Market Comment

Fertile Ground for Speculation, Part II

July 8, 2012

“A successful speculator bases no moves on what supposedly will happen, but reacts instead to what does happen.”
        
–Max Gunther

Shares moved out last week as complications from Europe dimmed. The Nasdaq, as shown below, shows a fair amount of accumulation, or institutional buying, and a modicum of distribution, or institutional selling.

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We have recently noted how the majority of individual leaders are in good shape, technically. According to our recent analysis, about 10 names act well vs. 1 that does not. This type of ratio is typical for the initial stages of a new intermediate-term advance.

We do not know the extent or duration of this move, nor do we need to know.

We also do not need to know anything about the economy or the progress of the European situation. For the backdrop and everything else that might affect things is already priced into shares.

It is far easier to play the game when you remove the necessity of trying to predict whether the economy goes into the toilet, what will Q2 earnings look like, who wins the White House, does Spain default, etc. – let alone what shares are going to do in response the these things.

The opinion here is that if you can get past having to predict anything, you have come a long way toward success as a speculator or trader. You can then narrow your focus on the essentials like trend, momentum, volatility, and relative strength. These are the raw materials that can give you the greatest probability of manufacturing an edge.

With less stress, less anxiety.

Otherwise, of bullish note are small-capitalization issues, which outperform for 3+ weeks. This, in addition to the buoyancy of the speculative growth stock glamours, is further evidence of a percolating speculative sentiment.

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Among the names, Facebook (FB) was noted here in last week’s report (“A potential entry above the June 22 high of 33.45 could be made by a speculator looking for a move of weeks to months.”).

This view is maintained, and is strengthened by the last five days of action as seen below. What is particularly positive is 1) volume bullishly drying up near the lows of the handle, which indicates a lack of resolve for holders to take profits in the wake of the 31% advance, and 2) a range contraction over the past three days.

Aggressive speculators could consider entering FB at current levels, using the low of the handle as a stop loss. A junior sized position is suggested for this, which could be added to as price moves in the desired direction.

Facebook (FB) Gilmo Report Stock Chart


Linkedin (LNKD) is behaving nicely as it moves up the right side of a base. Of note is the smoothness of the day-to-day price movement. Support was found twice recently at the 50-day, a mild plus.

In last week’s report, it was noted that “An aggressive speculator could potentially use the high of this shelf at 107.82 as a cheater entry point for a junior position. This could then be added to should price continue to move up the right side of its base.”

Last week the stock did take out the 107.82 high. For those not in the stock, we would prefer to see price pull back to form more of a handle prior to entering. There are very few companies trading publicly with this high level of earnings growth expected for ’12 and ’13.

Linkedin (LNKD) Gilmo Report Stock Chart


Synacor (SYNC) was noted in the last report as “This is a volatile, young, thinnish actor bound for excitement…in one direction or the other. A very aggressive operator might consider a junior-sized, initial entry as price approaches the May 31 high of 15, and an add-on entry if price breaks out and shows some follow-through. A protective sell stop of 7% should be used. For nimble speculators/traders only.”

As the below chart shows, the stock broke out, and on the right type of volume. For those not in the stock, we would not chase price from here.

Synacor (SYNC) Gilmo Report Stock Chart


Apple (AAPL) is one of the more interesting situations. As if out of a textbook, price scored a strong prior uptrend, went through a normal base-building consolidation to bring sellers and buyers into alignment, and now is coming up the right side of its base. Note the volume drying up in June.

Thursday’s high of 614.34 could be used as an initial entry for a junior position with the idea of adding to it as price moves up. This level makes sense, as the nearest support point, the June 19 high of 590, is 4% below this area, and not excessive. Using a half-sized starter position would result in de facto risk of 2%, had the position been normal in size. The risk here is considered to be minimal based upon the potential reward.

Apple (AAPL) Gilmo Report Stock Chart


Spirit Airlines (SAVE) is one of the better-looking glamours. The Street expects earnings growth of 40%/28% for ’12/’13 and the estimates were most recently revised upward. As the below chart shows, volume picked up on Tuesday and Thursday of last week, suggestive of large-investor interest. Price rose 4.4% on each day.

At present, there is no clear entry that makes sense from a risk standpoint. We would stand aside and monitor SAVE for a suitable entry.

Spirit Airlines (SAVE) Gilmo Report Stock Chart

Young children’s apparel concern Carters (CRI) is expected to grow earnings by 28%/26% in ’12/’13. Earnings stability over the past few years has been quite good at a 13% standard deviation. Liquidity is also good at $48MM average dollar volume traded each day.

Technically, price is forming a 10-week base, the entry pivot of which would be the July 5 high of 56.01, circled in the below chart. Price showed good resolve in the holiday-impacted session of Thursday, rising 2.8% as volume rose 15% above average. Friday saw both range and volume contract, a plus.

Carters (CRI) Gilmo Report Stock Chart


Annie’s (BNNY), a producer of natural and organic packaged food, doubled in the first dozen days after its March 28 IPO. The Street sees earnings growth of 24%/22% in the March ’13/’14 years. Liquidity is relatively thin, at $8.3MM average daily dollar volume.

The July 5 high of 44.68 could be used as a potential entry point by a speculator. Volume has dried up nicely in much of the basing area, as shown below.

Annie's (BNNY) Gilmo Report Stock Chart

In summation, to repeat what was said here a week ago, “institutional interest in this market is adequate for profitable speculation. The names above, and those in recent reports, can be used to form a watch list for the position trader.”

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.