“If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start.”
–Paul Tudor Jones
The clue that the May-June decline in the averages was going to be temporary, and not lead to a bear market, was the performance by risk-on, or more speculative segments.
Specifically, if the averages were going to get into real trouble, small-capitalization, retail, consumer discretionary, financial, and recent new issue segments would have lagged in May-June. Ditto for the Nasdaq Composite.
The fact that none of this occurred was enough to know that the clouds – which were never cumulonimbus types, but the thinner, benign cirrus examples – would part, allowing the sun to shine anew.
It was not known how long this soft spell would last, but one clue would be when some of the glamours began threatening the tops of their bases, and actually clearing them. Once this began transpiring, there was nothing else to hold an intermediate-term speculator back, not an O’Neil follow-through day or anything else.
The averages never did pull back by as much as 8% from their May 22 peaks, and thus did not qualify as an intermediate-term correction, in our book.
Again, recognizing that the speculative sentiment had not gone into hibernation was the key. Emerging markets were the one area that did not hold up.
When it comes to recent new issues, these often act as a canary in a coal mine. A number of these that are leading in a market advance will drop15%-20%+ in little time at all once the averages show some concerted weakness. This time around, this did not occur. This was a sign that the hot money was willing to stay with this bull market.
The big picture is that of a market discounting a bright ’14 for the economy. That, and continued central bank accommodation.
Meanwhile, as another earnings season is unfolding, players should be aware of the earnings release dates for both stocks held and those being stalked for purchase. Some participants will not enter anything until after earnings are released. Others will not let an impending earnings report prevent a stock from being purchased, but may take a junior position prior to, and through, the release.
There is no right way to play earnings. It comes down to what suits the player, given his temperament, risk tolerance, etc.
Otherwise, there is precious little not to like about this market.
Among the names, Netflix (NFLX), which along with LinkedIn (LNKD) and Tesla Motors (TSLA) form a Three Musketeers of institutional must-own issues – the über glamours of the current cycle, certainly among the large-investor set – cleared a symmetrical, eight-week base last Thursday. This pattern setup was out of a textbook and featured a few tests of 1) the prior base, 2) the round number and psych level of 200, and 3) the 50-day moving average line.
There was also a nice little dry-up in both volatility and volume the week before last, no doubt influenced by the holiday week. This was followed by three days of volume and volatility expansion, the last of which showed volume at 59% above average as price rose to the top of the base. This latter session was tantamount to the stock announcing it was ready to be taken.
One of the better-kept secrets that we are aware of is none other than the Facebook page of this Web site, www.gilmoreport.com, where NFLX was discussed after the close of 7/9. We also noted NFLX as “buyable at current levels” of 233.10 (the 7/8 close), in the MarketWatch column of 7/9.
(The Facebook page is turning out to be a handy repository for various ideas and setups intraweek, there being about 60+ so far, most of which are not appearing anywhere else.)
For those who missed NFLX, the stock can still be taken around Friday’s closing level of 257.26, using 235.58 as a stop. This is just below the 235.88 which is the key swing high in the middle of the base. In a general market pullback, price could easily pull back and violate the base top at 248.85, hence the usage of 235.58. The 235.58 level is 8.4% below Friday’s closing level, and could be halved to 4.2% if a half-sized initial position is used.
(The subject of stops is a completely personal thing, and the above represents an idea, but in no way is there a single best method or place to put a stop.)
Pharmacyclics (PCYC) was noted here in the last report (“The 6/3 high of 93.67 serves as a potential entrance pivot.”). Last Wednesday the stock provided a nice trade-through entry (no gap) en route to a breakout that day on volume 176% above average.
This was an example of why bases are necessary to take people’s attention away from a hot stock. PCYC had moved up 113% in about four months before announcing a primary offering of stock, which marked the peak for this hot stock. PCYC then formed its four-month base, which had the effect of removing the hot money from it. But the large investors were still accumulating it, as can be seen on a daily chart.
The stock is currently extended and does not offer an attractive entrance.
LinkedIn (LNKD) was noted in the last report (“LNKD is one to watch for a suitable entrance. The 5/15 high of 192.56 is too far away to discuss here, as a more attractive opening may materialize in the interim.”).
The stock can be taken on a clearing of the 5/2 high of 202.91. This represents the top of the 10-week cup that LNKD is forming. This is another textbook example of a constructive base, the type that you might take home to meet your parents.
It is almost perfectly symmetrical and is 21% deep, normal for a 10-week pattern that followed a 63% run over three months by a $22B capitalization issue. A moderate minus is the lack of real accumulation that you can sink your teeth into during the formation of this base.
Tesla Motors (TSLA) was discussed on our Facebook page on May 24 (“…Tesla Motors (TSLA) is a potential buy above Thurs high of 93.01 w/ protective stop of 8% on a junior sized initial position (half of normal, which results in 4% de facto stop). Thurs showed powerful outside day, up 6% on heavy volume of 77% above average.
Of note: TSLA has potential to be a major disruptor with its electric-vehicle technology and all-robotic manufacturing process which gives it the highest gross margin in the industry…unlike its rivals, it uses a direct-to-customer sales model (no dealer network)…its Model S was the No. 1 selling luxury vehicle in Q1, topping Mercedes’ S Class by over 50%…CEO Elon Musk (Paypal co-founder) is buying $100MM in stock…short interest is about 34% of float at last calculation, providing it with potential fuel for upward revaluation as shorts cover. Outside day + big volume after major run-up + disruptive technology in a giant industry spells “b-i-g-p-o-t-e-n-t-i-a-l”).
A month later, TSLA was discussed again on our Facebook page on June 27 (“For an aggressive operator, Kevin sees Tesla Motors (TSLA) offering a potential cheater entrance above the 6/20 high of 107.13. The stock has shown some very good relative strength intraday recently, and seems to just want to go despite the muddy market tone. A 7% sell stop can be used to mitigate the risk of being incorrect.”).
Bottom line: This is a company that is turning the No. 2 largest U.S. industry on its ear. This is a rarity, and is the reason why large participants are spiritedly buying the title.
At present, the stock is extended and does not offer attractive entrance.
Conns (CONN) was noted in the July 9 MarketWatch column (“A potential entrance would be a takeout of the 55.20 high of CONN’s four-week pattern.”). It is the leading stock in the leading group (consumer electronics retailers). Earnings are expected to grow by 62%/32% in the January ‘14/’15 fiscal years.
The stock is 5% past the four-week shelf from which it cleared last week. Using an 8% stop and a junior-sized initial position around Friday’s closing level of 57.96 would provide a stop of 53.32. The junior position size would have the effect of reducing risk to 4% if proven incorrect.
Lions Gate Entertainment (LGF) was discussed on our Facebook page (go to FB and search “Gilmo Report”) on July 3 (“Kevin believes Lion’s Gate Entertainment (LGF) could be taken above the 5/31 high of 30.57.”).
The stock is 7.6% past its base top and does not represent attractive entrance.
Santarus (SNTS) was mentioned in the MarketWatch column of 7/9 (“An aggressive speculator could consider taking the stock above Monday’s high of 24.07. A reasonable stop would be below Monday’s low of 22.48, or less than 7% below entrance.”).
SNTS was also noted on our Facebook page last Friday (“Santarus (SNTS) is a drug developer showing rapid earnings and quarterly sequential revenue growth, plus major growth estimates for ‘13/’14 (219%/51%). After breaking out earlier in the week, Kevin believes the stock can still be purchased around Thurs closing level of 24.83, with 8% stop.”).
The stock showed very nice confirming volume last week on two days as it came up out of its base and followed through. Price is 6.5% past the base top and does not offer attractive entrance.
Zillow (Z) cleared a nine-week base on Friday, but volume was 28% below average. Due to the lax volume, this would be one to keep an eye on, but not to enter presently.
YY Inc. (YY) has a lot of what we look for in a stock. The Chinese social media concern has big earnings growth estimates for ‘13/’14 of 63%/68%, it is a recent new issue that is up 200% since coming public last November, and it has high sequential revenue growth over the past few quarters. Its group is in the technology sector, which means growth. In fact it is the leading stock in the leading group (Internet – Content).
Liquidity is good, at $30MM in daily dollar volume on average, but not the sort that invites classification as an institutional must-own.
YY was noted on our Facebook page on May 29 (“Kevin sees YY Inc. (YY) as a potential long position trade above Mon’s high of 26.94 with a sell stop below Mon’s low of 25.25.”). This was a pullback entry. Price moved up 15% over the next two weeks, then got caught up in the general market weakness of mid-June and returned to below the entry point, where it found support at the 50-day line.
Last Thursday’s MarketWatch column also discussed YY (“The stock can be taken on a breakout of the 30.95 high of 6/10, using a standard stop.”), and the stock broke out of its four-week pattern last Thursday. Volume on the breakout was significant in that it was 201% above average in a week in which volume was lower pretty much across the board.
YY is extended at present and does not offer attractive entrance. This, like others noted in this report, should be added to one’s watch list and monitored each day just like we have done with YY for the past months.
In the 7/2 MarketWatch column entitled “3 stocks for the aggressive speculator,” we highlighted some of the numerous recent new issues that had been acting very well.
The fact that many of these had not come off by 15%-20% during the 7% declines in the averages was a clue that the market was stronger subsurface than the averages indicated. It was a matter of waiting for these to begin to break out, which they did ahead of the averages.
Of the three stocks in the column, Gigo (GIMO) and Epizyme (EPZM) have worked out, while Marketo (MKTO) never spent enough time basing sideways, and subsequently failed on its breakout.
A chart of Gigo is shown below, as it represents what we prefer to see in a recent new issue: 1) 51% move in first two days as a public company, 2) a pullback to form a pivot, and 3) a breakout of that pivot.
Many times these recent new issues will not build that perfect eight-week base shown in textbooks. In fact, GIGO paused for all of two weeks before launching anew. However, the power shown by GIGO in its first two days of trading as a public company (51% move) told us something was up. It, along with the firmness seen in other recent new issues and the small-capitalization sector generally, also provided an extra degree of confidence that a breakout might work.
Much like Pharmacyclics (PCYC), Bonanza Creek Energy (BCEI) doubled from November to March before embarking on a lengthy base. This is one of the premier plays on fracking, and earnings growth is expected to be 50%/61% in ‘13/’14.
Friday’s high of 41.04 and the high of the base at 42.36 (the 3/18 high) represent two potential entrance pivots.
After the Three Musketeers, Three D Systems (DDD) is one of the most intriguing glamours in terms of potential. While not as deep as the other three, it is nonetheless putting up $831MM in average volume daily. Earnings growth is expected to be 28%/24% for ’13/’14, and the consensus estimate has been recently revised upward.
DDD’s pattern has tightened some in the past three weeks. A potential entrance above the 5/31 high of 50.98 presents itself.
Acadia Pharmaceuticals (ACAD) is a highly speculative biotech that is teen-priced and with no earnings, and none expected for ‘13/’14. We were able to take advantage of the stock’s 6/6 breakout which was discussed here in the 6/3 report, and which yielded a 36% move in three days.
Since then, the stock has formed a 19% deep, five-week base. It is setting up at present, and can be taken above 20.09, the base top and high of 6/10. Despite the lack of earnings, the stock is liquid at $64MM in average volume, and mutual fund sponsorship has swelled nicely in recent quarters.
Actavis (ACT) is the former Watson Pharmaceuticals, a successful generic drug maker with a very high rate of earnings growth stability. Earnings are anticipated at growing by 39%/15% in ‘13/’14. While the expected rate in ’15 is not thrilling, what is interesting here is the stock, with a $16B market capitalization, moving 62% in three months. Add to this the subsequent eight-week base with just a 10.8% depth, and the tightening over the past two weeks, and this becomes something to monitor for a breakout above the 133 high of 5/22. Aggressive players may consider the 7/1 high of 127.62 as a potential pivot for entrance.
Clovis Oncology (CLVS) is a development-stage biotech outfit targeting the anti-cancer treatment market. The company has no earnings or revenue.
This is a 99 relative strength stock in a 97 relative strength group. After a 375% move in three months, price has been forming a six-week pattern. An aggressive entrance would be above the 7/8 high of 77.
Trulia (TRLA) is another of the Internet – Content glamours. Earnings are expected to grow 17 cents a share in ’13, and by 71 cents in ’14, a growth rate of 318%.
Price is in the process of completing a10-week cup that is about as symmetrical of a cup pattern as one is likely to see. Without any sort of pullback or handle formation, we would prefer to let TRLA pull back or at least move sideways before considering an entrance.
Pacira Pharmaecuticals (PCRX) was mentioned on our Facebook page on Friday (“Kevin notes strong demand days for Pacira Pharmaceuticals (PCRX) over the last three weeks, including Thursday, as price moves to the top of a long base. PCRX has proven it has what it takes to be taken seriously as a leader, following its 50% move in two weeks in Feb/Mar. The stock can be taken above Thurs high of 31.90, with 7% stop. This is a biotech issue, and therefore is for very aggressive speculators only. Group has 96 RS.”). The comment stands.
In summation, the averages have come a long way since the low three weeks ago. The Nasdaq is up 12 out of 13 sessions and 9%+. Speculators should be cognizant of what might happen to any of their positions if the averages decide to pull back. This means proactively thinking about potential exit points in case things weaken more than a trivial amount.
Historically, the Federal Reserve chair’s semi-annual testimony to Congress, on tap for later this week, has produced notable bond market volatility. This of course may spill over into equities, though of course the direction is unknown.
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