Market Comment

Rustling of the Leaves

April 22, 2012

“They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.”
            
–Jesse Livermore, “Reminiscences of a Stock Operator”

Last week witnessed three Nasdaq distribution days and one for the S&P. The Naz is now in a 5.1% reaction off the top; the S&P 4.6%.

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The backdrop turns mixed. Europe worsens as evidenced by Spanish bond yields rising and lingering around the 6% level that some view as key. On the plus side, China (FXI) shows some strength relative to most everything else over the past three weeks. Yet coal, steel, and copper, all highly sensitive to China, continue to soften.

In our report of a week ago, it was noted that “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
.”

Regarding the above two names, Apple (AAPL) has undercut the suggested exit level mentioned in the last report and should have been offed. Estimated earnings growth slows from 60% to 15% in the September ’13 year. While respectable, this growth rate is not the type usually associated with big market leaders. Having said this, estimates are merely estimates, and what is more important is price/volume. 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.

Priceline.com (PCLN), along with AAPL, has not righted itself, and is in the throes of institutions heading for the exits. In Tuesday’s MarketWatch column, it was suggested that the stock be exited immediately. PCLN and AAPL both act normally following their prior advances. PCLN has the faster earnings growth expectation of the two, and can be expected to perform better ahead. But the stock should prove itself as a future leader before being considered a candidate for speculation. This means building a new base, for starters.

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.

Last week’s breakouts can be examined to see if there is a clue as to the speculative sentiment at the margin:

Under Armour (UA): Friday, price broke out of five-week base on volume 304% above normal. So far, so good.

Sally Beauty (SBH): Price edged to a new high on Friday with volume just 2% above average. The action was on the fence.

Intuitive Surgical (ISRG): Wednesday price broke out of a three-week ledge, rising 7% on volume 397% above average. Friday, the stock on an intraday basis undercut the low of Wednesday’s gap day, a yellow flag. The action was on the fence.

United Rentals (URI):
Wednesday, price broke out of a short pattern on volume 343% above average, and a 12% gain on the day. So far, so good.

Salesforce.com (CRM): Thursday, price broke to a multi-month high, as volume rose to 25% above usual. But price closed poorly that day and lost another 2% the next day. Not good.

Sourcefire (FIRE): Wednesday, price cleared a three-week pattern, with volume below average. Price then fell on Thursday and Friday to return below the pivot. Not good.

Melco Crown Entertainment (MPEL): Wednesday price moved out of a base on volume 50% above average, and price continued to move up on Thursday and Friday, closing well both days. So far, so good.

Rackspace Hosting (RAX): Thursday price cleared a three-week shelf on volume 1% below average, closed below the pivot, and lost 2% more on Friday. Not good.

Tangoe (TNGO): Thursday price broke out on volume 106% above normal, rising 11% and closing well. Friday it gave back 4% and closed poorly. This is one of the only legitimate bases among the glamours. So far, so good.

So far, so good: 4
On the fence: 2
Not good: 3

The above analysis of last week’s breakouts does not take into account the behavior of the average leader. It is decaying, though not dramatically, exactly like the averages.

In summation, last week’s comment still applies: “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 [boldfaced] 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.”

We would add that this means of analysis is objective, and is a measure of what is actually taking place in the market, as opposed to what anyone believes might take place. The situation is fluid, and any day or days could materially change the picture.

If in doubt, get out.

Kevin Marder

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