Market Comment

Backing and Filling

August 28, 2011

“Unlike long-term and short-term moves, intermediate-term waves are relatively precise in form; they last long enough and are sufficiently identifiable to be outstandingly adaptable moves for selling purposes.”

                    — Justin Mamis

Shares wrapped up a constructive week with Friday’s outside reversal on slightly higher volume. The week began with a low-volume test of the previous Friday’s low (see below chart). This was followed by the accumulation days of Tuesday and Friday, which bookended the lower-volume consolidation sessions of Wednesday-Thursday. On balance, there is a slight accumulative tone to proceedings.

A market with such damage as this one cannot be expected to simply jump back to its old highs in just a few weeks.

Up and down the growth corridor, titles are licking their wounds. A few consumer names have moved to new highs, though their bases are not ideal.

Among the names, Dollar Tree (DLTR) is expected to put up earnings growth of 22%/16% during January ’12/’13. Earnings stability has been extremely high in recent years. We show it here, however we would not be buying anything right at the moment.

Like DLTR, Hansen Natural (HANS) shows good earnings stability, which is in vogue these days due to recession concerns. Earnings are expected to grow by 32%/18% in ’11/’12. This is not a number that interests us due to the somewhat erratic movements within its base. But we may be splitting hairs, as the accumulation is there, including Friday’s wash-and-rinse action.

Apple (AAPL) acts like a champ, all the more so in the wake of its legendary leader, Steve Jobs, announcing his retirement. At a time when its growth stock brethren are rebuilding their credentials, the It-stock is finding support at its 50-day and closer to a breakout than a breakdown. To be commended. This is one that we would consider entering even in the absence of any return to the market by institutions. The reason is that waiting for the return of large investors to the market after a correction usually means missing the breakout of the first few leaders which often end up producing one or more of the ensuing advance’s big winners.

And this one could be one of the first of the new leaders.

Pricesmart (PSMT) has good earnings stability and 18% earnings growth expected in ’12. It is a consumer name which is the vogue right now, along with dividend plays.

Alexion Pharmaceuticals (ALXN) has estimates of 30%/37% for ’11/’12 and decent earnings stability for a bio.

Green Mountain Coffee Roasters (GMCR), with its 58% estimate for Sept ’12, its very good earnings stability for such a fast grower, its increasing sponsorship by institutions, and its top-notch industry group, has our attention, even though it needs to put in more time polishing its rough base.

Growth stocks typically do well in this type of environment (’88-’89, ’91) as participants pay a premium for a company’s recession-resistant earnings stream. The names shown above are just a portion of those we see setting up.

In summation, last week’s constructive tone is encouraging. 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. 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.