“If a stock or the whole market cannot be advanced, the assumption is that it will decline — a market seldom stands still.”
–Richard Wyckoff, 1910
It is easy to like a market in which the pullbacks last all of a single session. The most recent one, which occurred Wednesday after a disappointing ISM number, was followed Thursday by a 1.3% gain and a new high for the move.
The ability to shrug off the ISM report said something, as did the two recent major accumulation days.
A positive is the outperformance of the Nasdaq Composite since the recent low in the averages two weeks ago. This is less a function of small-capitalization outperformance and more due to large-capitalization technology showing relative strength. Either way, it is welcomed.
Since our last report, several of the names highlighted then have responded well. These include Splunk (SPLK) and Ryland Group (RYL) on the long side, and Northern Tier Energy (NTI), Bonanza Creek Energy (BCEI), and gold on the short side. KB Home (KBH) was a stop-out.
We do not take credit for expecting gold to make its biggest two-day drop in 30 years. The market was vulnerable as noted in the report (“…gold looks as though it will come in from here and would be potentially shortable.”) which came out four days before the plunge . It is unlikely that anyone foresaw such a giant decline. At present, the SPDR Gold Trust (GLD) is forming a small ledge, with no directional bias evident.
Among the names, Cree (CREE) is the leading name in the suddenly-improving semiconductor group. The company is a leading producer of LED light bulbs. The bulbs shine as brightly as incandescents, yet compared to traditional bulbs they save 84% of the energy and last 25 times longer. Home Depot is the exclusive distributor of Cree bulbs for homes.
Most analysts eye earnings growth of 39%/38% for the June ‘13/’14 fiscal years. Most recently, these estimates were revised upward.
Technically, the stock broke out of a four-week shelf on Apr. 23. Volume was 96% above average. It then was shoved back into its pattern the next day on volume 238% above average. The stock has since regained its composure as volume has dried up. Friday saw price break out on volume 27% above average.
The view here is that CREE can be entered around Friday’s closing level of 58.13, with a stop just below last Thursday’s low of 54.20, or 7% lower.
Realogy Holdings (RLGY) is a real estate brokerage with brand names including Century 21, Coldwell Banker, and Sotheby’s International. The stock is a turnaround play after logging four-straight years of losses. After a per-share loss of $3.88 in ’12, most analysts look for earnings of $1.57 in ’13 and $2.55 in ’14 for a 62% growth rate.
Technically, a plus was the stock’s ability to weather a recent secondary offering. Volume exploded to over 25MM shares over a two-day period. This compares with average volume of 1.8MM. After advancing 53% since October, RLGY is moving up the right side of a 16% deep, six-week cup. Accumulation has been good. The stock can potentially be taken above the Mar. 25 high of 50.33.
Ambarella (AMBA) is another leader in the semiconductor space. While earnings are expected by most analysts to be flattish in the January ’14 fiscal year, they are expected to ramp by 30% in the ’15 year. Revenue growth has been steady between 20% and 28% over the past four quarters.
The stock came public last October at 6 and moved up to 16 before building its current five-week cup base. Price has found support at its 50-day line, a plus. Volume has come into the stock such that three major accumulation days have been posted in the last eight sessions. An entrance above the 16 high of the base could be considered, with a 6%-7% stop-loss. This one is fairly thin at just $6.3MM in average volume per day.
LinkedIn (LNKD) we took a position in on the pullback to its recent base. This was not a position trade, but a swing trade with a tight stop and modest target. After the target was quickly reached, the decision was made to play the position out for a larger gain. Just prior to Thursday’s earnings-related gap down, the position was up 3x our initial risk, with the stop-loss moved to lock in two-thirds of the gain. LNKD earnings report came out and the position was then exited at a small loss in the afterhours on Thursday.
Now why did we sell so soon after the gap? There are obviously those who are still in LNKD, hoping it recovers so they can either get out even or perhaps ride it on a new leg up. While every gap down situation is different, our opinion is that we are not in the business of hope. When the probabilities are no longer skewed in our favor, i.e. the overall trend is no longer with us, we will immediately exit the position with no questions asked.
Here is the key point: If price comes back, we have the option of re-entering a long. But if it continues lower, there is no telling where it will end up. The example of Crox (CROX) of a few years ago – another liquid glamour – comes to mind. The stock’s initial gap was roughly one-third. It then went down to less than $1.
Despite having never turned an annual profit, Workday (WDAY) has a few things going for it: 1) the ability of this recent new issue to double in its first four days post-offering last October, 2) Apr. 10’s big reversal day in which volume exploded to nearly 1,700% above average, 3) involvement in the high-growth cloud space specifically, and technology generally; 4) the presence of extreme accumulation, and 5) the current eight-week base being a reasonable 15% deep.
We would add to the above that quarterly sequential revenue growth has exceeded 10% over the past three quarters. This is the key metric used when examining a glamour with no earnings, either past or anticipated this year or next.
Price forms an eight-week cup-with-handle pattern. The Mar. 7 high of 65, which is the top of the base, represents a potential entry pivot. A 5% stop loss, just below the May 2 swing low of 61.32, would be appropriate.
Conns (CONN), an oil patch-based retailer of home appliances and equipment, is expected to grow earnings by 53%/28% in the January ‘14/’15 fiscal years. This is the top performer in the top-ranked industry group, consumer electronics. The stock has reasonable liquidity at $26MM in volume per day. Earnings are not expected out for a few weeks.
Price is forming a four-week shelf with a reasonable depth of 12%. It is hard not to pay attention to the top stock in the top group when it is four weeks toward a new base. All the more so when the estimates are what they are here. Missing from the equation is the “something new” that is consistent with most of history’s biggest winners.
CONN can potentially be taken above the Apr. 25 high of 45.18 with a 7% stop loss.
Trulia (TRLA) takes the cake as the most-out-of-control glamour in the current cycle. We all know what a Trulia looks like at a party. Boisterous, careening, completely unpredictable. The last two declines as seen on the below chart look similar to a bucking bronco.
After six years of losses, with ’12 losing $0.40 per share, most analysts expect a 16-cent-per-share gain in ’13 and a 77-cent-per-share profit in ’14, the latter amounting to a whopping 381% increase. This explains the wild behavior of TRLA. A plus is the stock’s industry group, Internet – Content, which is ranked in the top few percentile of all groups according to relative price strength.
Price is 3.7% past the most logical support area which is topped by the last swing high in the stock, 33.76 of Apr. 17. While this is not considered extended, given the unpredictable nature of the stock, we would prefer to wait until a pullback presents itself. Certainly worth watching.
We had some success with Three D Systems (DDD) in Q4 and welcome the stock back into the favored-glamour camp. It meets the “something new” test as its three-dimensional printer line, along with those of its rivals, is revolutionary. Most analysts look for earnings growth of 28%/25% in ‘13/’14.
The stock is forming a picturesque 14-week cup pattern. It is too soon to know exactly where the entry pivot is, or whether a handle or sideways drift will create a favorable entrance before setting a new high. Worth watching closely.
Pacira Pharmaceuticals (PCRX) is a leader in the biotech group, which is ranked in the top 2 percentile for relative strength. Being a bio, this is a higher-risk play. Liquidity is just $14MM per day in volume. Earnings are expected out this week. What is notable is the fairly tight base in the aftermath of a 50% move in less than two weeks. This is unexpected, and therefore has our attention.
Elsewhere, YY Inc. (YY), not shown, looks like a comer after Friday’s 5.8% surge on volume 415% above average. This is tiny at just $4.3MM in average volume each day.
Eagle Materials (EXP), not shown, with expected earnings growth of 74% in the March ’14 fiscal year, looks interesting above the Mar. 14 high of 72.31.
In summation, the takeaway of the past week is that the speculative sentiment has increased two notches, a welcome development for high relative strength players. This has resulted in more speculative growth stock glamours in play, and the intermediate-term speculator should respond accordingly.
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