Market Comment

August 21, 2013

August 21, 2013


No other stocks than the leaders can have more than a temporary effect on the market’s course.”


–Joseph H. Kerr, Jr. (1931)


The averages are in the midst of a well-deserved pullback. The S&P 500 has been off as much as 4.1% from its high, the Nasdaq Composite 2.8%. According to our interpretation, the latter has seen four distribution days in the last dozen days.




While we prefer not to interpret data in a purely mechanical way, as we do not believe the market is that pat, it is worth noting that the Naz’s current distribution count is similar to the old “3-5 distribution days in a 1-2 week period” that was noted in O’Neil’s first book. In terms of general market analysis, the current distribution count should be used as a guideline in combination with the action of the leading stocks. The most striking aspect of the averages’ price/volume behavior has been the lack of New York Stock Exchange volume shown on the six-week advance that began June 24.

There is precedent for this, and it lies in the October ’07 primary top that ended a five-year bull market. Then, the S&P 500 had moved up 15% over an eight-week period from the Aug. 16 low, yet only two days of the 39-day move were days in which volume was above average. Fast forward to today: Of the 36 days of rally from the June 24 low through the Aug. 2 high, just six had above-average turnover. While we are not expecting the Aug. 2 highs to be a primary top, this lack of NYSE volume makes it more likely there will be a pullback that leads to a secondary correction of at least 8% in the S&P.


On a longer-term basis, we have discussed in other reports the two indicators that in our experience are the best at providing a signpost of where we are in a bull market. These are breadth divergences and interest-sensitive divergences between segments such as the financials, banks, and brokers. As for breadth, the cumulative NYSE advance-decline line’s May high matched the S&P’s high in May. Subsequently, the two diverged, as the S&P kept hitting new highs that were unconfirmed by the a-d line, a proxy for the average stock.


On average, a breadth divergence has roughly preceded a primary market top by about 4-6 months. However, this is a rough gauge that can sometimes provide over a year’s worth of lead time before a top, as seen before the March ’00 end of the Bubble Era. For this reason, and also because we are intermediate-term speculators, we do not rely upon this or the next divergence indicator to be discussed to tell us when to buy or sell.

The second long-term indicator noted above is when interest-sensitive groups diverge from the blue-chip indices. This happened recently with the financials and utilities. 

We have found the above two long-term indicators to be more useful in telling us where we are in a bull market than anything else. At the same time, we are not in the business of making forecasts as to when long-term trends begin and end.

For it is important to recognize that a bull market is nothing more than several intermediate-term advances interrupted by a few intermediate-term corrections which are often in the range of 8% to 12%. By focusing on just the intermediate-term trends, then, we have no need to forecast or spend time worrying about the extent or duration of a bull market. This is fortunate because the intermediate trend is more easily recognizable than the long-term trend.

Otherwise, most leading stocks had gotten ahead of themselves, victims of their own success. With just a few forming bases of 5+ weeks, the opportunity for fresh-money buys has receded. But whereas a few weeks ago it made sense for an aggressive player to enter abbreviated patterns which we call ledges and shelves, this is no longer viewed as an option in light of the general market’s compromised tone.

The best vehicles to watch to ascertain how institutions truly feel about this market are the Four Horsemen: LinkedIn (LNKD), Facebook (FB), Tesla Motors (TSLA), and Netflix (NFLX). They all act fine. Participants who entered these at significantly lower levels and sit on stout gains should not feel compunction to sell them unless they break down materially.

Among the names, Netflix (NFLX) Tuesday cleared one of the only bases left in the growth sector. Volume was good at 40% above average. The degree of follow-through post-breakout will be a good litmus test of the speculative sentiment of this market. Wednesday’s activity showed a stall as volume dimmed.


Green Mountain Coffee Roasters (GMCR) was virtually the only other base besides NFLX that had set up. The stock broke out of a three-month pattern on Tuesday as volume rose 60% above average. On Wednesday, there appeared to be some churning. Price clocked its smallest gain of the past four days, with volume 166% above average on the second-heaviest day in 15 weeks.


Sprouts Farmers Markets (SFM) operates a chain of natural and organic grocery stores, mainly in the West and in Texas. This is obviously a growth niche. What really has our attention is that the stock skyrocketed 133% in its first three days as a publicly-traded entity following its IPO less than three weeks ago. Price then backed off just 12% before rebounding. Earnings are expected out this Thursday after the close. We pay close attention to new issues that run up 50% or more in the first few weeks after going public. Especially when they come public in a bull market such as this one that is so hospitable to aggressive growth issues, generally. Either Friday’s high of 40.19 or the high of 41.85 could possibly serve as an entrance pivot, but it is premature to say definitively at this juncture. Worth watching.


Alnylam Pharmaceuticals (ALNY).A takeout of the 51 high of 7/16 would provide a speculator with a potential entrance” is what was written here in the last report. The stock got close to this level Wednesday, only to back off in the session’s final hour. For those who are continuing to put on new positions in this market, this is one of the only bases in the glamour complex. NFLX and GMCR are the others.


LinkedIn (LNKD) was noted in the last report: “We would consider entrance above the high of its one-week ledge at 237.96. Since this is August, an entrance like this may not receive the same volume that might occur if this was to happen, say, in mid-September.” The next day price cleared the ledge on volume 25% above normal. It then pulled back to a level about 6.6% below the entrance pivot. Depending upon where one’s stop was placed, it is possible a position taken was stopped out. At this point, the stock acts fine but does not offer any sort of edge when it comes to a possible add-on or starter position. If you are a holder, be aware of the 222.22 level as shown in the below chart.


Pandora Media (P) was noted in the last report: “A good-volume breakout above the 20.54 high of 7/8 is worthy of a speculator’s entrance.” Price broke out the next day on volume 3% below average. In light of the punk volume, the trade should not have been taken. As it is, the stock moved up as much as 7.0%, and currently stands up 4.6%.

Earnings are expected after Thursday’s close. Since anything can happen with an earnings report and the market’s reaction to it, the suggestion here is to plan for a 20% or 25% downside gap on Friday. This represents a reasonable downside scenario as far as setting a workable position-size/risk-exposure that will not seriously impair a portfolio. Of course, some downside gaps exceed that, but that is just a figure we have been comfortable with. Each participant must choose the best fit for their risk profile. An alternative might be to exit the position altogether in advance of the report.


Fleetcor Technologies (FLT) forms one of the tightest shelves in the complex. This is something to consider when the averages firm up and show some volume.


3-D Systems (DDD) should not be lost sight of. Excellent group strength. Nice estimates of 23%/27%. This is the type of “something new” title that could move out ahead of the averages. Worth monitoring.

In summation, this is a bull market, and bull markets do not just stop on a dime, turn, and roll over into a bear market just like that. Tops are processes, and processes take time. We cannot expect the market to follow any sort of script it has followed in the past. Therefore, the divergence indicators discussed here should be used as signposts only. Their message is that the bull market is in its latter stages, perhaps the seventh inning, as a guess.

Of greater import is the price/volume behavior of the averages and action of the leading stocks. Fortunately, led by the Four Horsemen of liquid glamours, LNKD, FB, TSLA, and NFLX, there are dozens of speculative growers that hold up nicely. These form 2-3 week shelves, patterns whose clearances are risky in a market that does not show power and volume. One scenario is a market that does nothing but move sideways to modestly lower into Labor Day. This would provide the glamours with five-week bases and increase their attractiveness vis-à-vis the medium-term speculator.

In the meantime, a high cash position is suggested.


Kevin Marder


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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Gil Morales & Company LLC (“GMC”), Marder Investment Advisors Corp., or an affiliate thereof held no positions, though positions are subject to change at any time and without notice.
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