Market Comment

Moderation

February 28, 2012

“It is better to be roughly right than precisely wrong.”

–John Maynard Keynes

Demand for stock has moderated over the past week. As seen in the below chart, this is accompanied by an easing of the advance’s trendline.

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Leadership remains stout, an indication that institutions are content to sit with positions. The speculative sentiment hums. Important segments, such as the brokers, retailers, and technology, outperform.

There is little to fear except fear itself.

Of course, when everything looks good and people begin to say “there is little to fear except fear itself” it is often time for shares to come in. When they do not, it is a sign that something unusual is transpiring. This happened numerous times during the Era, and was an indication that shares were walking on exalted ground.

These days are not to be confused with the Era, yet they suggest a market doing the unexpected – going up without a reaction – to which attention is to be paid.

The intermediate-term speculator in leadership titles should not attempt to outguess the market as to the coming reaction’s timing, extent, or duration. In ’93, we exited a strong market not because the market told us to do so, but because the Investor’s Intelligence survey indicated bullish sentiment was at a level that had in the past correlated with a secondary top. For the subsequent three weeks, the averages went straight up. With us on the sidelines in cash.

Lesson learned.

Otherwise, the majority of leaders mentioned in these reports have already broken out of bases and do not represent attractive entry at this time. The following are some that may offer entry in the near future.

Among the names, Linkedin (LNKD) was noted here in the last report (“potential entry for the aggressive speculator would be above the Friday high of 91.20, preferably on strong volume. The usual stop loss of 5%-7% should be used if proven incorrect.”) Because the preference here is, in most cases, to open with a junior-sized position, and then add on as price moves in the desired direction, the failed breakout, as shown below, would have lost about 2.6% of a normal-sized position (at most) if an exit was made at Tuesday’s close of 86.50, which is 5.2% below the suggested entry.

For those who missed it, there will likely be other entries should price move forward. One possibility would be above the Feb. 21 high of 96.31, though more time would be needed in order to observe price/volume behavior between now and then. In itself, the pullback following the takeout of the handle is not surprising, as price still has a bunch of overhead supply of stock to contend with.

Linkedin (LNKD)  Gilmo Report Chart

 


Zillow (Z) is one we like very much, as it represents that “something new” that often accompanies big-winning stocks, and has a projected earnings growth of 170%/130% for ’12/’13, a rare triple-digit title. At about $7MM in average daily dollar volume, though, it is not a liquid issue. As noted in the last report, “Once [the] noise [following its earnings release] is disseminated, the stock may have a chance to assault the 36.60 pivot point.” A potential entry would be above the Feb. 16 high of 36.60, as illustrated below.

Zillow (Z)  Gilmo Report Chart


Teavana Holding (TEA), a recent new issue in the business of retailing tea through stores in the US and Mexico, is expected to record 30% earnings growth in the January ’13 fiscal year. Price was unable to clear and stay above the top of a cup pattern that is itself part of a larger cup pattern going back to last summer. Earnings are due out shortly and are no doubt contributing to the cautious volume levels seen in the stock recently. Another illiquid growth stock with average daily dollar volume in the $7MM range. Worth watching.

Teavana Holding (TEA) Gilmo Report Chart

If there was any stock that is deserving of a break, and it has certainly taken one over the past seven months, it is Baidu (BIDU). A victim of its own success, price is forming a large base after an eightfold move since late ’08. Not much accumulation to speak of, yet, but should this overall advance continue into spring, the stock may find itself attractive once again to institutions.

Baidu (BIDU).  Gilmo Report Chart


Francesca’s Holdings (FRAN), first noted here in the Oct. 30 report, is just now beginning to offer an aggressive speculator something to consider. The women’s apparel retailer is expected by most analysts to record earnings growth of 41%/38% in the January ’12/’13 fiscal years. Earnings are due to be released shortly. Technically, price has been making strides in working off the excesses related to its IPO in July. This can be seen in the calming of volatility, both intraday and week-to-week, in the below chart. The circled high of Jan. 25 in the chart may represent a possible pivot for an aggressive speculator, pending the earnings release. This is another less-than-liquid number, with average daily dollar volume of just under $10MM. Worth monitoring.

Francesca's Holdings (FRAN) Gilmo Report Chart


Netsuite (N) was noted in the last report (“A possible entry above the Feb. 3 high at 48.82, preferably on big volume, could be considered by an aggressive speculator.”) The below chart shows price unable to stay above the handle area following its breakout of the 48.82 level. Worth watching.

Netsuite (N)  Gilmo Report Chart

In summation, most glamours have already broken out of bases and no longer offer attractive entry. From the standpoint of the intermediate-term specialist, it would not be the worst thing in the world for the averages to pull back. This would allow for easier separation of the wheat from the chaff, i.e. the real leaders from the also-rans. A speculator should not chase the market, and should use care to only enter positions when they offer attractive reward:risk ratios. This means that entering stocks without reasonable support areas beneath them should be avoided.

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.