Market Comment

Summer slowness

August 12, 2012

“The fastest way to the bank is education.”

— Steve Nison

Shares put in a constructive week technically, with Tuesday’s higher volume rise the centerpiece of last week’s activity. Prices then spun their wheels on Wednesday, Thursday, and Friday, as range contracted and volume ebbed.

The action is viewed as a plus, and more evidence that market participants are content to add to positions and sit on them, as opposed to selling into the strength.

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The S&P 500 has been the leader among the big three averages.

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Within the list, the oils and technology lead, trailed by the industrials. This is not considered “great” leadership, but having technology in there does say something about the speculative sentiment.

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The wild card, as always, is the Middle East. The prospect of an Israeli-Iran war is viewed as the big risk from among China, Europe, and the soft domestic economy. The onset of recent Middle East wars, such as ’91 and ’03, was trumpeted in advance. Investors had time to prepare. A potential attack on Iran by Israel is unlikely to be announced beforehand. This possibility is behind the resurgence in the oils, in our opinion.

Notwithstanding the above, speculation in leading titles is believed to be best accomplished by a focus on the present and not what might happen in the future.

On that score, the current market does not offer many valid setups. Yes, leading actors do hold up for the most part. But they suffer from the type of choppiness seen in the averages. The previous chart of the S&P best illustrates this. Price has been moving up in stair-step fashion, with higher highs and higher lows. However those pullbacks after the highs are made nearly take out the previous short-term rally.

Comparing this to the very-smooth Q1 advance in the averages best explains things.

The cause of this choppiness is the unwillingness of institutions to steadily accumulate stock. The reasons for this tentativeness are unimportant. Time will sort this out. What is important at this juncture is for the momentum player in growth stocks to realize that the odds are what they are – and to play his or her hand accordingly. Or not to play at all.

Among the names, the long position entered in Apple (AAPL) above the April 10 high of 619.87, and mentioned in recent reports, holds. We had noted that “a less-aggressive player could wait for the April 10 high of 644.00 to be taken out before entering.” This comment still holds, though it should be noted that many players are watching this high.

Since we are technical traders, we do not look at Apple as a best-of-breed-technology story. We look at it as a supply-demand story. And on this score, there is nothing to dislike about AAPL. The stock is going through a normal base-building period subsequent to a 4.5-month run of 77%. Not bad for an old gal.

Apple (AAPL) Gilmo Report Stock Chart

The July 9 high of 60.05 for Pharmacyclics (PCYC) continues to loom as a potential pivot for entry. Last week’s note holds (“Because of the heavy attention cast on this issue, and the rather obvious-looking base, we would prefer for the stock to do nothing for a few more weeks before coming out. This would hopefully serve the purpose of taking more attention away from PCYC.”).

The chance of a PCYC breakout succeeding increases the longer price remains in a basing mode. This is a biotech, and presents higher risk.

Pharmacyclics (PCYC) Gilmo Report Stock Chart

For an aggressive operator, Acadia Healthcare (ACHC) sets up in a five-week base with a potential entry of Thursday’s high at 19. Earnings are turning positive, next year shows expected EPS growth of 32%, and recent quarterly sequential revenue growth is impressive. Mutual fund sponsorship increases steadily in recent quarters, and industry group strength is near the top of all groups. This is higher-risk, as market capitalization is less than $800MM and average dollar volume is about $5MM.

Acadia Healthcare (ACHC Gilmo Report Stock Chart

Rackspace Hosting (RAX) is worth watching. Fundamentals are excellent, and earnings stability is quite high for a company with such fast growth. Last week’s big rise may portend big things to come. For now, we would let price bide its time, pending an attractive entry.

Rackspace Hosting (RAX) Gilmo Report Stock Chart

Zillow (Z) continues to find its footing as it builds a long, multi-month base following its widely-watched initial public offering of a year ago. The July 19 high of 44 could potentially be used as an entry pivot.

Zillow (Z) Gilmo Report Stock Chart

Linkedin (LNKD) was noted here last week (“A takeout of the July 5 high of 109.90 would represent a breakout of a five-week consolidation zone, and could be used as a potential entry for the aggressive speculator.”). The stock broke above the July 5 high and has since pulled back to just above the 50-day moving average.

Last week’s report went on to say “For those who only like their bases to appear as if they were lifted from a textbook, LNKD may not be of interest. An examination of the leading stocks in past cycles, however, reveals that many defied description. Historically, what has been most important was that a leader: 1) went through a sound base-building phase in which the market’s speculation and attention was distracted from the stock, and in LNKD’s case this is evident due to the notable dimming in volume during June/July, as shown below; and 2) showed clear signs of being accumulated, i.e. institutional buying, on the right side of the basing structure.”

The Aug. 6 high at 113 could potentially be used as an add-on point for entry or as a fresh-money buy. If the earnings growth estimates for ’12/’13 (80%/108%) were not as prodigious as they are, LNKD would not hold the same appeal. As it is, companies with this degree of expected growth, this level of immense liquidity, and this amount of recent growth in institutional sponsorship do not grow on trees.

Linkedin (LNKD) Gilmo Report Stock Chart

 

In summation, the averages rise in choppy, summerlike fashion. There are few pattern setups in high relative-strength growth stocks. As a result, the position trader in leading growth titles sits in a generous cash position.

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.