Market Comment

Ruffling of Feathers

June 24, 2012

“Take your losses quickly and don’t brood about them. Try to learn from them but mistakes are as inevitable as death”.

–Jesse Livermore

Shares darkened the moods of some on Thursday, though the market had risen 10 times in 13 tries and was due for an unwind. Wednesday’s disappointment in some quarters that Big Ben did not do more to prime the pump was an excuse for short-term participants to unload.

Friday was business as usual, albeit on volume skewed due to rebalancing. The below chart of the Nasdaq shows price in an uptrend (higherlow, higher high) that was not violated by Thursday’s fall.


Positives include 1) fairly abbreviated bases by numerous glamours, indicating some urgency by institutions to put money to work, and 2) more relative strength lines that precede price into new-high ground than any time in memory.

Risks are the still-developing European situation, sinking commodities (reflectiveof slowing emerging markets), flagging US economic growth, and potential war in the Mideast.

Because we are focused on the supply-demand picture for shares, and not the backdrop, the risks do not impact the way we view the game. The market has a way of seeing better than anyone. By sticking to the trend, we are unlikely to miss a bull market and unlikely to risk precious capital during a bear. In itself, this might be the best part of this strategy.

Among the names, Linkedin (LNKD), which snapped back impressively Friday, up 4.6% on volume 35% above normal, could potentially be taken above the Friday June 22 high of 107.10 by an aggressive speculator using a standard 5%-7% stop. This is a favored candidate to be an outstanding leader due to its deep liquidity and face-melting growth rate.

The online social networking concern has grown revenue at triple-digit rates for seven-straight quarters. Earnings have grown by triple-digits in the last two. Very few publicly-traded companies are expected to show earnings growth of 94%/79% in the ’12/’13 period. To be exact, just 11. This is 11 priced at $13 or higher out of 6,000+ companies.

Linkedin (LNKD) Gilmo Report Stock Chart

Alexion Pharmaceuticals (ALXN) was noted last week (“Friday’s high of 94.38 could potentially be used as an entry point.”) The stock did clear this level on Tuesday before being turned back just shy of par on Wednesday. Another entry may possibly present itself on a takeout of the recent high of 99.41, but this will depend upon general market health, and is being monitored for now.

Alexion Pharmaceuticals (ALXN) Gilmo Report Stock Chart

Netsuite (N) was noted in the last report (“The March 27 high of 51.78 could be used as a launch point potentially, but more evidence will be needed before that area can be played with confidence.”) The stock then broke out of a 12-week base last Wednesday on volume 82% above average. Friday’s volume spike in the below chart is related to the Russell index rebalancing.

A move above Friday’s high of 52.82 could be used for a starter position or a possible add-on position. A pullback to 50 or below would create a potentially sounder base, however leaders like Netsuite do not often make it easy to enter with picture-perfect basing patterns. This explains the view that Friday’s high could be used as a pivot for a junior position or a possible add-on position if entry was already made on the breakout.

Netsuite (N) Gilmo Report Stock Chart

Ulta Salon Cosmetic & Fragrance (ULTA) was noted in the last two reports as being potentially buyable above the high of 97.89. The stock did poke its head above this level last Wednesday on volume 8% below average. A breakout with volume less than 40% above average equates to less conviction among investors, and is a higher risk entry. If one had entered on the breakout, a 5% stop-loss would have survived the weakness last Thursday and Friday. The low volume on the breakout day, and subsequent action of the stock objectively says that it is not ready just yet for a genuine move higher without at least some additional backing-and-filling.

ULTA’s base is among the best of the leadership names, the growth is there (34%/26% for January ’13/’14 fiscal years), the earnings stability is there, and the liquidity is abundant (averagedollar volume of $109MM). This is one that deserves attention.

Ulta Salon Cosmetic & Fragrance (ULTA) Gilmo Report Stock Chart

SXC Health Solutions (SXCI) was noted in the last report (“Technically, a position trader can potentially use the June 14 high of 96.20 as an entry pivot, with a 5%-7% stop loss.”). Price then broke out above the pivot (thepurple horizontal line in the below chart. Volume was not especially strong on that day, and well below the minimum 40%-50% above average that is preferred on a breakout day. Along with some other leaders, the stock reversed late last week.

SXC Health Solutions (SXCI) Gilmo Report Stock Chart

Facebook (FB) has not been attractive to this point. IPOs often offer fantastic trading vehicles, but only after they form their first base following the offering.

FB is forming a cup-shaped base and is being watched for the first pullback. Tuesday/Wednesday of last week did see some stalling action on dimming volume which we then noted in a separate report might offer the very-aggressive operator a potential entry point for a trade.

Facebook (FB) Gilmo Report Stock Chart

Home Depot (HD) was noted in the last report (“For the conservative speculator, potential entry would be above the May 3 high of 52.88, using a stop loss just below the 50-day moving average, currently at 50.50.”). The stock staged a weak breakout attempt on Tuesday that fell on deaf ears. HD may not become an outstanding leader, as its growth rate normally does not correlate with big-winning stocks, but should nevertheless outperform if the general market advance continues. One of the best bases in the market.

Home Depot (HD) Gilmo Report Stock Chart

More glamours act well than otherwise. Of those that have failed post-breakout, the list includes Sally Beauty Holdings (SBH), Under Armour (UA), and Cerner (CERN), but not much else.

In summation, until we see more breakdowns in the leaders, Thursday’s weakness will not be considered the beginning of the end of the post-June 4 move. Few glamours offer clear entry points, but this is likely to change over time should shares regain their sea legs. Volume needs to kick in to provide comfort that institutions are committed to this market.

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.