“Chance favors the prepared mind.”
–Louis Pasteur, 1854
Shares showed encouraging behavior last week, with the Nasdaq bouncing off its 200-day line. The key distinction was not the 200-day bounce, but that price found support so soon after it undercut the low of two weeks’ prior, as seen in the below chart.
After a market has declined amid a cascade of negative news, these are the things that this participant looks for to determine a durable bottom:
Ability to rise amid ongoing bad news.
Major accumulation days in the averages.
Basing and breakouts in leading issues.
Notice that there is no mention of an O’Neil follow-through day. While this is always welcomed, it is not a prerequisite. Some FTD’s are also major accumulation days.
It is tempting for a less-experienced participant to become mesmerized by the news. In our view, this is not the optimal way to view the general market’s health. This is because the market, in its inimitable wisdom, is a discounting mechanism, pricing the outlook for the next six to nine months, roughly, into today’s prices. The market sees better than we do.
Therefore, one cannot expect to be there when the market turns if one is focused on the news. In fact the preferred sentiment indicator is not the surveys of various market participants. It is the market’s behavior to news. At most bottoms, the market will go up despite the news being sour. The reverse is the case at most tops.
Applying the above three steps to the current situation, last week the averages ignored the bad news out of Europe and the so-called fiscal cliff of higher taxes/lower spending slated to kick in later this year. In particular, prices rose when Spain asked for help. As for major accumulation days, there has not been one in the Nasdaq, but there was one in the S&P last week, as seen below.
Not only was there a major accumulation day (Wednesday), but price went out at the top of the day’s range. Also notice the range of Wednesday’s bar: It dwarfs every other day except for one on the seven weeks of the chart. Then Friday again went out well.
A good number of the speculative growth stock glamours are completing five-week bases. In itself, this is the largest positive that we see.
Among the names, we have been watching the first two breakouts, Pharmacyclics (PCYC) and Petsmart (PETM), for sentiment clues. Last week’s action in both was encouraging.
PCYC, below, emerged from a low-volume pullback last week after it found support at the top of its prior base. In hindsight, one could have purchased the sustained breakout on Tuesday, but it was not noted here, as the general market was more dubious then. Also, this represented a higher-risk entry, as price is not breaking out of a legitimated base, merely a shelf.
The base that PCYC did clear initially, which is outlined in gray, was quite attractive. The price/volume sequence has been classic.
The second breakout, PETM, could have been entered on its breakout day, as shown below. Similar to PCYC, it would have been aggressive to take this setup due to the general market being in poor shape at that point.
Under Armour (UA) broke out on Friday, as volume rose 138% above normal, exactly the type of conviction that is desirable. The stock is potentially buyable at current levels for those aggressive participants who seek some exposure to the glamours in advance of any firming in the averages.
Dollar Tree (DLTR) last Wednesday came out of a five-week, 11% deep pattern on volume 63% above normal. The volume is difficult to see on the below chart due to the December volume spike which affected the scaling of the horizontal axis. At Friday’s closing level, price is 2.5% above the May 2 top of the pattern at 104.08, and is therefore not yet extended above the base, and is potentially buyable. A standard protective sell stop 5%-7% below entry is reasonable.
Equinix (EQIX) completed a six-week base on Friday, and is potentially buyable above the Apr. 26 high of 172.44. This was one that we missed when it originally broke out on Jan. 5 due to the averages not yet showing enough accumulation. It then was perhaps the most impressive of the glamours in the Q1 run. Earnings estimates are 52%/43% for ’12/’13, and were most recently revised higher. There are very few titles in the current market with estimates this hefty for ’12 and ’13. This fact, plus EQIX’s deep liquidity (averagedaily dollar volume of about $200MM), makes this attractive to institutions.
Ulta Salon (ULTA), with its big estimates (34%/26% for January ’13/’14), deep liquidity (averagedaily dollar volume of $95MM), and solid earnings stability (18% standard deviation), on Wednesday cleared a seven-week base to rise 8% on 254% more volume than usual. The high of 97.89 could be used as an entry pivot by an aggressive speculator seeking some exposure to leading issues.
Alexion Pharmaceuticals (ALXN) has beefy estimates of 30%/40% for ’12/’13, deep liquidity (over$180MM in average dollar volume), good earnings stability considering the growth rate, has extremely high group RS, and appears close to putting the finishing touches on an 11-week base. The May 22 high of 94.36 could be used as a potential entry pivot.
Other glamours that merit attention for their basing action include Whole Foods Market (WFM), Athenahealth (ATHN), Allot Communications (ALLT), Cirrus Logic (CRUS), TJX Cos (TJX), Sally Beauty Holdings (SBH), Liquidity Services (LQDT), Cerner (CERN), Bally Technologies (BYI), American Vanguard (AVD), Carters (CRI), Chipotle Mexican Grill (CMG), Vivus (VVUS), GNC Holdings (GNC), Monster Beverage (MNST), Intuitive Surgical (ISRG), Apple (AAPL), and SXC Health Solutions (SXCI).
In summation, the trend remains down in the averages. On the bright side, the market began ignoring most bad news last week, the S&P put in a major accumulation day, and a host of leading titles are forming five-week-plus bases. As they break out, a few of these can be taken by the aggressive speculator seeking to pre-empt strength in the averages. Otherwise, less-aggressive players should remain in a full cash position pending further accumulation days. Of import is an open-minded, flexible approach and a one-day-at-a-time focus.
Louis Pasteur would agree.