Market Comment

January 26, 2014

January 27, 2014

Many of life’s failures are people who did not realize how close they were to success when they gave up.”
–Thomas A. Edison

In the wake of the averages’ 2% drubbing of Friday, we would use care about jumping to any conclusions. The following is what is objectively known:

1)    The averages have gone 14 months since their last 7% decline. This is a long period of time, and the longer the trend, the more likely a correction.

2)    Very few leaders form 5+ week bases. The intermediate-term advance is mature. For the base breakout player, the market is a victim of its own success.

3)    Since Jan. 1, the Nasdaq Composite has put in six distribution days, five of them major.

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In light of Nos. 2 and 3 above, most followers of this strategy should be in a high cash position. An exception would be for those legacy positions obtained at substantially cheaper quotations, for which there is an interest in playing things out for a larger gain.

The primary trend does not appear to be in jeopardy. As we have mentioned a number of times, the two signposts of long-term direction that we have found to work the majority of the time (but not always) are: a) the average stock’s performance vs. the averages, and b) interest-sensitive segments vs. the averages.

Neither the average stock nor interest-sensitive indices show the material deterioration, or divergence from the averages, that has historically served as a leading indicator of a primary market top.

The following are titles that for various reasons are the ones we are following the closest. Obviously, much depends on the general market, and whether this develops into an 8%-12% intermediate-term correction or something less. Since most issues follow the direction of the averages, continued corrective action by the Nasdaq may result in none of them being appropriate long candidates.

Among the names, Criteo SA (CRTO) develops algorithms to enable its e-commerce clients to better grow their online sales. Most analysts look for earnings to have grown 90% in ’13 and another 126% in ’14. Revenue growth has been between 62% and 81% in each of the past four quarters, respectively.

The company went public Oct. 30 at 30, trading as high as 45 that day. Since then price forms a base, and last week formed a reference high at 38.95. This high could potentially serve as an entrance pivot for an aggressive operator, depending upon general market health in the sessions to come. We especially like the estimate acceleration, an uncommon sight up in the rarefied air of triple-digit earnings forecasts.

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Gilead Sciences (GILD) shows earnings estimates of 3% for ’13 and 66% for ’14. Most recently, these estimates have been revised upward. The company, the largest by market capitalization in the biotech group, was noted here in the last report: “A takeout of the 12/09 high of 76.11 would represent a potential entrance for the speculator.”

Price took out the 76.11 high of its base and moved as high as 84.40 before easing. The stock is now being watched as a possible pullback candidate, given its relative strength (it has outperformed for six-straight sessions), group strength (ranked 99th percentile in relative strength), and its recent breakout from a base which should provide some degree of support. Earnings are expected to be released after the close on Feb. 4.

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NPS Pharmaceuticals (NPSP) had a good run last year due to the market discounting (pricing in) a long-awaited moved to profitability. Most analysts peg the biotechnology concern losing 21 cents a share in ’13, but turning a 39-cent-a-share profit in ’14.

The last report noted that “At this juncture, due to the recent strength, we would prefer to allow price to form a handle or pull back, as opposed to using further strength from here as an entrance.” Price forms a textbook, 16-week, cup-with-handle base. Last week, the stock twice attempted to break out of this pattern. This is a 98 rs stock in a 99 rs group. We believe NPSP has enough going for it in terms of relative strength, group relative strength, expected move to profitability in ’14, and encouraging chart pattern to warrant a potential entrance should Thursday’s high of 37.43 be cleared. At the time of the breakout, volume should be on track to finish the session by at least 50% above the 50-day moving average of volume by session’s end.

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With earnings out of the way last week, most analysts expect Netflix (NFLX) to grow its bottom line by a very beefy 90%/75% in ‘14/’15. It is exceedingly rare for a liquid glamour like NFLX to show estimates of this size for the next 24 months. Estimates are only estimates and are therefore subject to change. But it is the market’s focus. The company is not without its risks, including so-called Net neutrality and competitors like Amazon.com (AMZN). Our job, however, is to let others parse the fundamentals, while we focus on the supply/demand quotient of the stock.

Last Thursday, in reaction to its earnings report, price vaulted 16% on volume 378% above average. This left price briefly in new-high ground, before easing. The stock is being watched to see how it acts in light of the general market weakness. Ideally, there is a handle formed over the next session or sessions that sets the stage for an entrance above Thursday’s high of 395.63.

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Palo Alto Networks (PANW) is a network security specialist whose earnings are expected to grow 100%/79% in the July ‘14/’15 fiscal years. Sequential revenue growth impresses over the past two quarters, at 11% and 14%, respectively. The stock has moved up 61% since bottoming in November. While price is just one week into the basing process, and unattractive technically from a breakout standpoint, PANW is noted here as a means of bringing the stock to the reader’s attention.

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Priceline.com (PCLN) shows a 24% earnings-growth estimate from most analysts in ’14, following an expected 31% in ’13. Revenue growth impresses, especially for a company of this size. Technically, price cleared a seven-week base of constructive depth last week on volume 25% above average, before being turned back Friday along with the general market. PCLN can be monitored for a takeout of the 1/22 high of 1214.19.

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Tesla Motors (TSLA) should grow earnings by 151% in ’14, according to what most analysts forecast presently. The stock does not present attractive entrance currently, but is being monitored for a pullback or some sideways basing action that would create a more-advantageous pivot. This should be very interesting in the event that the stock comes off more than it has in conjunction with the averages correcting further. More than most other issues, this would set the stage for a possible slingshot/spring-loaded snapback in TSLA.

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Twitter (TWTR). In the 12/6 MarketWatch column written 12/5, it was noted that “A potential entrance may present itself should price pull back over the next session or sessions.” Price then pulled back over the next session and broke out the following day, rising 61% over the next three weeks.

In the 12/17 MarketWatch column, it was noted that “One-day pullbacks may not be for everyone, and are likely embraced by very few speculators. Yet the volume on that day, the highest since the day after the stock’s debut, showed a lot of players keying on that particular pivot point. TWTR’s 19% advance in seven trading days prior to the pullback day would be expected to have elicited more than just a 1.5% decline. That it didn’t, and instead broke out, said something to the very aggressive operator in momentum names. Again, the unexpected is what was important.”

On 12/27 we noted on the Twitter feed two minutes prior to the open that: “Thurs showed spinning top, a candle pattern that indicates indecision & often the start of a topping sequence.” Did we know that this was the top? No. Speculation is a game of probabilities. One pieces together various clues to come up with a probable scenario. One then lets price confirm that scenario. Of critical import: Volume was the second-highest in the stock’s seven-week life, and yet following the gap open could muster very little energy and ended up inching ahead. This was a clear loss of momentum. The next day, price confirmed that.

On 12/30, we noted on the Twitter feed that “Issues that form witches-hat peaks like this tend to take months to recover and re-set their base.”

In our 01/13 report, we noted here that “Volume drying up constructively amid range contraction (daily hi-lo range) would be a sign that the speculative frenzy and attention heaped on the stock may be dissipating.”

Since the last report, volume has begun to dry up, along with range contraction. The stock is now four weeks into a base with 26% depth. This is deemed excessive for a four-week pattern. A plus is that price outperformed on four of the last five days, including the two down days seen in the averages on Thursday and Friday. Despite the excessive base depth, a very aggressive speculator might use the 1/17 high of 64.69 as a potential cheater entrance for a junior position. A less-aggressive player may prefer to see more of the right side developed before considering entrance.

It is to be noted that while the base depth may be considered excessive, with each day it becomes a little less so. More important, it is doubtful that large investors who seek to build a large position are going to let an “excessive base depth” deter them.

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Zulily (ZU) offers discounted sales events geared toward mothers through its namesake Web site. Most analysts see ’14 earnings growth of 250%. Sequential revenue growth has been high over the past two quarters, respectively, while top-line growth on a year-ago basis has been triple-digit for the past five quarters. The stock came public in November and was up as much as 88% during its debut session. Currently, price traces a wedging triangle pattern with lower highs and higher lows. This type of pattern tends to resolve itself in the direction in which price was previously heading, in this case up. An aggressive speculator could use the 44.96 all-time high of 12/23 as a potential entrance pivot.

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In summation, based on the behavior of the average stock and interest-rate proxies, any decline in the averages is expected to be a secondary correction at worst, not a primary top ending the bull market. Intermediate-term speculators should be in a high cash position by virtue of the six Nasdaq distribution days post-Jan. 1 and the scarcity of names forming five-week-plus bases. The names mentioned herein are long candidates in the event the general market stabilizes and firms.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

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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.
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.