Market Comment


April 8, 2012

“The whole idea is to somehow get an edge. Sometimes it takes a little extra something to get that edge, but you have to have it.”
–Don Shula

Shares remain in decent shape, with the Nasdaq and S&P both off 1.7% from their recent peaks. The selling of last week was minimal. Friday’s jobs number will clearly pressure things, but is not expected to be terminal to this bull market.


For an index that is up 24% since Dec. 19, with just a 3.3% reaction in between, a Nasdaq correction can be expected. Rather than take a guess at the extent, duration, or even timing of such a pullback, it makes more sense to simply take things one day at a time, making sure you have an understanding of how the leadership and averages are faring. This assumes you know where you intend to exit each of your positions. By mapping out your exit points on each position in advance, you spare yourself the emotion of having to make exit decisions in the heat of battle.

One should be aware that the speculative glamours may be some of the first issues unloaded in haste should this pullback materialize into a correction.

Along these lines, we would be cautious about any positions recently entered on breakouts, as these may be among the first to fail. Thinner names, like those mentioned in these reports with average daily dollar volume of $10MM-$15MM or under, would be especially susceptible.

It is be noted that, in theory, aggressive growth titles tend to decline, at a minimum, 1.5-2.5 times that of the averages in a correction. In reality, some of these have ATR that are four and five times that of the averages, and can be expected to come off by this amount, as many holders run for the door at the same time.

The volatility in these is great on the way up, which is why you buy them. But the initial decline off the top can be sharp and can catch one off guard if one is unprepared.

A good example of this is Yelp (YELP), which tumbled 24% off the top, as shown below.


Another is Guidewire (GWRE), which crumpled close to 20% off the top. The stock’s average daily dollar volume is $11.7MM.

Guidewire (GWRE) Gilmo Report Stock Chart

One thing to remember is that recent new issues like these, while institutionally owned, are nevertheless owned by trading-oriented hedge funds and other hot money. They are going to come off much faster than a liquid glamour such as Apple (AAPL) or Baidu (BIDU).

The flip side of this is that, when the market tops, these high-ATR titles can make fantastic shorting vehicles for nimble traders using a compact timeframe of a few days. In a bull market like this, shorting opportunities for the nimble, short-term trader have not been ubiquitous. Yet a few have cropped up, notably in the levered energy and emerging markets ETFs.

Most leaders continue to act well, including Lululemon Athletica (LULU), Apple (AAPL), Tractor Supply (TSCO), Chipotle Mexican Grill (CMG), (PCLN), Select Comfort (SCSS), Starbucks (SBUX), Dollar Tree (DLTR), Mastercard (MA), Ulta Salon (ULTA), Sally Beauty Holdings (SBH), Intuitive Surgical (ISRG), Monster Beverage (MNST), Las Vegas Sands (LVS), (CRM), Pharmacyclics (PCYC), and Equinix (EQIX).

Besides YELP and GWRE, other leaders that are getting roughed up include Zynga (ZNGA) and Angie’s List (ANGI). It is clear that the speculative sentiment has peaked, along with the breadth of the advance in the averages.

These reports have recently emphasized the lack of long setups amid the extended nature of many glamours. This has been an objective sign that one should not be chasing this market if one is not already long.

Among the names, Zillow (Z) is one of the few to hold up and flirt with a new high for the cycle. What separates it from some of the recent-new-issue also-rans, such as Groupon (GRPN), but not all, is the hefty earnings growth expected, 190%/110% for ’12/’13. The relative strength line (RS), not shown in the below chart, is angling upward over the past few weeks, a plus. Z can potentially be entered above the Thursday high of 38.50, provided volume is confirming the breakout.

Zillow (Z) Gilmo Report Stock Chart

Michael Kors Holdings (KORS) is worth watching to see how it backs and fills within its base over the coming week or more. Price has not corrected much despite running up 150%+ since its Dec. 15 debut. At this juncture, a potential pivot for entry would be the Mar. 22 high of 50.48.

Michael Kors Holdings (KORS) Gilmo Report Stock Chart

Baidu (BIDU) trades at the same level it did a year ago. No matter. At some point, this institutional must-own with outstanding growth prospects is likely to be done digesting its giant move shown below. No other stock in today’s marketplace can boast of earnings estimates of 53%/41% in ’12/’13 and a $52B market capitalization. For speculation purposes it is not attractive yet, but an intermediate-term speculator could potentially use the Mar. 27 high of 154.15 as an entry.

Baidu (BIDU) Gilmo Report Stock Chart

Linkedin (LNKD) is another of the few that have not gotten materially extended above their most recent bases in the post-Dec. 19 move. The 95-96 area is of some significance, as this was the high of the lower level cup-with-handle of which it took out Mar. 21. A potential pivot for entry would be Mar. 27’s high at 106.97.

Linkedin (LNKD) Gilmo Report Stock Chart

Otherwise, shares are a discounting mechanism. Because of this, it does not do much good to analyze the present-day economy and use this as the basis for a projection of what the market will do over the next few months. Much better than this is to study what the market is actually doing, and then correlate this with historical precedent.

This has been the basis of these reports since their inception in ’93. For what matters not is our opinion. What matters all is the market’s.

In summation, if precedent is a guide, any correction in the averages is expected to resolve itself with upward revaluation, and not lead to a new bear market. Few glamours offer attractive entry due to their extended nature. Those few are mentioned above.

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.