Market Comment


October 30, 2011

“A market that is fundamentally and technically poised to move higher is not going to reverse direction because of a news item – even a dramatic one.”
                — Mark Weinstein, Market Wizard

The chief technical development of recent weeks arrived Thursday in the form of institutions showing some conviction in their buying. As the below chart shows, Nasdaq volume jumped 37% above average. Add this to the day’s opening gap, which was never filled, and a decent close, and you have further confirmation that the four-week move is on solid footing.

How long the market will continue its rise, and whether this is the early stages of a brand-new, bull market is, of course, not known, and will not be known with absolute certainty until some months from now.

The view here has been that, in light of the technical evidence that has presented itself in recent weeks, there are long opportunities for intermediate-term speculation. And this is all we need to know. It is objective evidence that we are after, not someone else’s opinion, and not our own opinion. And objective evidence comes from the market itself.

The backdrop remains fraught with risk. Details of the European plan have not been formulated, and spreads on Italian debt have been widening. The arrangement reached last week could unravel at any time. At this writing, the Bank of Japan’s intervention into the currency market appears to have compressed the dollar, a reminder that exogenous events still can twist the days’ activities in shares.

Within the list, retail shows impressive relative strength, with its narrow groups proliferating the top decile of group relative strength. This is typical early-cycle behavior for a new bull market, and is clearly a feather in the market’s cap.

Among the names, buy points for Golnar LNG (GLNG) have been mentioned twice here recently, once in Oct. 16’s report (“on a takeout of the Sept. 20 high of 37.26“) and once in last week’s report (“…a possible pivot point of July 8’s high of 39.90 for those who did not enter on the cheater entry point”). Volume was strong on the first breakout, at 98% above average, as seen below. Last week’s clearing of the horizontal line, which was the second potential entry, came on below-average volume. This is not a concern considering how far the stock has come this month – just like the averages.

Chipotle Mexican Grill (CMG), mentioned in last week’s report (“could be purchased here, with a stop below Thursday’s low of 306.06.”) was noted after Oct. 21’s 8% surge on volume 161% above average, gap open, and good close. Rather than come into any of these positions in full size, a suggestion might be to start with a junior-sized position (one-half your normal position size). If the position moves in your direction, add the remaining capital via one or two add-on entries. This further reduces your risk so that a 5%-7% stop loss might only represent an initial risk of half that, or 2.5%-3.5%. As a further entry, CMG could potentially be taken if it moves convincingly above the Sept. 20 high 346.78. But at this point, volume may not emerge in any size given the Oct. 21 surge and the overall structure of its base in terms of depth/length.

In general, the market has had a historic run this month, and a pullback and digestive period should be expected. For now, any continued run higher in the leaders might be too much to expect. Therefore, expectations for the immediate-term should be tempered.

We are only watching a few recent new issues. Among them, Fusion-Io (FIO) jumped 15% a week ago on a story in Barron’s. A maker of next-generation data storage solutions, the Street expects its earnings to grow 89%/94% in its June ’12/’13 fiscal years. Quarterly results are expected after Wednesday’s close. Given that the stock has more than doubled in the past few weeks, it might be too much to expect it to break out of its base, as shown below. Of note: The stock nearly doubled within three weeks of its June IPO. This is the type of behavior often seen in big-expectation issues that go on to become big-winning stocks.

Linkedin (LNKD) is another recent IPO that bears watching. Earnings are out later this week. Technically, the stock is emerging from the depths of its correction. A positive is the dry-up in volume around the lows of its cup-shaped pattern, seen below, followed by a few accumulation days. The dry-up indicates the speculative excesses surrounding the stock’s IPO have been wrung out of it. A takeout of the horizontal line below might represent a potential point to use in building a starter position, especially if there is a pullback ahead of the earnings report. This one can be expected to react decisively on the report. Despite the big pullback from its peak, it trades at about double its issue price of $45.

Francesca’s Holdings (FRAN) leaped from 17 to nearly 30 in the first three days following its July IPO. Wall Street eyes earnings growth for the women’s apparel retailer of 38%/31% in the January ’12/’13 fiscal years. Worth monitoring.

Rackspace Hosting (RAX), with expected earnings growth of 49%/52% in ’11/’12, and a prominent leader in the last bull market, appears to be going through a normal correction. There are not many technology issues with this type of growth that have gone public in the last few years (RAX’s IPO was in ’08), and therefore this one deserves our attention. Earnings are expected soon. Worth watching, as an attractive entry point is not there currently.

Regarding gold, in Thursday’s MarketWatch report, it was mentioned that an aggressive speculator could consider entering a junior-sized position in SPDR Gold Trust (GLD), with a sell-stop below the most recent swing low of 156.05 on Oct. 20. Using Friday’s close of 169.62 would amount to an 8% risk, and a risk of about 4% if a junior position was used. An add-on position or positions could then be added if price moves up from entry by a certain amount. We like to give gold and silver positions a wider stop-loss than a growth stock, and for this reason, the stop-loss here would be below the recent four-week shelf, not at the top of it. The view here has been positive on GLD since mentioning it in an Oct. 6 report on MarketWatch.

As Gil Morales likes to say, “Buy it when it’s quiet.” Although GLD is not as quiet as it was on Oct. 6, it is nowhere as noisy as last summer. The recent four-week shelf did not produce a thundering-volume breakout, but this is to be expected when price clears a staging area that is a ways away from its high.

Elsewhere, we talked about Under Armour (UA) in recent MarketWatch reports, with potential entries at 80.80 and again at 82.89. This is one to watch, but no longer offers attractive entry, in our view.

Stocks like this should at a minimum be monitored to see how their breakouts follow through. If a number of these early leaders begin to falter post-breakout, this may be a hint of the rally in the averages being on softer ground than might be apparent.

Fossil (FOSL) is a ways away from offering attractive entry, its recent behavior a plus, notwithstanding a lack of volume. Earnings are expected out in the near future.

In summation, the backdrop is no less murky than before the European agreement to “solve” the debt crisis was announced last week. Institutions came back to the feeding trough in abundance last Thursday, a welcome development. There are some, but not many, growth vehicles that are breaking out or nearing the tops of their bases. Some of these have been listed above, and they will require some time to fill out their bases. Others have recently broken out, and still offer entry if a junior position is used initially in order to reduce risk to a manageable level. As always, staying flexible and open-minded as to each day’s technical developments will be key.

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.