50 area which previously served as resistance four times as price was basing.

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In summation, the averages are in solid uptrends, if on less-than-desired volume. Subsurface, more issues with buoyant prospects for ’14/’15 set up. Accordingly, the speculator has opportunity to take advantage of.

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 PANW and TRIP, 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.