Market Comment

Risk On

July 24, 2011


“Rule number one for success is make your own rules.”

                — Paul Stanley

Shares have had a fair amount thrown at them, and yet they hold up. Regardless of the outcome of the Washington budget talks, and the initial reaction thereto, the direction of least resistance remains up. It is unlikely that the market is currently priced for a US default. Such a development cannot be predicted, and thus we look at what the market has already done and take action accordingly.

Friday was a positive. The S&P 500, not shown, put in an inside day and went out well, while the leading index, the Naz, went out ahead of an uncertain weekend near the session high.

There is nothing magical about a head-and-shoulders continuation pattern, such as that seen below. It merely signifies a market transitioning from a down trend to an uptrend. A plus.

Silver looks pregnant.

As the below chart indicates, ProShares Ultra Silver (AGQ), the 2x version whose chart is substantially the same as the unlevered iShares Silver Trust (SLV), resembles a low-level cup-with-handle. We are using a wider stop than usual given this number’s potential for extreme volatility and in light of our taking a smaller-than-normal initial position. In the chart, the stop is shown by the horizontal line drawn just south of the July 12 swing low. We expect an add-on position to be taken upon either a break of the handle currently being formed or a pullback to the general vicinity of where our stop rests. The stop will likely be lifted upon a decisive breakout of the handle.

Bullion, meanwhile, easily absorbed two days of selling last week, as the below chart of SPDR Gold Trust (GLD) indicates. Like AGQ, this should also be given plenty of leeway in case there is a reaction to a breaking of the logjam in Washington.

The speculative growth stock glamours continue to act well.

Apple (AAPL) gapped up following its earnings release. It, and other of the liquid glamours, are signposting richer quotations for shares generally. As the below chart shows, the stock did not make the final low of its base until just a short time before its breakout. We have spoken before about this type of behavior which we prefer to see. What we do not prefer to see is a stock that makes the low of its base toward the far left side of its pattern. This creates a situation where price rises through most of its base. This does not give the stock enough time to shake the attention of speculators. Apple’s base was more likely to lose the attention of players, especially after printing the second lower low, which was the low of the base.

Baidu (BIDU) releases earnings after Monday’s close. A liquid glamour like this one is always watched with special interest because of what it says about institutional sentiment. The stock corrected 27% in its 13-week base, normal for a leading stock. A logical entry point would be on a takeout of the handle at 155.90. The potential for a gap open on Tuesday following the earnings release obviously is there.

Outside of Amgen (AMGN) in ’91, the only time we have ever seriously been interested in the bios was in ’99 when the entire group skyrocketed, a term we have not used since then. As mentioned last week, Alexion Pharmaceuticals (ALXN) “…has shown nice completion of its base. Biotechs are always a different breed when it comes to playability. This one has shown an improving bottom line for five years running, with ’11/’12 estimates of 28%/32%, and is therefore not just another biotech.”

Yandex (YNDX) is the leading search engine in Russia, accounting for 64% of Internet searches in that country in ’10. The company also operates in Ukraine, Kazakhstan, and Belarus. Earnings are estimated at 50%/44% for ’10/’11, and 120 mutual funds own the stock already. In light of the success shown by other dominant search engines such as Google (GOOG) and Baidu (BIDU), and also due to its new-issue status, this is one we are monitoring. Liquidity is very good at $125MM average daily dollar volume. Earnings are to be released this coming week.

A chart of the recent IPO is shown below. A logical entry would be on a takeout of 7/11’s high at 37.09.

Sequans Communications (SQNS) designs 4G chips for smartphones, routers, and other cutting-edge devices. The French concern went public at $10 on 4/15 and nearly doubled in its first six weeks. Earnings are expected to grow 82% in ’12 and percentage revenue growth has been triple-digit on a year/year basis for each of the past five quarters. Quarterly sequential revenue growth has exceeded 10% during this same period. Mutual funds holding the stock on June 30 totaled just five. This is not a liquid stock: Market capitalization is $546MM and average daily dollar volume is $17MM. The shares are also a teenager.

Add this all up and you have a very speculative issue. A logical entry point would be on a takeout of the 7/6 high of 17.80, as shown by the horizontal line in the below chart. Earnings are to be released before Thursday’s open.

Linkedin (LNKD), the most interesting recent IPO, follows the recipe we like to see in a recent new issue: a rebound following the to-be-expected selloff, and then a small pullback to create a pivot. In this case, the title has formed a handle over the past five days. A logical entry would be on a takeout of the 7/15 high of 110.50.

In summation, the budget crisis is muddying the waters, yet the clear tone beneath it is a market seeking upward revaluation – once the dust ultimately settles. This is evident by the lack of selling pressure at the surface, the underperformance of defensive sectors like consumer staples, utilities, telecom, and healthcare, and renewed institutional interest in the liquid glamours. Pattern setups are not ubiquitous among growth titles. Gold and silver ETFs offer the most attractive vehicles technically, albeit with potentially sizable volatility in coming weeks.

Kevin Marder

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.