Market Comment

Shares Plod Higher

August 19, 2012

Riches don’t respond to wishes. They respond only to definite plans, backed by definite desires, through constant persistence.”

–Napoleon Hill

Shares put in another constructive week amid Thursday’s increased volume and range expansion. The muted NYSE volume this month is not a concern since this is par for the course at this time of year.

The below chart shows price rising sharply in early August followed by a tight sideways range of six days’ length on subsiding volume. This range ended last Thursday via a breakout.

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The below chart isolates technology, and this time price moved resolutely higher last week compared with the Nasdaq and S&P.

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The cup bases formed by the averages have historically been one of the most bullish things a market can do. Nothing is infallible, but this pattern, together with perky action in some of the speculative growth-stock glamours, augurs for richer quotatations over the intermediate-term.

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Last week’s report, while acknowledging the healthy price/volume behavior of the averages, noted the relative lack of growth issues that are on the cusp of clearing constructive basing patterns of five weeks plus. Things have improved slightly on this score over the past week.

Among the names, Apple (AAPL) was noted here previously as being buyable above the April 10 high of 619.87. Last week, we had noted that “a less-aggressive player could wait for the April 10 high of 644.00 to be taken out before entering.” The 644 level was taken out on Friday, and the stock remains potentially buyable, but only to the extent it does not become extended beyond the Aug. 6 high of 624.87 by more than 5% or 6%.

Apple (AAPL) Gilmo Report Stock Chart

Zillow (Z) was noted last week (“…continues to find its footing as it builds a long, multi-month base following its widely-watched initial public offering of a year ago. The July 19 high of 44 could potentially be used as an entry pivot.”). Last week, price dropped to the bottom of its four-week range. The potential pivot drops from the July 19 high of 44 to a cheater pivot of Aug. 7’s high at 42.60.

Zillow (Z) Gilmo Report Stock Chart

Rackspace Hosting (RAX) was noted last week as “…worth watching. Fundamentals are excellent, and earnings stability is quite high for a company with such fast growth. Last week’s big rise may portend big things to come. For now, we would let price bide its time, pending an attractive entry.” The Aug. 8 high of 57.12 represents a potential entry pivot (circled in the below chart), as long as a junior-sized position is used for initial entry. The big earnings estimates of 36%/45% for ’12/’13, together with a high level of earnings stability, very steady revenue growth, and deep liquidity, augur well for RAX, and explain the strong institutional investor interest two weeks ago.

Rackspace Hosting (RAX) Gilmo Report Stock Chart

Acadia Healthcare (ACHC) was mentioned last week (“For an aggressive operator, [ACHC] sets up in a five-week base with a potential entry of Thursday’s high at 19“). Price rose last week to as high as 18.99 on Thursday, just missing the potential pivot by a penny. The 19 level remains the potential pivot for entry. The stock has one of the most constructive bases in the entire glamour complex. This is higher-risk, as market capitalization is $770MM and average dollar volume is about $4.5MM.

Acadia Healthcare (ACHC) Gilmo Report Stock Chart

Michael Kors Holdings (KORS) was noted on our Twitter feed Thursday evening (“could be taken on break of Wed high of 50.68“). Friday, price broke through this level on volume 49% above average. A stop of below the Thursday low of 47.53 would be used. Recent new issues that are up 50% or more are always favored horses given the right technical entry. KORS is up more than 150% since the December IPO. Price can be expected to pull back from here, and we would consider an additional entry pending this pullback.

Michael Kors Holdings (KORS) Gilmo Report Stock Chart

Outside of these setups, a few other titles look interesting, but they are generally higher-risk formations or need more time building their pattern. These include Equinix (EQIX), Petsmart (PETM), Sally Beauty Holdings (SBH), Carters (CRI), Ross Stores (ROST), and Fortune Brands (FBHS).

In summation, the averages form cup patterns that normally lead to upward revaluation over the intermediate-term. There are some, but not many, setups for the position trader of leading growth titles. Other than the last week of December, the next three weeks are often the slowest weeks of the year, volume wise.

Kevin Marder

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