Market Comment

Bias Still Up

August 5, 2012

After a while, the [trade] size means nothing. If you complete 78% of your passes, it’d be nice if you’re in the NFL, but if you’re in college or high school or even elementary school, I’m sure the thrill is just as great.”

–Paul Tudor Jones

Friday’s 2% rise in the Nasdaq took price to a one-month high, allowing the pattern of higher highs and higher lows to stay intact. Volume was ordinary, which is to be expected for this time of year.

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Other positives surfaced. The yield on 10s rose to 1.58%, which signifies less of a risk-off sensibility among market participants.

And a few leading stocks moved closer to potential entry points.

The 50,000-foot view is that of a market in the midst of a large base-building pattern in the wake of the December-March mark-up period. This basing phase occurs as the individual investor appears to have given up on equities. In light of a global growth slowdown, participants favor low-expectation issues, many of which pay dividends above the yield on Treasurys.

This level of risk aversion results in the Nasdaq underperforming the S&P 500. There are, however, growth issues that set up in attractive bases. A negative is trading volume, which does not show the power normally associated with a thriving bull market. This makes sense due to the summer months generally experiencing a drop-off in activity.

It would be normal to see the averages weaken in and around the September period, prior to strengthening in the November-January period. This constitutes the strongest three-month period of the year, historically. Of course, it does not always pan out this way, and due to our emphasis on the intermediate-term, we do not suggest investing based upon a forecast of what might occur later this year.

Among the names, The Fresh Market (TFM) rides the hot trend toward organic food. Earnings growth estimates are 27%/24% for ’12/’13, and the most recent revision was up for both years. Liquidity is good at north of $60MM in average dollar volume. Earnings are expected to be released near the end of this month. On an intermediate-term basis, the stock is under extreme accumulation by large investors.

Technically, TFM is attempting to break out of the fifth in a series of ascending bases that it has formed over the past eight months or so. The stock has not shown enough power (read: institutional interest) to decisively break out of any of these bases and run up 20%-25% or more. To its benefit, a couple of these breakout attempts occurred after the Q1 market rally was over and the averages were in a corrective mode. The most recent attempt occurred last Tuesday when price jumped 5% on volume 84% above average. The follow-through, as shown in the below chart, has been tepid.

The Fresh Market (TFM) Gilmo Report Stock Chart

TFM can potentially be entered here with a junior-sized position that can be added onto if the follow-through continues. A stop can be placed at about 56.70, which is just below the prior swing high of July 17 at 57.08.

Alexion Pharmaceuticals (ALXN), one of the flagship glamours of the past few years, shows earnings growth estimates of 36%/39% for ’12/’13, with the most recent revision being upward for both years. Mutual funds that own the shares have steadily increased at a time when the sponsorship of other growers has faltered. This is the premier biotech, from an earnings and relative strength standpoint.

Technically, ALXN tried to come out of a three-week shelf two weeks ago, but was turned back. The move had volume, but may have run into the overall summer sluggishness that often limits big moves in growth titles. The stock may be trying to come out again, as volume increased to 39% above normal activity on Friday. A potential entry point would be a takeout of the July 27 high of 109.96. We would prefer to allow price to do some more sideways tracking before entering on the takeout.

Alexion Pharmaceuticals (ALXN) Gilmo Report Stock Chart

Apple ([AAPL]) was noted last week (“[The stock] had a chance to sell off but hasn’t, at least as of this report. Its technical pattern is intact, and the July 10 high of 619.87 could potentially be used as a pivot for entry. This would depend upon general market behavior and leading stock action between now and then.“). The general market’s behavior has clearly been positive, and the comment holds. A less-aggressive player could wait for the April 10 high of 644.00 to be taken out before entering.

Apple ([AAPL]) Gilmo Report Stock Chart

Linkedin (LNKD) was last noted here on July 15. At the time it was “worth watching,” as the right level of institutional interest was not yet evident. We have felt that due to its very-high expected earnings growth rate for ’12/’13 (89%/86%, with estimates most recently revised down), and its immense liquidity, it would ultimately enjoy generous upward revaluation courtesy of institutions with a growth mandate.

Although the basing structure is not the most picturesque, Friday’s 16% vault on volume 234% above average, together with its good close, says it all. A takeout of the July 5 high of 109.90 would represent a breakout of a five-week consolidation zone, and could be used as a potential entry for the aggressive speculator. A stop loss of about 5% could be used to mitigate risk in case proven incorrect.

For those who only like their bases to appear as if they were lifted from a textbook, LNKD may not be of interest. An examination of the leading stocks in past cycles, however, reveals that many defied description. Historically, what has been most important was that a leader: 1) went through a sound base-building phase in which the market’s speculation and attention was distracted from the stock, and in LNKD’s case this is evident due to the notable dimming in volume during June/July, as shown below; and 2) showed clear signs of being accumulated, i.e. institutional buying, on the right side of the basing structure.

Linkedin (LNKD) Gilmo Report Stock Chart

On the latter score, there was undoubtedly large-investor selling last week. However, beginning in June, a few major and a few minor accumulation days occurred, and these push the scale over into the bullish camp. Then Friday’s action essentially nullified the major distribution days of Wednesday/Thursday.

Less-aggressive players should, at minimum, monitor LNKD as it rounds out the right side of its base for either a pullback to the 110 area or the printing of another suitable spot for entry. Aggressive operators can enter as noted on the previous page.

Pharmacyclics (PCYC) was mentioned last week (“Aggressive players might choose to enter on a takeout of its high at 60.05, set July 9. However, it is worth noting that, being a biotech stock, this carries a high amount of risk.”). The stock has been up as much as 300% so far this year. It is being watched by many traders in the wake of its last move during May/June. Because of the heavy attention cast on this issue, and the rather obvious-looking base, we would prefer for the stock to do nothing for a few more weeks before coming out. This would hopefully serve the purpose of taking more attention away from PCYC. With that said, last week’s comment is intact.

Pharmacyclics (PCYC) Gilmo Report Stock Chart

Nationstar Mortgage Holdings (NSM) is the leading stock in the market’s leading industry group. The mortgage servicer is expected to post earnings growth of 40% in ’13. Since coming public in March at $14, it has risen to as much as 25.11. This says there is something special going on here. Average dollar volume is about $20MM per day.

Technically, price is three weeks into the basing process, and has shown two major accumulation days since troughing a week ago. An aggressive speculator might enter on a break to a new high, though at this point, the brevity of the pattern might make this too obvious for it to succeed without a longer basing phase. Very speculative. Worth watching to see if another pivot can form which might mitigate the risk of such a short pattern.

Nationstar Mortgage Holdings (NSM) Gilmo Report Stock Chart

In summation, our comment here a week ago is intact (“…this is still a go-slow market. The averages may have an upward bias, but there are not lots of pattern setups screaming for the attention of a speculator in growth stocks. In all, this is not especially surprising given a market ready to enter the month of August.”). A few of the names listed above are worthy of a medium-term speculator’s attention. While anything is possible, the dog days of summer are upon us. That usually means lighter volume and muted price movement.

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.