Market Comment

Plodding Ahead

March 18, 2012

“In trading…the person who can easily admit to being wrong is the one who walks away a winner.”

–Victor Sperandeo, “Market Wizard”

Shares remain in good shape. Breadth and leadership are quite strong, enough so that any intermediate-term correction that occurs should be just that, a correction, and not the end of the bull market. Bulls like this one do not go away quietly.

Last Tuesday’s move by the Nasdaq out of its eight-day staging area came on less than average volume, as shown below by the last blue arrow. However, the S&P, the laggard index on this move, saw NYSE volume expand 15% above normal on its take-out day.


Last week’s report spoke of a paucity of names with actionable buy points. The reason is that most leaders are materially extended above their most recent support points. Medium-term speculation in a cycle’s growth-stock glamours is more than simply buying the names that go up the most.

That can work some of the time. But it leaves the potential for risk in the form of a leading stock pulling back 15% to 20%, as it will inevitably do from time to time. Buying stock coming out of a base, on the other hand, mitigates the risk of getting exposed to a 10% or more correction in price.

The bases are no longer there, for the most part, the market being a victim of its own success.

(Note: These reports are written from the standpoint of an intermediate-term speculator in the market’s leading titles. Other timeframes, shorter and longer, require other techniques which are not discussed here.)

Among the names, TripAdvisor (TRIP) works on a six-week base. The number of mutual funds that own the shares came to 545 in the December quarter, a high figure for the first period possible to own a stock. Earnings are expected to grow 17%/21% in ’12/’13, less than what is normally preferred here, but less important than the supply/demand picture for the shares.

Technically, the online content provider is expected to make a run at the Feb. 3 high of 35.93. Depending upon the action of the next few days, Friday’s high of 34.92 could potentially be used as a pivot. A look at the below chart shows this to be quite volatile, despite this being a liquid, institutional-quality number with market capitalization of $4.6B and average daily dollar volume of $81MM. Seat belts advised.

TripAdvisor (TRIP) Gilmo Report Stock Chart (CRM), the customer relationship software developer, is benefiting from the vogue for technology. Earnings growth is estimated by the Street at 15%/29% for the January ’13/’14 fiscal years. As the below chart shows, the stock has over the past 1.5 years been digesting its gain of over 600% in the ’08-’11 period. Price has been quickly building the right side of a base. Worth monitoring for a pullback or other consolidation which might present an attractive entry point as it nears its July high of around 160. (CRM) Gilmo Report Stock Chart

Spirit Airlines (SAVE) was mentioned in the last two reports as having “A potential entry for an aggressive speculator…above the Feb. 21 high of 19.96, using a junior-sized position with a 7% stop in case proven incorrect.”

Price did break out on excellent volume of 126% above average, but price could not follow through, with sellers taking it below the line. This resulted in a 5% drop from the potential entry point. Depending upon where one’s stop-loss was, this new high of 20.66 could be used as a re-entry point.

Spirit Airlines (SAVE) Gilmo Report Stock Chart

Freescale Semiconductor Holdings (FSL), like most semiconductor makers, is a cyclical animal, and not a true growth stock in the traditional sense. Nevertheless, with expected earnings growth of 185% in ’13, and given the leadership of the technology sector, this may be worth watching to see how it reacts around its recent high of 17.84 on Feb. 3. There is not enough evidence at this stage to know whether an attractive entry will present itself, but time will tell.

Freescale Semiconductor Holdings (FSL) Gilmo Report Stock Chart

The comment of each of the past two reports for Linkedin (LNKD) holds (“The Feb. 21 high of 96.31 still looks to be a reasonable entry pivot to use in the absence of additional evidence”).

Linkedin (LNKD) Gilmo Report Stock Chart

Fusion-Io (FIO) does not offer enough support in the event a move above last week’s high does not hold. It does represent that “something new” that is common in leadership names, in addition to having a high growth rate in revenue and earnings. Therefore, it is being watched for more development of its base. This clearly has the attention of institutions by virtue of its purported game-changing storage technology.

Fusion-Io (FIO) Gilmo Report Stock Chart

Zillow (Z), along with LNKD, has been one of the recent new issues with the most potential, in our view. Earnings growth of 170%/130% is expected in ’12/’13 by the Street. The chart below shows volume picking up last week after price tested its 50-day moving average line twice. The high circled below at 36.60 represents the most attractive entry potentially, pending more backing and filling. This is not a highly liquid issue, with average daily dollar volume at around $10MM.

Zillow (Z) Gilmo Report Stock Chart

Elsewhere, Air Lease (AL) has seen some buyers show up in the last week, and is worth watching as it attempts to seize its Feb. 17 high of 26.47…the positive action of recent new issues like Demandware (DWRE), Epam Systems (EPAM), Brightcove (BCOV), Bazaarvoice (BV), Proto Labs (PRLB), and Cost Plus (CPWM) says volumes about the speculative sentiment, a plus…

In summation, the market’s leadership and breadth
are strong enough so that the next correction of 8%-12% in the averages should not represent the beginning of a bear market. There are few growth issues which offer a long enough basing pattern to qualify for an attractive entry. For this reason, fresh-money buys should be few and far between.

As Livermore might say, the best course of action for a speculator is to do more sitting and less thinking. At least until the next setups present themselves.

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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.