“In order to be profitable, you must learn how to win the real game: the mental side of the business.”
The S&P is in a four-week reaction of 4.8%, while the Nasdaq is off as much as 3.3%. Volume has been lighter on the Nasdaq’s decline than that of the S&P, due to the Naz being the leading index.
In our last report we noted that a number of issues were two or three weeks into a basing process. “One scenario is a market that does nothing but move sideways to modestly lower into Labor Day. This would provide the glamours with five-week bases and increase their attractiveness vis-à-vis the medium-term speculator.”
Since then, the market has had the benefit of more time spent basing. A number of issues completed the fourth week of basing last week. For those participants who insist on entering on a five-week-or-longer base, this is good news.
Some names, like Tangoe (TNGO), Splunk (SPLK), Fleetmatics Group (FLTX), Facebook (FB), Tesla Motors (TSLA), and Fleetcor Technologies, came out of their abbreviated patterns since then.
In this report, we discuss a number of glamours which are either a few weeks into their basing process, or have the requisite five-week pattern that we feel defines a base. Every participant attacks the market in a slightly different way, while following a similar trend-following strategy. For those that insist on entering only on the breakout of a valid base, the pickings are slim.
For those comfortable with abbreviated patterns, there are several here for use either if/when the market firms up or in the meantime.
Over the years, we have grown accustomed to wildness and unpredictability happening in September. The best part about it is that it sometimes sets the table for an important turning point in the September/October period. This can then sometimes lead to a nice Q4 move.
We have noted that during secondary corrections in the averages, at least one or two outstanding leaders ignore the softness to break out. Examples cited were Baidu (BIDU) and Equinix (EQIX). More-aggressive speculators can take these in line with their own risk tolerances, as long as portfolio exposure respects the fact that the averages have yet to turn the corner and head up.
We do not begin looking for an O’Neil follow-through day until after one of the averages declines by at least 8% off its peak. Even then, it is not used as a mechanical signal.
The Four Horsemen discussed in previous reports as offering a superior gauge of the institutional sentiment, LinkedIn (LNKD), Facebook (FB), Tesla Motors (TSLA), and Netflix (NFLX), all act fine. These do not offer attractive entry at present. In order to allow these titles to form new bases, it would not be the worst thing in the world if the averages come in during September.
The primary positive is the buoyancy shown by dozens of speculative growth-stock glamours. This is the same behavior that we recognized during the May/June decline in the averages. Then, this action suggested the averages would not come off much.
At present, we arrive at the same conclusion. This should also be tempered with the realization that the farther the averages come off their peaks, the more likely the leaders will eventually cave and join the rest of the market lower. For individual issues can only buck the general market trend for so long.
Among the names, Conns (CONN), while not a loud or flashy name, is up nearly 400% since last summer. The consumer electronics retailer is a 98 rs stock in a 99 group. We like the estimated earnings growth of 63%/32% for the January ‘14/’15 fiscal years. The stock is 12 days into a shelf, hit a new high on Thursday, and should be monitored.
Acadia Healthcare (ACHC) is a psychiatric services provider. Earnings growth is expected to be a healthy 56%/30% for ‘13/’14. Sequential revenue growth has been impressive over the last few quarters. Price is forming a four-week consolidation pattern despite the decaying averages. This has resulted in a nicely, upward sloping rs line. A potential entrance could be considered above the 38.91 high.
Zillow (Z) is a prominent real estate data provider. While the earnings picture has been spotty, quarterly sequential revenue growth has been very good over the last seven periods. This is a 99 rs stock in a 96 group.
Wednesday, price was up 4.5% on volume 41% above average and Thursday it was up another 7.4% on volume 132% above normal. Following a 53% move in five weeks, for price to complete a short, three-week cup Thursday on the second-heaviest volume for an up day in over six months says that something is going on here. While excessive at a depth of 17.8% for such a short pattern, outstanding leaders, and Z qualifies due to its 300% move in nine months, often defy categorization.
(Leaders do not know that their behavior may not qualify as textbook behavior. They are simply responding to institutional behavior. When an institution, or 10, seek to accumulate a title, they do so with other things in mind than whether a name is operating according to “textbook behavior.”
For this reason, a study of history’s outstanding winners reveals many containing “imperfections” in their price patterns. Some market students might consider these imperfections to be flaws, disqualifying them from potential purchase. The moral here is that a participant should be aware that being too finicky about whether a pattern fits a preconceived notion of what price behavior is supposed to look like may reduce one’s chances of climbing aboard a big winner that is otherwise showing abnormal accumulation.
At the same time, this is not to say that a speculator who buys issues that emerge from bases should begin buying anything that shows unusual accumulation. Other factors, including general market tone, need to be considered.)
The longer that Z does nothing, the more attractive it will appear as a breakout candidate. In the meantime, a takeout of the 8/29 high of 98.40 can be considered by an aggressive speculator.
Invensense (INVN) is a semiconductor maker focused on consumer electronics devices. Most analysts expect earnings growth of 21%/29% for the March ‘14/’15 fiscal years.
Price is four weeks into a triangular pattern. The most compelling piece to the chart is the conspicuous accumulation that first occurred in early May. Most recently, four weeks ago price jumped 13% on volume 385% above normal. An aggressive speculator might consider a breakout above the Wednesday high of 17.98. A somewhat wide stop of 10% below entry could be used to compensate for the pattern showing its low toward the far left side of the base. This wider-than-normal stop would then necessitate a correspondingly smaller position size, if not a junior position (half normal).
Netsuite (N) is a developer of customer relationship management software. Most analysts eye earnings growth of 59% in ’14, following an expected 4% in ’13. Technically, price forms a seven-week base with a very reasonable depth of roughly 10%. The fact that N forms a legitimate base of five-plus weeks is a rarity among glamours. The rs line has already reached new-high ground, a plus.
A potential entrance exists in a takeout of the base top of 100.49, the high of 8/5.
Nationstar Mortgage Holdings (NSM) services residential mortgages of a nonbank nature. The most striking thing about NSM is its earnings multiple of 13, extremely low for a company expected to grow earnings by 99%/50% in ‘13/’14. This is a sign that the earnings stream is cyclical, not recession-resistant as is the case with a classic growth outfit.
Price forms a tight, four-week, flat base of 9.1% depth. Volume has receded as the base formation as progressed. A potential entrance above the 51.55 of the base could be taken by a speculator.
Ligand Pharmaceuticals (LGND) is a biotech concern that logged a 2-cent-a-share loss in ’12, but is expected by most analysts to record a 51-cent profit in ’13 and a $1.01 profit in ’14. Following a 70% move after breaking out of its last base three months ago, LGND has been consolidating its gain in a six-week cup. This is a 98 rs stock in a 98 group.
A potential entrance above the base top of 50.85 presents itself. The rs line moved into new-high ground ahead of price, a positive.
Acadia Pharmaceuticals (ACAD) is a 99 rs stock in a 98 group, and accumulation has been very good. This is a development-stage biotech concern, and there are no earnings. Despite the lack of profits, ACAD is up over 1,100% over the past 10 months. Price is currently in a four-week shelf with a 12% depth, a positive. A potential entry would be a clearing of the pattern top of 21.85, the 8/6 high.
In summation, the leading growth titles continue to hold up better than the general market. Ditto for the Nasdaq, which continues as the leading index. These are shares’ two primary positives. The Four Horsemen serve as the most propitious measure of institutional sentiment at the margin. Either the general market will firm, following the Four Horsemen’s lead, or the FH and other leaders will begin to break down under the weight of institutions tossing in the towel. It is important to keep an open mind as to either of these scenarios transpiring. September is a most unique month. Traditionally, anything can happen here. Throw in the Mideast, the ultimate market wild card for decades, and a flexible, open mind will pay the biggest dividends.
In the meantime, a generous cash position is suggested.
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