Market Comment

Scattered Showers

May 13, 2012


“Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, preferably one that is sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading.”

— Mark Weinstein, “Market Wizard”

The downdraft took on a life of its own last week, with the Nasdaq putting in an unusual four distribution days in a row, and bringing to mind the August downpour.

As players left their desks Friday, and with August and May ’10 in their memories, there was little expectation of the de rigueur bounce.


The European situation decays. Talk circulated of the potential for bank runs in Greece and Spain. Spanish 10s, after printing a high for the move of 6.35% on Tuesday, dropped on Wednesday and Friday, going out at 6.27%.

Regardless of Europe, the overall tide moves out, mainly due to a China slowdown. The view here is that China cannot simply flip on the stimulus switch as it did so well in ’09. Debt is higher now and so is inflation. The markets clearly sense this, and this is why commodities and emerging markets began lagging in August.


Petsmart (PETM), Dunkin’ Brands Group (DNKN), Sally Beauty Holdings (SBH), Pharmacyclics (PCYC), Liquidity Services (LQDT),

Zillow (Z), Vocera (VCRA), Demandware (DWRE), Spirit Airlines (SAVE),

When a market comes off deliberately and cannot stage much of a rebound, that says something. The lethargy seen over the past three sessions in the averages is unexpected. And it is the unexpected that is of interest.

The S&P, not shown here, appears weaker than the Naz, thanks in part to larger exposure to the financial and materials sectors, and saw two distribution days last week.


Spanish 10s, which had retreated below the key 6% level on Apr. 24 and had stayed there for the next two weeks, vaulted 24 basis points on Wednesday to 6.08% before going out Friday at 6.01%. This is the canary in the coal mine.

It is surprising that shares have not come off more in light of the worsening of the euro-zone. The currency is shown below against the buck. Although the market is far smarter than we, this is one of those times in which we wonder whether the market is underestimating the risk, in this case of the European situation getting much worse.

For its part, the euro has fallen in six of the last seven days. The medium-term trend is clear. Short-term, things are a bit overdone on the down side.


Critically, at the margin, leadership decays. For every glamour that improved its technical standing last week, 1.5 deteriorated.

As one example, while Chipotle Mexican Grill (CMG) eked out a negligible gain last week, it put in a new low for the move and printed a distribution day.

With its deep liquidity ($233MM in average daily dollar volume on top of a $12B market capitalization), its substantial earnings estimates (30%/25% for ’12/’13), and its very high level of earnings stability, we are viewing Chipotle as an excellent barometer of institutional sentiment, perhaps just below Apple and in importance.

The below chart shows Chipotle moving up close to 40% from the Dec. 19 low to its recent peak. Since then, it has declined as much as 11%. This is a normal retracement, and if every leader had a base that was 11% deep following a material advance, the world might be a better place. This will be monitored with special interest to see if this is all it is, or if the pullback extends.

Chipotle Mexican Grill (CMG) Gilmo Report Stock Chart

The few that remain in base-building mode include Petsmart (PETM) and Pharmacyclics (PCYC).

Pharmacyclics (PCYC) Gilmo Report Stock Chart

At the same time, a number of leaders that had held up fairly well were taken out of contention last week due to an abundance of sellers. These included Rackspace Hosting (RAX), (PCLN), (CRM), Epam Systems (EPAM), Qihoo 360 (QIHU), Francesca’s Holdings (FRAN), and Michael Kors Holdings (KORS). now faces an extended period of repair as it deals with a heightened level of speculation/attention placed upon it by many participants. Gilmo Report Stock Chart

One of the myths of this game is that it is important to “know” where price will be a week from now, a month from now, a year from now. It may be for some strategies that rely upon a top-down fundamental approach. For technically-based speculation such as the strategy discussed in these reports, all that is important is to know what the market has already done.

Since this is a trend-following strategy, prediction or personal opinion never factor into the game plan. For it is a matter of recognizing the direction and underlying strength of the averages, and then combining that with an understanding of who the leadership is, what the leadership is doing, and how the leadership is doing it.

Along these lines, in our opinion, the most valuable quote ever uttered on investing/trading is the one that appears at the top of this report. It is by Bill O’Neil, a living legend.

In summation, the averages worsened last week and so did the leaders. This is all we need to know to play the game. Unless a speculator is holding leadership names that have held up well and near their old highs (DollarTree, Sally Beauty, Whole Foods, Intuitive Surgical, et alia), a high cash position is warranted until the storm lets up. Of import will be a focus on what the market is doing and not what happens in Europe. This approach places a premium on flexibility, as the market will usually bottom when it is least obvious.

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.