Market Comment

September 30, 2013

October 1, 2013

 

If it’s obvious, it’s obviously wrong!

 

–Joe Granville

 

Shares remain in good shape, the Nasdaq off as much as a slim 1.7% thus far in this week-plus sideways drift. While the weaker sister, the S&P is down as much as a mild 3.2%, barely qualifying for reaction territory, let alone a correction.

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Some deterioration is being seen in some leaders as the Nasdaq softens. There are a number of situations that can easily roll over and show their cards should SPX lose another 1%-1.5%. Especially in this wild-card politico environment. While the Nasdaq has been marching to the beat of its own drummer, it will not be able to do this indefinitely should the eight-day decline in SPX pick up some steam. The market remains devoid of attractive setups. The following is the list, not a partial list, from our vantage point.

Among the names, ICON (ICLR) showed good volume of 67% above normal Monday on an otherwise down day for most issues. This was good enough to bring price out of a six-week pattern. The medical research services provider can be entered around Monday’s closing level of 40.93. This is 5% above the 50-day line. Another possible stop level (preferred) might be below last week’s swing low, 7% below Monday’s close.

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Raptor Pharmaceutical (RPTP) is a development-stage biotechnology concern whose focus is acute and chronic conditions. As such, there are no earnings nor revenue. Despite this, the stock is up 200% in seven months. Monday, the stock barely eclipsed the high of its three-week shelf. That price rose 2% Monday on volume 67% above average, and on a day in which its group fell 0.7%, says RPTP may be able to make some headway in coming sessions, the general market willing. This, if it can get past the 15 psych level. Accordingly, a potential entrance pivot would lie in a break of 15.

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Chipotle Mexican Grill (CMG) has not gotten our attention for some time following its descent of close to 50% over a six-month period in ‘12. Estimates are nice and steady at 21%/22% for ‘13/’14. Earnings stability is very high at a standard deviation of 8. Monday CMG rose 2.3% on volume 70% above average, going out well. A potential entrance could be had on a break of Monday’s high of 429.78. Earnings are expected in mid-October.

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Valiant Pharmaceuticals (VRX) is in the hot biotech/ethical drug area of the economy. Estimates are for 36%/40% earnings growth in ‘13/’14. A week ago, VRX came out of a tight, five-week pattern on decent, if not great, volume. The last three weeks of this pattern were constructive, showing tight price action and a marked dry-up in volume.

Following this breakout, price was unable to follow through. Price slipped back into the base and has formed a handle. Many patterns like this one do not follow through on the first breakout attempt. In some situations, it is worthwhile to try the second attempt. Some traders will draw the line after the second failed attempt, while others will try a third time due to the “rule of three.” Others will only trade the second or third attempts, as they see those as being lower-risk than the first attempt.

The rule of three states that the crowd will generally figure out what is going on by the third occurrence of something, e.g. a breakout attempt. And since the crowd is usually incorrect, that third occurrence will often have a result that is contra to that of the first two.

A takeout of VRX’s 9/19 high of 106.98 would constitute a second attempt entrance, and could be taken by an aggressive speculator.

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Actavis (ACT), discussed recently on the Gilmoreport.com Facebook page, is believed to have the potential to be a burner in this market due to what we will call estimate acceleration (’13 estimates for 39% growth rising to ’14’s 50% estimate), as well as good relative strength since March, and a high level of earnings stability, which institutions crave. Estimate acceleration is particularly exciting when a) the numbers are beefy, e.g. 39% to 50%, and not something tamer, like 10% to 15%; and b) a stock is showing superior relative price strength.

 

ACT is the old Watson Pharmaceuticals, following its merger with a European concern. Price is about 2% above its recent ascending structure, and can be entered around Monday’s closing level of 144.

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Sticking with the biotechnology theme, Biogen (BIIB) is a liquid glamour owned far and wide by institutions due to its prodigious estimates of 32%/28% for ‘13/’14, not to mention its ridiculous level of earnings stability (just 4%, virtually unheard of for a company growing earnings at this rate). Two weeks ago the stock came out of a 16-week, double bottom base.

(Not every double bottom base has a second low that undercuts the first low. While it is preferable to see this, it is also a positive to see a test of a prior low occur on less volume than the first low, and price to hold up above the first low. This indicates participants are showing more urgency to their buying, as they are willing to pay up for stock in the open market. Is the reason why BIIB did not follow through post-breakout related to its printing a higher low four weeks earlier in its pattern? We like an a-b-c complex retracement as much as the next guy, but seeing a higher low does not render a pattern faulty.)

BIIB post-breakout has been idling in a 4% range. An aggressive speculator may consider taking the stock as a second attempt entrance above the 9/19 high of 248.95.

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FireEye (FEYE) is a recent new issue that more than doubled in its first day on the market. Fundamentally, there is not a lot to go on. The security software specialist has lost money the last four years and is expected to lose more this year and next. Sequential revenue growth has generally been impressive. For the very aggressive participant, a potential entrance pivot might present itself if price holds below Friday’s high of 43 for a few days or more. A simple break above the 9/20 high of 44.89 is also a possibility for a very aggressive operator, with correspondingly higher risk. #NotForEveryone.

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In summation, we remain constructive, while cognizant of the market being in the midst of the notorious September/October period. Speculators who believe they are underexposed should not push the envelope, but instead wait for the market to come to them. This is always the best policy, particularly in a market such as the current one which offers very few attractive setups.

 

Kevin Marder

 

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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Gil Morales & Company LLC (“GMC”), Marder Investment Advisors Corp., or an affiliate thereof held no positions, though positions are subject to change at any time and without notice.
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