Market Comment

As the World Burns

September 8, 2011

“Most people have the will to win. But few have the will to prepare to win.”

                    — Bobby Knight


Shares, in spite of having a lot thrown at them over the past fortnight, hold up well. Price movements, however, should be taken with a grain of salt during the vacation-heavy, late-August/early-September period. Next week will allow us to remove the grain of salt and take the technicals at face value.

A few positives show up. The two down days of Friday and Monday, yellow-highlighted in the below chart, came on some of the lightest volume of the past half-dozen weeks. Then on Tuesday, a down day, price spent nearly the entire session rising subsequent to the gap-down open. Ditto for Wednesday, except this time the gap was in the right direction, and on modestly higher volume.

In addition, the all-important intermediate-term trend remains up, with a higher low and higher high in place.

Further, the biggest positive lies with the action of the speculative growth-stock glamours. It is doubtful that these issues would be building bases and firming if the market was of the opinion that it needed to take out the August lows in order to properly rebuild.

Negatives include a lack of conviction among institutional players, which says a lot. Without them on board, any advance cannot be taken seriously. The safety trade is another minus, with euro/dollar moving in favor of the buck for nine of 10 days.

Too, a market that recently experienced its third-steepest descent of at least the past fifty years cannot be expected to jump right back to its prior highs, ‘Nineties style.

The bond market, smarter than shares when it comes to the economy, is signaling economic growth softens further into ’12.

In our last report, it was written that “We would need to see a bit more participation by institutions, perhaps one more accumulation day or a session of improved action in the leaders, to warrant the initial stage of a speculation campaign for aggressive intermediate-term participants.

Along these lines, the leaders continue their improvement.

Among the names, Alexion Pharmaceuticals (ALXN) has estimates of 30%/37% in ’11/’12 and impressive increases in mutual fund ownership over the last two quarters (from 881 to 983 to 1051). The stock, mentioned in our last report, could potentially be purchased above Wednesday’s high of 60.81, as seen in the below chart.

Athenahealth (ATHN) broke out of a five-week pattern Thursday on volume 92% above its daily average. The volume increase represents the conviction that this market so badly needs. Estimates are for 31%/36% growth in ’11/’12. The provider of medical record management software for physician practices could potentially be picked up right here, as it is not more than 5% or so past its base-top.

Acacia Research (ACTG) moved to within a stone’s throw of its base-top on Thursday with volume increasing to 32% above its average. The producer of digital encryption and storage technology for audio and video media is expected to notch earnings growth of 45%/41% in ’11/’12. Technically, ACTG’s pattern is a five-week double-bottom-with-handle. The stock could potentially be taken coming out above 8/2’s high of 46.32, provided volume is robust on the day of the breakout.

Lululemon Athletica (LULU) announces Q2 earnings Friday Sept 9 before the open. The athletic apparel maker has been working on a seven-week base. The aggressive speculator might potentially use 8/15’s high of 59.75 as a cheater pivot point. It is reasonable to expect a gap open Friday following the news release.

Beauty store operator Ulta Salon Cosmetics and Fragrance (ULTA), with Street estimates of 37%/25% for September ’12/’13, building a constructive nine-week base. Tuesday and Thursday showed large investor interest on the offer side, as volume came in at 54% and 137% above average, respectively. The stock appears poised to take out resistance at 60-61. We would let the stock build more of its base before contemplating entry. Its specialty-retail group ranks in the upper decile for industry segments.

Pricesmart (PSMT), mentioned in our last report, was one of the first glamours to break out. The relative strength line has been on a strong upward slope since early spring, and the stock continued to outperform during the quasi-bear recently. Although the stock is more than 5% past the top of its base, and is therefore “extended,” one way to squeeze into a position would be to take a half-sized position at current levels. This would allow one to use a wider stop and still be within the recommended 5%-7% range for a stop-loss. The remaining half of the position could be added as price moves in the right direction.

In our last report, we mentioned Green Mountain Coffee Roasters (GMCR) as having “…our attention, even though it needs to put in more time polishing its rough base.” That time has come and went, with the stock appearing to be readying a run for the roses, as the below chart shows. GMCR is expected to put up 58% earnings growth in September ’12. This rate of growth is a rarity among $16B market-capitalization titles, as is triple-digit revenue growth in the past two quarters. This high rate of growth coupled with its deep liquidity (average daily dollar volume of $316.6MM), make this an irresistible catch for institutions with a growth mandate. There are only so many deeply liquid, high growth titles around like GMCR for large investors to stuff into growth portfolios. The number of mutual funds that own the stock has increased impressively in recent quarters, from 484 funds to 559 to 721. The stock could potentially be taken above 8/3’s high of 111.42 on confirming volume.

Cerner (CERN), with its estimates of 24%/21% for ’11/’12, extremely high earnings stability on a par with such steady eddies as Procter & Gamble (PG) and Johnson & Johnson (JNJ), and virtually no debt (4% long-term debt to equity), meets our definition of a truly high quality company. Industry group strength is in the 97 percentile. The stock could potentially be had on a takeout of 8/31’s high of 67.93.

Recent new issue Zillow (Z) has formed its first base. The online provider of housing data posted ’10 net of -$0.25, and estimates in ’11 are for a profit of 12 cents a share, followed by 28 cents in ’12. Sequential revenue growth, our favored metric for young companies in the process of being profitable, was 17%, 18%, and 41% in the past few quarters, respectively. The aggressive speculator could use 9/1’s high of 37.99 as a potential pivot point for a junior position, which could be added to should price move in the right direction.

Other prominent outperformers building bases include (AMZN), (PCLN), Apple (AAPL), Questcor Pharmaceutical (QCOR), Watson Pharmaceuticals (WPI), Jazz Pharmaceuticals (JAZZ), and Baidu (BIDU).

In summation, as the world burns, positives outweigh negatives, the biggest of the latter being a lack of participation by institutions. Next week will present a truer reading of large-investor sentiment as the heavy-vacation period ends. Since our last report, improvement in leadership is enough for the intermediate-term speculator to wade back into the water off his or her 100% cash position. The 16 shares listed herein represent most of the current cycle’s emerging growth-stock leadership.

It is critical to be flexible in one’s thinking at this particular juncture in the cycle, and we remain open to any new technical developments.

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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.