Market Comment

Quiet Improvement

April 29, 2012

“Besides trading, there is probably no other profession where you have to admit you’re wrong. In trading, you can’t hide your failures. Your equity provides a daily reflection of your performance.

–Victor Sperando, “Market Wizard”

In our last report of a week prior, it was mentioned that “There remain a decent assortment of leaders that hold up. These include Dollar Tree (DLTR), Pricesmart (PSMT), Cost Plus (CPWM), Yum Brands (YUM), Tractor Supply (TSCO), Ulta Salon (ULTA), Celgene (CELG), Whole Foods Market (WFM), Spirit Airlines (SAVE), Alexion Pharmaceuticals (ALXN), Mastercard (MA), Liquidity Services (LQDT), Bazaarvoice (BV), Dunkin’ Brands Group (DNKN), Petsmart (PETM), Monster Beverage (MNST), Lululemon Athletica (LULU), and Starbucks (SBUX). If these show distribution in the days ahead, this will be an objective sign that the general market weakness is likely to extend further. Conversely, if these remain stout, and show some accumulation days, the averages’ decline may be numbered.

Since then, things have improved not only at the surface (theaverages), but also subsurface (theleaders). Nasdaq volume, if not explosive, has nonetheless increased as price has risen. It would actually not be the worst thing for the averages to do more backing and filling in order to keep the crowd honest.


Among the names, Apple (AAPL) last week was mentioned that “If AAPL builds a new base, it then becomes a possible candidate for speculation. But until then, attempting to guess at a bottom in the stock is left to others.”

The view here is the stock does not simply go back to its prior high without a base-building process lasting at least a few weeks and possibly a few months or longer. If this is incorrect, and the stock breaks out to a new high over the course of the next few days or week, we would be wary about coming in with anything more than a junior-sized position initially. The reason behind this is that the stock’s character changed when it put in the three range expansion days of Apr. 13, 16, 17. This was discussed recently. Add to that the big gap day of last week, and the stock needs some time to gather its composure. The odds do not favor a run for the roses right away.

Apple (AAPL) Gilmo Report Stock Chart

Pharmacyclics (PCYC) has been a leader in this bull market, tripling since last fall. This is a higher-risk play, given its industry group (biotech), its history of operating losses, and the fact that it has yet to release Q1 earnings. For the aggressive speculator, a potential entry may present itself above its current five-week pattern at 29.43. Volume on the breakout day should be well above average.

Pharmacyclics (PCYC) Gilmo Report Stock Chart (PCLN), which broke out of a nine-month base on Feb. 13, as noted in the MarketWatch column at the time, is quite interesting in that it has had one of the most unidirectional, persistent moves among all the glamours. When a stock has this type of deliberate move without much selling occurring on the way up, and when this move emanates from a lengthy base, or what some might call a first-stage base, the first pullback can usually be bought on the breakout. Even more interesting is that PCLN is not pulling back excessively (12.5% from top to the low of this three-week retracement). Too, Friday saw the biggest volume on an up day in more than 40 trading days. This says the big money is not content to wait for a larger decline before getting in or adding to their positions. Institutions are eager. With the understanding that earnings are due to be released in early May, the stock can potentially be entered by an aggressive speculator on a takeout of the 774.96 high of Apr. 10. This may occur before the stock has a chance to complete a formal base of five weeks or more, however in this instance the risk is viewed as worth taking. To mitigate risk, we would suggest using a scale-in entry, whereby a junior sized position is put on initially. This can subsequently be followed up with an add-on position if price moves higher after entry. (PCLN) Gilmo Report Stock Chart

Equinix (EQIX) had one of the most impressive run-ups of Q1. It was overlooked here because the market had not quite reached the point at which we felt was conducive to taking longs at the time EQIX broke out (firstweek of January). The below chart shows the unidirectional character of the stock, even more so than PCLN. It is listed here as one to watch to see if there is a pullback opportunity for entry in the days/weeks to come. Earnings were just released and estimates are 55%/35% for ’12/’13.

Equinix (EQIX) Gilmo Report Stock Chart

Dunkin’ Brands (DNKN) is not a business that one normally associates with a big-winning stock. However, the shares have shown good relative strength during the pullback in the Nasdaq Composite, enough to break out of a six-week pattern. Volume on the breakout day was 78% above average, though price did not close well. This is another that can be watched to see how it acts going forward. The price/volume indicates the direction of least resistance is up.

Dunkin' Brands (DNKN) Gilmo Report Stock Chart

Under Armour (UA) broke out of a pattern a week ago on its earnings report and then retreated back below the lip. This is not a positive, however it does not necessarily need to be a negative. It may have been caused by just a couple of institutions heading for the exits in a hurry. In light of the superior earnings estimates of 27%/28% for ’12/’13 and the respectable level of earnings stability over the past several years, this may represent a potential entry above the 102.86 high of the breakout day (Apr. 20). Volume dimmed since the breakout day and then rose on Friday’s advance.

Under Armour (UA) Gilmo Report Stock Chart

Alexion Pharmaceuticals (ALXN) may represent potential entry above the top of its current base, with the Mar. 26 high of 95.01 being the pivot. The quarterly earnings release is out of the way. Risk is higher here, as it is a biotech. A plus is the support shown by the 50-day, as seen below.

Alexion Pharmaceuticals (ALXN) Gilmo Report Stock Chart

Laredo Petroleum Holdings (LPI) spurted 64% in the first nine weeks following its Dec. 15 IPO. Any stock that can do this right after going public has our attention. The oil & gas explorer is expected by the Street to put up earnings growth of 35%/63% for ’12/’13, with the next earnings release expected to come out during the first half of May. Price has put in a higher low and two higher highs, and is safely above the 50-day. Volume has dimmed nicely over the past fortnight.

A potential entry for an aggressive speculator might be above the two-bar high of last Wed-Thurs, as shown by the circled bars in the below chart.

Laredo Petroleum Holdings (LPI) Gilmo Report Stock Chart

Michael Kors Holdings (KORS), which doubled in a little over eight weeks after it went public in December, is another that is worth watching. There is not an attractive entry at present. But given the prodigious earnings growth expected in the March ’13 fiscal year (41%), and its past history as a dynamic leader, it is being monitored for future entry. Quarterly earnings are not expected until some weeks from now.

Michael Kors Holdings (KORS) Gilmo Report Stock Chart

In summation, both averages and leaders have improved over the past week. Volume is not impressive, and this bears watching. Further sideways action by the averages would be preferable as a means of keeping any froth down to a minimum. A few glamours approach attractive entry points, while others moved out quickly to new highs without pausing for any sort of opportunity for entry. The leaders on the next advance in the averages are likely to be the strongest actors currently, and speculators should concentrate their activities here, not on laggards.

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.