Market Comment

A New Chapter?

November 20, 2011

“Stay positive, pal. Most people, when they lose, they whine, they quit. But you gotta be there for the turns. Everybody’s got good luck, everybody’s got bad luck. Don’t run when you lose, don’t whine when it hurts. It’s like the 1st grade, nobody likes a crybaby.”
     –Gordon Gekko

Last week’s takeaway was the unloading of sovereign bonds in so-called core European nations like France, Belgium, Finland, Austria, etc. This opened a new chapter in the crisis, one in which market participants are now discounting systemic problems spreading to all European countries, not just the peripherals.

Technically, the view here has been that the near-term direction in the averages would be dictated by which way price exited the wedge pattern in which they have


been confined for the past three weeks. This pattern, shown by the purple lines in the above chart, is considered a consolidation pattern with lower highs and higher lows converging on each other. It normally resolves itself in the direction from whence it appeared, in this case up.

As the chart above and the one below of the S&P show, price broke down out of the pattern on Thursday. The significance of this should not be overstated, and there is no implication here that price will automatically go down to such-and-such level, e.g. the October 4 lows. To us, it merely says that the market is weaker than it has been in a few weeks, and is weakening. Trends mean everything here, and so this has value, all the more so for a pattern that has resolved itself in an unexpected manner. It is the unexpected to which we pay special attention.


As for the backdrop, if you could draw a chart of it you would see a line that last week showed its steepest weekly fall in quite a while. Market confidence is everything. Most dramatically, this was seen with Bear, when whispers on European repo desks led to its failure a scant ten days hence. Thus, global participants offing bond positions last week in anything European, let alone just the peripherals like Italy and Spain, raises the specter of a vicious domino effect. Germany was not the safe haven last week that it normally is.

The key distinction between the dollar and the euro is that the buck is the world’s reserve currency, and the Fed can print if it wants to. It is unlikely that Germany is going to want to print.

The European situation is expected to play out over a period of years, not months. This does not mean that it will hold the US share market hostage forever. At some point, there will be a decoupling. In the meantime, the markets, in their inimitable wisdom, are taking matters into their hands forcing the issue that the politicos cannot.

Among the names, leading stocks predictably pulled back. The key question is whether they are coming off in orderly fashion or whether there is abnormal liquidation. The latter would provide information not readily apparent by the behavior in the averages.

Apple (AAPL). Nine down days in the last 11 are telling.

Apple (AAPL) Gilmo Report Chart

Following’s (AMZN) big-volume break off of its double top, price staged a lighter volume retracement of the decline, but then sold off anew on Thursday and Friday. The action in institutional must-owns like AAPL and AMZN tells a story of risk aversion across the growth sector, and the market generally.

<strong#### “’s (AMZN) Gilmo Report Chart” title=”’s (AMZN) ” />

Cerner (CERN) has shown even weaker behavior than AAPL and AMZN, as it was unable to put in a double top in mid-October, unlike the other two. It put in a lower high and then proceeded to print lower highs and lower lows since then. This had been a very attractive stock for institutions given its extremely high level of earnings growth stability, virtually unseen in a stock expected to show earnings growth of 24%/22% for ’11/’12.

<strong#### “Cerner (CERN) Gilmo Report Chart” title=”Cerner (CERN) ” /> (PCLN) had shown some resilience lately, and was a threat to break out of its multimonth base – that is before sellers took over on Thursday and Friday.

<strong#### “ (PCLN) Gilmo Report Chart” title=” (PCLN) ” />

Intuitive Surgical (ISRG). Very good volume on the Oct. 19 breakout of its base, 218% above average. But the post-breakout follow-through has been lacking. Price rose just 8% past the top of its base and has now pulled back to just a couple of percent above its former pivot. Uninspiring.

Starbucks (SBUX). This is a slower stock than is normally discussed in these reports, however most analysts look for 20%/21% earnings growth in the September ’12/’13 fiscal years + it is a $31B capitalization name. Therefore, it is of interest to us from the standpoint of being a growth-stock bellwether for the institutional crowd. The stock is pulling back in line with the averages, so no real clue here.

Tractor Supply (TSCO). Broke out of a three-week handle area last Wednesday and reversed to close near its low.

Rackspace Hosting (RAX) is easing back from the top of its base. Nothing out of the ordinary here. Volume has dimmed for six days in a row.

Tibco Software (TIBX) failed to hold the top of its base following last Monday’s breakout. But volume was below average, so this is not anything unusual.

Under Armour (UA) cleared a base in late-October but only rose 5% past its pivot before reversing to stand below the pivot.

Baidu (BIDU), Lululemon (LULU), Athenahealth (ATHN), and Deckers Outoor (DECK) are all former leaders that are breaking down, along with recent IPOs Francesca’s Holdings (FRAN), Linkedin (LNKD), Pandora (P), (Z), and Yandex (YNDX).

Fusion-Io (FIO), the recent new issue with the ground-breaking data storage technology,
has held up relatively well, and is a candidate for leading the next advance in the averages.

As the above indicates, there have been no breakouts in growth stocks that have seen advances that follow through for the 20%-25% gains that typically occur in a healthy intermediate-term market advance. This, along with the disappointing level of interest on the part of institutions, has been our clue that something has been amiss with the advance that began Oct. 4. These two characteristics were also lacking in the 11% June-July advance in the Nasdaq.

In summation, last Thursday’s breakdown out of the lower band of the wedging formation confirmed that near-term market direction is down. This reinforced the message given by prior breakdowns and subsequent weakness in institutional glamours such as Apple, Amazon, Cerner, Baidu, et al. For the long-only position trader in growth stocks, cash is king.

Kevin Marder

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