Market Comment

The Train and The Station

January 22, 2012

“Mistakes are a fact of life. It is the response to error that counts.”

                    — Nikki Giovanni

As the train leaves the station, professional investors feel compelled to jump on board, otherwise they will miss the ride. While this explains part of the reason for the one-way, five-week move in the averages, it is immaterial to the overall game plan.

Last week’s volume on up days was the most in quite a number of weeks, as a check of the below chart shows. The chart also shows that material selling by large investors has not been seen since mid-December.


The game plan mentioned above is to become invested in an advancing market supported by substantial institutional buying in leading stocks, preferably growth. As these moves in the averages begin, the backdrop should be bleak and possibly scary to most.

As the move matures, the backdrop and/or fundamentals grow brighter. At this point, numerous leading stocks may have already put in advances of 20% to 50%, with each cycle being different.

As for the current cycle, the explosive follow-throughs that produce gains of 20%-50% post-breakout have not been seen, generally. This simply indicates the speculative sentiment is not there in any large amount. Ditto for the languishing of recent new issues such as Groupon (GRPN), Linkedin (LNKD), Pandora Media (P), (Z),

Look for this to change as the advance matures.

Among the names, Monster Beverage (MNST), mentioned last time as a potential buy at then-current levels, has followed through on the breakout. This would be a hold.

Monster Beverage (MNST) Gilmo Report Chart

A client asked why this stock is favored vs. Nuance Communications (NUAN). Nuance came out of a very nice base on good volume recently. The stock was passed on due to its earnings estimates being 17%/11% in the current and next fiscal years. This is, with some exceptions, below the minimum used here since the mid-‘Nineties. We are believers in personalizing an investment strategy to fit one’s own unique makeup of temperament, risk tolerance, experience, etc. Therefore, as long as it works for you, great. There are people using astrology to trade with, and we would never pass judgment on their approach, as long as it meets their needs.

(If one looks at history, one will find winning stocks with no earnings estimates or even negative ones. One will also find every possible fundamental characteristic under the sun associated with one or more big winners.)

Alexion Pharmaceuticals (ALXN). Pulling back now, can be monitored for better entry in weeks ahead.

Alexion Pharmaceuticals (ALXN) Gilmo Report Chart

Dollar Tree (DLTR), mentioned in the last report as potentially buyable on a breakout of its seven-week base, preferably on strong volume, did break out since then. The breakout was on lukewarm volume, and the stock has done nothing since.

Dollar Tree (DLTR),  Gilmo Report Chart

Apple (AAPL).

Still no sign that institutions are anxious to own this. Nice recovery from Oct-Nov chop, but not much accumulation to speak of.

Apple (AAPL).  Gilmo Report Chart

Ulta Salon (ULTA).

In the last report, it was noted that “An aggressive speculator might consider entry on a breakout above its Dec. 5 high of 75.70, preferably on volume at least 40% or 50% above average daily volume. A 7% sell stop could be used in case the breakout does not follow through. With a half-sized position, this would amount to a 3.5% risk (based upon normal position size).”

There was no volume to the Wednesday breakout and the stock is hovering just above the line.

Ulta Salon (ULTA).  Gilmo Report Chart

Lululemon Athletica (LULU).
This was detailed in last week’s report, noting that “the stock’s ability to stay above this gap, suggests a breakout may be in the cards. A potential entry point for a starter position might be above Tuesday’s high of 62.68, though the stock may need some time to digest its 50% rise over the past five weeks.” The gap referred to above is on a daily chart, not shown. The below weekly chart shows the obvious institutional buying that has taken place for quite some time.

Lululemon Athletica (LULU).  Gilmo Report Chart

SXC Health Solutions (SXCI).
A breakout above Jan. 12’s high of 64.87 could potentially be used for a starter position in SXCI, assuming solid volume on the breakout day.” The breakout of Thursday did not come on good volume, and the trade should have been passed. The stock remains on the watch list to see if it can clear its all-time high of 66.40 set July 21.

SXC Health Solutions (SXCI).  Gilmo Report Chart

Tractor Supply (TSCO) was noted in the last report as “could be entered at current levels using a starter position (half normal) and a tight stop loss of below the low of the breakout day. Alternatively, a more traditional stop could be used below Dec. 9’s high of 75.48.” The stock remains at about this same level.

SPDR Gold Trust (GLD) remains a hold following the Jan. 3 buy signal noted in the MarketWatch column.

Elsewhere, (PCLN) is being watched to see if it can pull an “end-around” and attack the top of an eight-month base. Certainly, it has all the credentials necessary.

Fusion-io (FIO), spoken about some time back, is another to watch.

Invensense (INVN), is a good example of targeting a recent IPO once it clears the top of its first base. In this case, the top of its first base was $11.85, a price that is below the minimum requirement here, and thus has not been covered in these reports.

Other than some speculative energy issues like Sandridge (PER), Chesapeake (CHKR), Laredo (LPI), Sanchez (SN), etc. recent new issues do not offer fertile opportunity for speculation. Air Lease (AL) is one that might be interesting, as its growth rate and estimates are both very good and its price action is tightening up over the past few weeks.

Zillow (Z) is another that is starting to perk up, but not liquid enough for many portfolios. Pandora Media (P) is another starting to shake off the dust, and has better, if not great, liquidity.

In summation, last week saw institutional interest increase as the train leaves the station. A few growth stocks are plowing into new-high territory, but volume, and hence follow-through, still leaves something to be desired. Given the one-way tape for five weeks, it would be logical to expect a pullback in the averages. This remains a market that is best waded into, not dived into.

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.