“When the least-probable scenario plays out, there’s a very powerful reason why.”
— Linda Raschke
Shares started out last week with three-straight down days before gaining their composure and rising on Thursday and Friday. Nasdaq volume was below average all five days.
The Nasdaq has lagged for nearly eight weeks. This reflects the diminished level of speculative sentiment which peaked Oct. 1. This underperformance is easily recognized by looking at the 20 ema, which has contained the S&P for its entire move up off the Oct. 9 lows, vs. the Nasdaq, which undercut its own 20 on four sessions.
Nasdaq underperformance is not fatal. However, along with a few other flaws, such as the topping of most of the Four Horsemen and the lagging posture of small-capitalization names, it is emblematic of a market that is maturing from one in which everything in growth went up to one in which there is opportunity, just less of it.
Under these conditions, leading issues staging breakouts may be less explosive than earlier this year. Follow-through progress may be slower. Expectations should be tempered, accordingly.
Within the list, there is some firming in the oil & gas explorers/producers and also the resumption of biotechs as leaders. The latter stand a good chance of recording durable mark-ups because they offer deep liquidity, good earnings growth, and high-to-extremely-high earnings stability. This latter fact makes it easy for institutions to hold them, which is good for speculators.
Among the names, Biogen (BIIB) is slotted for earnings growth of 29% in ’14, per most analysts. Over the past three to five years, the standard deviation of its earnings has been 4%, an extremely high level for any stock, let alone one expected to grow at a rate such as BIIB’s. Friday, price gapped up and out of a four-week cup pattern, +13% on volume 289% above usual. As the stock essentially went sideways for the past six months, the gap is not considered an exhaustion gap that typically is associated with climactic behavior. An aggressive speculator can consider entrance around Friday’s closing level of 285.62, with a stop just below the low of Friday, or 274.98. This would be less than 4% risk. An initial starter position of half normal size would reduce risk further, to a de facto 2%.
Celgene (CELG) is expected to post earnings growth of 22%/21% in ‘13/’14. The stability of past earnings is close to as high as it gets, just 2% standard deviation over the past three to five years. This has “institutional quality” written all over it. Price broke out of a five-week cup on Friday. Volume was slightly disappointing at 21% above average. A position can potentially be entered around Friday’s closing level of 163.33. A 7% protective sell stop would be close to the 50 ma line.
Gilead Sciences (GILD) is forecast by the Street to produce 57% earnings growth in ’14, up from 3% in ’13. The three-to-five-year earnings stability has been at a standard deviation of 11%, extremely good for a company with this type of expected growth. Friday, price cleared a three-week cup-like pattern on volume more than double average. An aggressive participant can consider entrance around Friday’s closing level of 74.27, using a standard 5%-7% as a protective stop.
Calamp (CAMP) was noted in our week-ago report: “We would be looking at this as a standard breakout entrance above the 26.14 high of 10/18. Earnings are expected in December.” The comment stands, with the addition of a potential cheater entrance pivot of 25.69, the 11/18 high.
Harman International Industries (HAR) makes high-quality stereo equipment, and is therefore not a true recession-resistant growth concern that we would normally target. The name is a play on expanding consumer spending as economic growth picks up. Most analysts look for 29%/26% earnings growth in the June ‘14/’15 fiscal years.
Technically, price forms a three-week pennant after staging two high-volume breakouts over the past four months. Based on the healthy growth estimates, the major-volume backed breakouts, and the tightness of the current pattern, the 85.76 Halloween high can be considered as an entrance pivot. A cheater pivot using last week’s high is also possible, but we would prefer to see something a little more than that.
Melco Crown Entertainment (MPEL) was discussed in last week’s report: “After an 80%+ run from July into October, price forms a well-structured four-week, flat shelf with good depth. The stock could be taken above the 37 high of 10/21.” The comment stands.
Nexstar Broadcasting (NXST) was mentioned in reports of last week and also two weeks ago, the latter of which said “…can potentially be taken above the 48.19 high set on 10/15.” Friday, price cleared its five-week flat base on volume 45% above normal. A minus was the inability of price to close in the upper reaches of its range. The stock can still be entered around Friday’s closing level of 48.91, as it is less than 2% past its entrance pivot. This is a 99 rs stock in a 99 group.
Pacira Pharmaceuticals (PCRX) was noted here in last week’s report: “…a takeout of Friday’s high of 56.01 represents a potential entrance for the speculator.” Price cleared 56.01 on Monday, before pulling back to the 20. This was a 7% pullback, which may or may not have been a stop-out. This was the first attempt at clearing resistance at 55.99, and many times it takes two or three attempts before clearing resistance for good (this is the same for support).
(We will take second attempts. We generally will not take a third attempt, except occasionally. However, this is purely personal preference, and many players will take the third and beyond, while others will only trade the first. The fact is that price will only sometimes make it through on the first attempt, and will often make it on the second. This applies to all timeframes, from tick to monthly.)
The pullback last week created what appears as a handle to go with the w-shaped body of the pattern. The 11/18 high of 56.94 can be used as a potential pivot.
Envestnet (ENV) was discussed in the week-ago report: “Based on the impressive jump in sequential quarterly revenue growth over the last two periods (the most recent one being especially kinetic), the reasonable 13% depth to its current three-week consolidation pattern in light of a 37% move in just two weeks prior, and the issue’s ability to absorb a secondary offering which was capped by 10/11’s 15% gap move on volume an explosive 1,249% above average, a clearing of 10/24’s high of 38.70 represents a potentially attractive entrance.”
The comment stands. Price closed at 38.70 Friday, after trading up to 38.90 intraday.
Fleetcor Technologies (FLT) is expected by most analysts to grow earnings by 23% in ’14, following an estimated 35% in ’13. Earnings stability has been quite high, at just 8% standard deviation over the past three to five years. Price on Friday cleared the top of a three-week ascending triangle pattern. Volume was 71% above average, though the price move was just 1.3%. A potential entrance exists should price exceed Friday’s high of 122.09.
Nu Skin Enterprise (NUS) is a marketer of personal care products. Most analysts look for 28% earnings growth in ’14. Earnings stability is extremely high at a very low standard deviation of 4% over the last three to five years. After tripling over an eight-month period, price came out of a four-week pattern late last week on volume. As NUS is not materially extended, a potential entrance would be around Friday’s close of 125.39.
Shutterstock (SSTK) was discussed in the week-ago report: “Based on the estimate acceleration, the steady revenue growth at a high level, the recent high demand at the 50 ma, the reasonable depth to the base, the two attempts at clearing resistance at 76.12, and the superb performance since going public 13 months ago at 17, a takeout of the 76.12 level can be considered as an entrance.”
The comment stands.
Valeant Pharmaceuticals (VRX) should grow earnings by 36%/42% in ‘13/’14, per most analysts. Estimate acceleration such as seen here is always of interest. Revenue growth over the past eight quarters has been excellent. Earnings stability is very respectable for a company growing at this pace. 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.
Winnebago Industries (WGO) is a prominent motor home and RV manufacturer that is a play on the housing sector and the economic recovery. Most analysts see earnings growing 34%/22% in the August ‘14/’15 fiscal years. This is a cyclical stock whose fortunes will rise and fall with the economy. We recall how in the ‘92/’93 period, which was not a period of growth-stock leadership, Bill O’Neil was interested in two cyclical groups, the builders and the brokers.
Technically, WGO forms a four-week, w-shaped pattern. The 31.13 high of 10/29 represents a potential entrance.
In summation, given that the trend of the averages remains up, selective buying is valid. Speculators should temper their expectations of what breakouts and follow-throughs will produce, as the speculative sentiment is different from what existed pre-October 1.
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