Market Comment

An Orderly Descent

April 15, 2012

“Old Baron Rothschild’s recipe for wealth winning applies with greater force than ever to speculation. Somebody asked him if making money in the Bourse was not a very difficult matter and he replied that, on the contrary, he thought that it was very easy… “I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.”
            –Jesse Livermore, Reminiscences of a Stock Operator

Attention shifted last week from fundamentals to Europe and China, marking a return to the mindset that had dominated proceedings for much of ’11.

The Nasdaq is in the midst of a 4.7% reaction off the top; the S&P 4.6%. On the surface, the selling has been orderly, and devoid of any headlong rush for the exits that often marks a full-fledged correction.

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The backdrop, at the margin, gets worse. This features slowdowns in China and Europe, plus more fiscal issues in the Eurozone.

As for the latter, market participants are again watching Spanish yields closely, with the 10-year note yield moving up this month from 5.33% to 5.98% Friday. The five-year high is 6.70%, set in November. The likelihood of a Spanish default, then, rises. The view here has been that the Eurozone breaks up sooner or later. And it may be Germany that leaves.

Otherwise, last week’s takeaway was the market’s separation of the wheat from the chaff among the leadership. Even if some of the glamours staged half-hearted attempts to vault to new highs, the week’s developments left no doubt as to the identity of the genuine leaders.

Starbucks (SBUX) acted best, with volume stunning. Earnings estimates have been lifted in recent weeks, and now stand at 22%/24% for Sept ’12/’13 fiscal years. This is impressive for a $46B market capitalization stock. During this spate of general market softness, the stock had only corrected by 3%, less than nearly all of its fellow leaders. At present, there is no suitable entry point, since the nearest area of potential support is the 50-day MA, 15% below current levels. We did not mention SBUX at the time of its breakout from its first base (seebelow), as the general market was not conducive to longs at that point. The second base eluded

Starbucks (SBUX) Gilmo Report Stock Chart

us, as it was a week shy of the five weeks that we normally like to see for an attractive entry. Mainly, however, the growth rate was at the time not quite up to where we like to see it. Since then, this has improved.

Chipotle Mexican Grill (CMG),
mentioned in our Dow Jones MarketWatch column of Jan. 19 (“…could be entered by an aggressive speculator – not an investor – at present levels
with a protective sell stop below the 50-day moving average at about 331.22“), broke out of a two-week shelf this past week, taking runner-up honors on the week. Estimates for ’12/’13 have moved up since CMG broke out of its base in January. Leaders can be entered early in bull markets upon clearing two, three, and four-week shelves, but the risk is higher that such an abbreviated pattern will not provide the support needed to contain a pullback.

Chipotle Mexican Grill (CMG) Gilmo Report Stock Chart


Tractor Supply (TSCO) was another glamour that came out last week on obvious volume. The stock was mentioned in our Jan. 17 report (“…could be entered at current levels using a starter position (half normal) and a tight stop loss of below the low of the breakout day”). Like SBUX and CMG, there is not enough of a base to offer much in the way of support if price decides to pull back soon.

Tractor Supply (TSCO) Gilmo Report Stock Chart


Yum Brands (YUM) is not a name that is associated with dynamic leadership, yet it has a 93 relative strength ranking and came out last week on major volume. The company has the highest earnings stability rank possible over the past five years, and it is easy to see why an institution with a growth mandate would want to own the shares. Growth is estimated at 14%/15% for ’12/’13, in line with its 14% annually compounded growth rate over the past five years. Like SBUX, CMG, and TSCO, price came out of an abbreviated pattern that may not offer much support should it sell down in the near future.

Yum Brands (YUM) Gilmo Report Stock Chart


Monster Beverage (MNST), another leader that was mentioned here as offering an attractive entry on Jan. 18, cleared a short pattern Friday on volume 20% above average. Again, there is not enough of a base here to warrant attractive entry.

Monster Beverage (MNST) Gilmo Report Stock Chart


Linkedin (LNKD) was mentioned in the week-ago report that “A potential pivot for entry would be Mar. 27’s high at 106.97.” Friday’s clearing of this area came on average volume, not the 40%-plus-above-average volume that is preferred, and therefore should not have been taken. If the stock was entered, a 5% stop loss should be used.

Linkedin (LNKD) Gilmo Report Stock Chart

In the last report, it was mentioned that Baidu (BIDU) could be taken above the Mar. 27 high of 154.15. Price has not reached that point yet, and we would respect the bearish undercurrent of the general market by refraining from entry should price move above this point in coming sessions.

Baidu (BIDU) Gilmo Report Stock Chart


Apple (AAPL) was mentioned in the Jan. 31 Dow Jones MarketWatch column
(“The stock, whose price is 4.8% above the top of its base, could still be purchased at current levels by a speculator looking for a move over the medium-term.”). At present, price has retreated 6% off its high. It makes sense to consider selling the position, if price undercuts the Mar. 30 low of 597.94 on a closing basis. The idea here would be to re-enter should price firm up, move sideways for a while, and then break out.

The “it” company operates on a September fiscal year, which means that the ’12 year will end in five-and-a-half months’ time. Earnings are expected to grow 60% in the September fiscal year, followed by a big drop to 14% in the September ’13 year. The market is no longer fixated on the ’12 earnings estimate, but rather on the ’13 estimate. It is unclear how the stock will continue its big-winning ways when it has an estimated 14% growth rate ahead of it. This is no doubt a respectable growth rate, but not one normally associated with a big-winning stock. Therefore, this is a very different situation from CMG, SBUX, LNKD, etc., in terms of forward growth expectations.

Apple (AAPL) Gilmo Report Stock Chart

The above represent the best acting of the glamours. Others that act well include Spirit Airlines (SAVE), Dollar Tree (DLTR), Select Comfort (SCSS), Sally Beauty Holdings (SBH), SXC Health Solutions (SXCI), Whole Foods Market (WFM), Ulta Salon (ULTA), Under Armour (UA), Ubiquiti Networks (UBNT), Las Vegas Sands (LVS), Equinix (EQIX), and Cost Plus (CPWM).

The intermediate-term speculator, for whom these reports are written, is urged to track the daily price/volume action of the leaders that are still holding up, such as those in the above paragraph and charts in this report. This will provide the best means of determining to what extent large investors, the most important players in the market, are willing to sit tight with their positions.

Should these better actors begin to come under material distribution, joining other glamours that are already under pressure, the odds of a deeper market correction increase.

In summation, shares are in the midst of what is believed to be the second intermediate-term 8%-12% correction since this bull market began in October. Since we do not possess a crystal ball, there is no way of knowing the extent, duration, or exact timing of this pullback in the averages. Hence, there is no way of knowing whether this correction turns into a bear market. For the intermediate-term speculator, this is immaterial as his/her timeframe is a few weeks to a few months. Long entries should not be attempted at this juncture until more leaders begin to right themselves and the averages can print one or more major accumulation days.

The action in institutional must-own leaders like Apple and Priceline.com (PCLN) will be telling.

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.