Market Comment

May 26, 2014

May 27, 2014

Discipline is the bridge between goals and accomplishments.”

— Currency trader

The Nasdaq Composite put in a technically significant, if unheralded, pair of outings on Thursday and Friday. Thursday, the index printed a second higher high and Friday price cleared the top of a four-week trading range.

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Paving the way higher has been the Nasdaq 100 (QQQ), the larger issues within the Composite. The index has outperformed the S&P 500 in 11 of the last 12 sessions. Instead of lagging, small-capitalization shares are now performing in line with the S&P, but are not leading.

Beneath the surface, a few liquid glamours like Netflix (NFLX) and Google (GOOGL) turned the corner. This is significant.

Among the names, Actavis [s: act] is a generic drug maker expected to earn 44%/22% in ‘14/’15. Revenue growth has been robust in recent quarters. Price forms a constructive three-month pattern. This one can be monitored for an attractive entrance, as one does not exist currently.

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Avago Technologies (AVGO) is a recent breakout that is up 7% from launch. Estimates for the Singapore chip designer are 30%/30% for the October ‘14/’15 fiscal year. This is a 98 rs stock. Price came out of a two-week ledge on less-than-average, holiday-related trade on Friday. An aggressive operator looking for immediate exposure might consider entrance around Friday’s closing level of 70.55, with a 5% stop just below the two-week ledge which also coincides with the 20 ema.

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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. Worth watching for the next attractive entrance that may materialize.

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Cheetah Mobile (CMCM), discussed last week on the Twitter feed, came public two weeks ago. The Chinese security software developer did not move explosively post-IPO, however its sequential revenue growth has been excellent in recent quarters. Price is building its first base. One to monitor for very aggressive speculators.

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Enanta Pharmaceuticals (ENTA) is a biotech with estimates of 23%/999%+ for the September ‘14/’15 fiscal years. Price is nine weeks into a base and one day into a low handle. Like CMCM above, a few more days of sideways movement might set Thursday’s high of 40.50 as an aggressive cheater entrance. Otherwise, this is to be watched for a better entrance farther up the right side of the pattern.

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In terms of relative price strength and overall pattern, Google (GOOGL) is presently the No. 2 leading liquid glamour, just behind Netflix (below). It does not possess the rapid growth rate of NFLX, and thus cannot be expected to show the same horsepower on the price chart, all else being equal. In fact, GOOGL has been ignored in these reports for many months simply because its earnings growth was not in the same league as NFLX, LinkedIn (LNKD), Tesla Motors (TSLA), and Facebook (FB). These issues were in the vanguard of the ’13 advance, while older material like Apple (AAPL) and GOOGL represented sentimental favorites in the eyes of many, but had little to do with the cutting-edge leadership that is prime for growing an account.

Technically, like the Naz, GOOGL printed a second higher high and higher low last week. While NFLX showed better volume last week, GOOGL’s turnover was soft, perhaps due to the pre-holiday conditions. Worth watching.

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Illumina (ILMN) is a work in process, technically. The provider of genetic research systems is forecast to grow net by 20%/23% in ‘14/’15, per most Street seers. Price is under extreme accumulation and is more than halfway up the right side of a sound base. 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.

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Kate Spade & Co. (KATE) is a turnaround play. The marketer of clothing, accessories, and fragrances lost 31-cents-a-share in ’12, lost 15 cents in ’13, and the Street has pegged ‘14/’15 to show profits of 25 cents and 69 cents, the latter representing a 176% increase from that of ’14. For those who are unconcerned with buying cyclical issues when much of growth is not working, KATE offers a cheater entrance above the low handle’s high of 5/14 at 38.32. Otherwise, price can be monitored to see if it offers an entrance farther up the right side of its base.

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Live Nation Entertainment (LYV) is the giant concert and theatre promotion firm. It is a cyclical stock enjoying a turnaround. From a 4-cent loss per share in ’13, most analysts look for 22 cents profit in ’14 and 39 cents profit in ’15. So there appears to be plenty of octane to drive a move. Accumulation on the right side of the base is evident. 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.

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Michael Kors Holdings (KORS) shows an earnings estimate of 23% for the March ’15 fiscal year. Price forms a respectable base. While the expected growth rate does not imply KORS may be a big winner, this may appeal to some participants who seek larger, liquid names to fill out a more-diversified portfolio. 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.

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Netflix (NFLX) cleared the midpoint of its 11-week base last Wednesday on volume 53% above normal. The stock has plenty of firepower to catalyze a move, what with estimates of 98%/66% for ‘14/’15. At present, attractive entrance does not present itself. This is the horse among liquid glamours at this point in the cycle. It deserves monitoring for either a pullback entrance or something closer to the base top.

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Pacira Pharmaceuticals (PCRX) is expected to go from a per-share loss of $1.73 in ’13 to an expected loss of 63 cents in ’14 to an expected profit of $2.10 in ’15. Sequential revenue growth impresses. 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.

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Salix Pharmaceuticals (SLXP) is expected to record earnings growth of 92% this year per most analysts, followed by a slowdown to 15% next year. This is a 95 rs stock in a 99 rs group, the ethical drugs. The 3/19 high of 116.72 could potentially be used as a cheater entrance ahead of a possible pattern breakout.

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Trinity Industries (TRN) is still viewed favorably following the recent positive review in the MarketWatch column, which was followed by a breakout. We are watching it avidly for an opportunity to squeeze into a position, but at present attractive entrance does not exist.

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Travel content provider TripAdvisor (TRIP) is expected to notch earnings growth of 30%/29% for ‘14/’15, according to most analysts. Two weeks ago, price turned the corner of its constructive base, coming out of a head-and-shoulders bottom pattern on volume 70% above average. Price then dropped back below the pattern’s neckline and found support at the round number (80). Last week, TRIP set a new higher high and higher low, cementing the nascent uptrend as it pierced the 50-day moving average to the upside.

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.

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Vipshop Holdings (VIPS) 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. A mild positive Friday was the ability to hold above the top of VIPS’ internal range and the most recent swing high (see below chart).

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Zendesk (ZEN) is for the truly aggressive speculator. Sequential revenue growth impresses. As discussed on the Twitter feed* last week, this is a recent new issue that was up as much as 100%+ in its third day of trading. It pulled back for three days and closed very well on Friday, printing a bullish hammer pattern. Either the 5/20 high of 18.17 or Friday’s high of 16.46 can be considered as a very aggressive entrance.

*(If you are not already doing so, it might be worth your while to look at the Twitter feed, if only once a day, because very often what shows up in these reports and the Dow Jones MarketWatch column shows up on the Twitter feed first.)

What distinguishes ZEN from other recent new issues is that it 1) more than doubled by its third day, 2) corrected only 9.4% subsequent to this double, and 3) has the excellent sequentials.

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Zillow (Z) recently failed on its first two breakout attempts, before succeeding (apparently) on a third attempt last week. We felt the pattern was too wide and loose for our taste and thus were not attracted to it. This is one to watch (at least for sentiment purposes), however, as it is a leader in the growth sector with giant estimates of 71%/190% in ‘14/’15.

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In summation, both at the surface and subsurface, things improve at the margin. While there has been no O’Neil follow-through day, we believe an aggressive speculator can wade into the water with one or more test buys. While not a reason to necessarily buy anything, it is to be noted that one or a few big leaders often end up emerging from pattern setups prior to a follow-through day. This was illustrated in a past MarketWatch column that used Baidu (BIDU) and Equinix (EQIX) as two examples.

However, with that said, each participant has a different makeup and risk tolerance level. Thus, if in doubt, stay out.

Kevin Marder

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

Charts created using TradeStation. ©TradeStation Technologies, 2001-2014. All rights reserved.

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 a position in FB, 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.