Market Comment

Fertile Ground for Speculation

July 1, 2012

 

 

“When you take your initial position, you have no idea whether you’re right or not. What’s exciting is if it starts to go your way. Now that’s thrilling.”

                    –Paul Tudor Jones

Last week’s key session was that of Thursday, when price put in a wash-and-rinse day to close just below the open, as shown below. This took out the prior swing low of three days’ previous (bar”A” in the below chart), and set the table for a takeout of Wednesday’s high, which transpired Friday.

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It should be noted that this behavior was not “known” in advance. There was certainly the possibility that the Nasdaq would go down and test the June low. Despite this possibility, we operated with a bullish bias, noting in last Monday’s report “Until we see more breakdowns in the leaders, Thursday’s weakness will not be considered the beginning of the end of the post-June 4 move. Few glamours offer clear entry points, but this is likely to change over time should shares regain their sea legs.”

But we did not “know” price would put in the Thursday reversal and move higher. This point is made because no one owns a crystal ball that foretells exactly what the market will do.

We had the bias, and that was premised upon the solid basing action of various speculative growth stock glamours.

All of this is to say that trading or speculating is about probabilities and uncertainty. How one responds and manages risk in the face of this constant uncertainty will dictate one’s success.

In last week’s report, the positives that were mentioned included “… 1) fairly abbreviated bases by numerous glamours, indicating some urgency by institutions to put money to work, and 2) more relative strength lines that precede price into new-high ground than any time in memory.”

Another positive was that there was a good amount of negativity, including weakening growth concerns and Europe. Good bottoms emanate from a belief that things will only get worse.

Among the names, Linkedin (LNKD) has seen volume dry up since it began forming a shelf over the past two weeks. This is viewed as a positive, as it shows profit-taking was not excessive following its 22% rise earlier in June. 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.

Zooming out, the stock more than doubled from late November to its May high. Hence, its current base is seen as a normal consolidation of this move prior to its next attempt at a run.

Linkedin (LNKD) Gilmo Report Stock Chart


Alexion Pharmaceuticals (ALXN) was noted here in the June 10 report (“The May 22 high of 94.36 could be used as a potential entry pivot.”) The stock is now at 99.30 and at the outer reaches of what might represent a reasonable entry vis-à-vis risk unless one was to use a junior-sized position.

Alexion Pharmaceuticals (ALXN) Gilmo Report Stock Chart


Zillow (Z) is one of the few stocks publicly traded that possesses earnings growth estimates for both current and next fiscal years that are triple-digit. It has that “something new” that most big-winning stocks have had historically, and for these reasons it has been worth watching. There is no clear entry here, but as it puts some seasoning on its cup base it can be expected to offer an attractive entry.

Now that the move in the averages is more obvious and Z’s turn up the right side of its base is more evident, we would expect institutions to begin leaving their footprints on the tape, as they did Friday when about $30MM of stock changed hands.

Zillow (Z) Gilmo Report Stock Chart


Equinix (EQIX) is expected to continue its leading ways in the footsteps of its Q1 move of about 60%. Price is at the outside edge of being extended above its most recent base, and is at about the level where it was noted here as being potentially buyable. One could enter at present levels using a wide stop of about 162, which is a fraction of a percent below the 50-day line, and a junior-sized position.

We believe that it pays for one to use a junior-sized position on most initial entries, followed by an add-on position when price moves in the desired direction. The risk reduction from this approach more than compensates for the added return one gets by going all-in on the initial entry and having price tear higher, in our opinion. But each participant must do what best suits his/her temperament and risk tolerance.

Equinix (EQIX) Gilmo Report Stock Chart


American Vanguard (AVD) was first noted in the May 27 and June 10 reports as a stock to keep an eye on in the event the averages firmed up. AVD makes insecticides and fungicides for agricultural use. This does not fit the “something new” mold, necessarily, of a big-stock winner. Price went up nearly 1.5 times from Thanksgiving to its recent high. Estimates are 34%/25% for ’12/’13. A medium-term speculator could use the May 31 high of 27.25 as a potential entry for an initial, junior-sized position.

American Vanguard (AVD) Gilmo Report Stock Chart


Facebook (FB) has been unattractive up to this point. Expected earnings growth of 27% for ’13 is enough to support a potential move up. The below chart shows a low-level, cup-with-handle base. 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.

Facebook (FB) Gilmo Report Stock Chart


SXC Health Solutions (SXCI) shows earnings estimates of 45%/25% for ’12/’13, the type of growth that is always preferred in these reports. Group RS is right near the top of the heap. Worth watching for a pullback or ensuing breakout above its 103.97 high of June 19.

SXC Health Solutions (SXCI) Gilmo Report Stock Chart


Synacor (SYNC) has an average dollar volume of less than $15MM and tripled in less than four months after going public. The technology concern has big growth estimates and potential for a breakout move. 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.

Synacor (SYNC) Gilmo Report Stock Chart

In summation, the action of Thursday and Friday confirms that the table is set for the speculator in aggressive growth stocks. 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.