Market Comment

December 17, 2013

December 18, 2013

Those who are the best at losing will get all the money in the end.”

— Professional currency trader


The Nasdaq Composite has gone over a year without more than a 6.7% pullback. In a bull market, such occurrences are rare. The longer the averages go without a pullback, the more likely there is to be one.

For some time, the theme that we have been keying on has been that the speculative sentiment peaked in early October. Market participants are simply not willing to take the risks that they were earlier in the year. The importance of this is that expectations of what can be done in the current market as well as long exposure should both be trimmed.

A second development that should be recognized is that this market advance is narrowing. A narrowing advance equates to a market in which it is harder to make money. Money is rotating out of the average stock and into the larger issues that dominate the averages. The below chart shows how the generals (larger stocks) are marching forward with fewer troops (the average stock) accompanying them.




A third characteristic of this market is a lack of growth stocks setting up in basing patterns.

Weaker speculative sentiment + the narrowing + the lack of pattern setups = a reduced probability of successful speculation. The experienced participant recognizes this and adjusts his/her game plan accordingly. The less-experienced player does not see this and speculates with the same degree of commitment as earlier in the year.

This does not mean that a speculator should avoid all stocks. It means the probabilities of successful speculation are not what they were.

Among the names, Wageworks (WAGE) is an example of how the speculative sentiment has changed. Price broke out of a five-week pattern Friday, but volume was 3% below average. The following day saw price up just 0.5% on volume 20% above normal. Then Tuesday the stock lost 0.5% on average trade.

This is the type of pattern that is likely to have shown more vigor on the breakout if it occurred earlier in the year. Perhaps the fact that it is trading at 70 times the 16% growth rate expected in ’14 has something to do with it. Our job is not to assess how something is priced, whether rich or cheap. It is to measure supply and demand. The demand is not there for this 97 rs issue. And that is all that needs to be said. The same situation exists for other speculative names.


Three D Systems (DDD) shows 33% estimated earnings growth for ’14 along with good sequential revenue growth in the last two quarters. Liquidity is very deep at $406MM average daily dollar volume. While we are never thrilled to see price spend very little time on the left side of its base vs. that of its right side, the title is a 98 rs name in a 97 group, support was found at its 20 a few times, and price rebounded Thursday and Friday from last Wednesday’s market comedown.

A more-aggressive operator might use the 12/11 high of 82.65 as a potential entrance for a junior-sized position (half of normal) initially. Preferably, price pulls back before moving ahead.


Facebook (FB) is a top actor, and perhaps the top actor in the glamour complex, save for TWTR. The estimate for ’14 is there, at 35%. Sequential revenue has grown over the past two quarters at > 10%. The pattern may be the most constructive in the market.

A pullback or handle are being watched for in order to provide an attractive entrance. We would expect this to be on reduced volume, which would be a positive, and indicative of normal profit-taking.


Under Armour (UA) is expected by most analysts to grow earnings by 24% in ’14. Price forms an eight-week base that is characterized by 50-day support on multiple occasions. A plus was last Wednesday’s (12/11) advance on volume 70% above normal. This activity was the largest in nearly seven weeks. While the close was not particularly auspicious, this is tempered by the fact that the Nasdaq lost 1.4% that day. The 12/11 high of 85.65 can serve as a potential entrance pivot. Otherwise, the 86.02 high of 10/21 represents a possible pivot.


Canadian Solar (CSIQ) shows big sequential revenue jumps in the last two quarters. Earnings in ’14 are also expected to leap, per most analysts. After tripling from August to November, price is building a five-week base of reasonable depth. While an attractive entrance does not present itself, this is one to keep an eye on.


Twenty One Vianet (VNET) is a Chinese provider of Internet network services. Most analysts see an 86% rise in earnings for ’14. Sequential revenue growth has been solid the past two quarters. The chart pattern is that of an eight-week base that is wide and loose. We have seen patterns like this produce big moves (Peoplesoft from ’98 comes to mind). Tuesday’s 4% move on volume 20% above normal following several days of tighter action is a plus. Given the looseness of the pattern, we would prefer to enter on a pullback following any breakout.


Palo Alto Networks (PANW) is a network security specialist with estimates of 100%/79% in the July ‘14/’15 fiscal years. It has shown very good accumulation over the past several weeks. While it is not showing any sort of entrance we would be interested in at present, it is worth monitoring for an eventual setup.

(The fact that we are even including a “setup-less stock” like PANW that appears to have a substantial road ahead of it before it becomes actionable should say something about the quality/quantity of pattern setups we are seeing.)


Harman International Industries (HAR) was discussed in the last report: “Based on the healthy growth estimates, the major-volume backed breakouts, and the tightness of the current pattern, the 85.76 Halloween high can be considered as an entrance pivot. A cheater pivot using last week’s high is also possible, but we would prefer to see something a little more than that.”

We would modify the comment to note that the 12/10 high of 84.33can be used a potential entrance pivot.


The Container Store Group (TCS) is a chain-store operator offering storage products. Earnings are expected to go from 38 cents a share in the February ’14 fiscal year to 63 cents in the ’15 year, a 66% increase, per most analysts. This is a recent IPO that doubled its first day. While TCS is not setting up presently, this is one to watch for an eventual entrance possibility.


Valeant Pharmaceuticals (VRX) was mentioned in the last report: “Price forms a five-week cup which can be monitored for a potential entrance above the base top at 115.40, the 10/21 high.” The comment stands. Monday’s 4% move on volume 84% above average, the highest volume in six weeks, is notable.


Qunar Cayman (QUNR) is a Chinese provider of online travel bookings. This is a recent new issue that rose to more than double its offering price on its first day of trading in November. It is currently forming its first base with a potential entrance pivot of 30.01, the 12/10 high. Being a Chinese issue with a limited trading history, QUNR comes with higher risk, i.e. accounting and governance risk, not to mention the risk of a company with losses in the last three years plus an expected loss in ’13. For very aggressive speculators only.


In summation, reduced speculative sentiment, narrowing breadth, and a modicum of pattern setups among growth titles has lowered the probability of successful intermediate-term speculation.

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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