Market Comment

Steady as She Goes

April 1, 2012

“Speculation is essential not merely in the market for stocks, but in any market. Somebody must take chances.”
                
–William P. Hamilton, 1906

Volume picked up last week as the Nasdaq put in four straight losing sessions. Despite this, institutions do not show signs of anxiety over a party that tacked up gains for Q1 that would normally be considered a decent year.

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Some rotation was seen into healthcare issues last week, a defensive sign. This is not surprising after high-beta segments like technology became crowded.

Besides the European situation, the risk is the softening trend in Europe and China. This is evident in declines on price charts for coal, steel, and base metals aluminum, copper, nickel, zinc, tin, and lead.

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Ditto for crude.

Along these lines, emerging markets, after outperforming the S&P for most of January and February, have lagged for nearly the last month.

The backdrop includes an earnings growth picture that slows over the near-term, and unfinished business in Europe related to Spain and Italy.

None of this matters now, especially for the speculator, whose focus is the intermediate-term timeframe, not the long term.

One litmus test of impending general market weakness is the action of recent new issues, a canary in the coal mine. These thinner, younger titles can be expected to show incipient weakness in advance of the liquid glamours such as Apple (AAPL) and Baidu (BIDU), which require much more volume to turn them around.

Most recent new issues with robust growth prospects act well, including Bazaarvoice (BV), Brightcove (BCOV), Demandware (DWRE), Epam Systems (EPAM), ExactTarget (ET), Francesca’s Holdings (FRAN), Greenway Medical Tech (GWAY), Jive Software (JIVE), Michael Kors Holdings (KORS), Proto Labs (PRLB), Spirit Airlines (SAVE), and Tangoe (TNGO).

A few have been roughed up, including Guidewire Software (GWRE), Invensense (INVN), Teavana Holding (TEA), and Ubiquiti Networks (UBNT).

Among the names, Yelp (YELP) was mentioned in the last report (“…an attractive entry is not available at present, but this gets added to our watch list. A clearing of the Mar. 13 high of 24.40 would represent an aggressive entry with very little support in case proven incorrect. The chart pattern is suggestive of a breakout.”). We would not pursue this now, as volatility is high post-breakout, and would let the dust settle, but this is worth monitoring for the future.

Yelp (YELP) Gilmo Report Stock Chart


Zillow (Z) was noted in last week’s report (“The high circled below at 36.60 represents the most attractive entry potentially, pending more backing and filling.”). This setup is intact.

Zillow (Z) Gilmo Report Stock Chart


Yandex (YNDX) was on our front burner shortly after it went public last summer. The Russian Internet search service has earnings estimates of 45%/34% for ’12/’13, is liquid ($44MM in average daily dollar volume), but shows declining numbers of mutual funds owning it during Q4. Regardless, this is one to watch, as at present it is extended above any sort of support area. It has a long ways to go to get near to the top of this long basing pattern.

Yandex (YNDX) Gilmo Report Stock Chart


Tangoe (TNGO) was mentioned in last week’s report (“Depending upon the price action over the next few days, either the Mar. 22 high of 19.35 or the Feb. 24 high of 19.90 could be used as a potential entry”). If either the 19.35 or 19.90 area (circledbelow) were used as an entry point, a 5%-7% stop loss would have been triggered, closing the position. The action of that day was likely colored by the primary offering of stock two days later.

The high of Thursday at 20.05 can now be used as a potential entry, preferably on a day in which volume is solid. Earnings are not slated to be released until May, so there would appear to be some breathing room.

Tangoe (TNGO) Gilmo Report Stock Chart


Netsuite (N) was
mentioned in last week’s report (“Technically, the view here is that eventually price moves up and through the top of its four-week shelf, and assuming there is some confirming volume on the day of the breakout, N could be entered.”). The stock cleared the top of its shelf, as seen in the below chart, but did not show above-average volume on the breakout day, and as a result, should have been passed upon.

Netsuite (N) Gilmo Report Stock Chart


Spirit Airlines (SAVE) was mentioned in the last report (“May represent an attractive entry above the Mar. 14 high of 20.66.”). Friday, the stock moved past its Mar. 14 high of 20.66 by four cents, less than what we would normally want to see a stock clear an entry point by. This occurred as volume for the day was only about average. Given the maturity of the general market’s advance, this is not one that should be chased, in our view.

Spirit Airlines (SAVE) Gilmo Report Stock Chart


United Rentals (URI) is expected to show earnings growth of 62%/37% in ’12/’13. Despite this, the company is not so much a growth stock, but more of a cyclical story that does not fit the mold of history’s big-winning stocks. The company is priced at about 14 times this year’s expected earnings. Nevertheless, the stock is a leader, up more than 240% since its August low.

Technically, a potential entry could be made as URI clears the top of its five-week flat base, provided that volume is on track to exceed its daily average by 40% or more.

United Rentals (URI) Gilmo Report Stock Chart

Elsewhere, Brightcove (BCOV) was noted in last week’s report as “one to keep an eye on. Worth monitoring for an attractive entry.” The stock proceeded to break out last week, moving up as much as 22%.

Brightcove (BCOV) Gilmo Report Stock Chart

Moves like this may look appetizing, however buying positions without technical support beneath entry can often catch up with one. Especially in a market that is overdue for a correction.

The titles which are most likely to come off by 15%-20% or more during a correction in the averages are the hot, young, thin things (toparaphrase Gil Morales) like BCOV which have never turned a yearly profit and are not expected to this year or next. Toss in illiquidity (BCOVhas $530MM market capitalization and $6.4MM in average daily dollar volume), and the game can resemble musical chairs when a correction hits the general market. It is to be noted that during an 8%-12% intermediate-term correction in the averages, growth stocks can often correct by 1.5 to 2.5 times that.

If you are geared up to trade quick flips across a short timeframe, itself a potentially rewarding activity, then the above does not apply. Generally, this column is about speculation over the intermediate-term, or weeks to months.

In summation, any correction in the averages is expected to resolve itself with upward revaluation, and not lead to a new bear market. Few glamours offer attractive entry due to their extended nature.

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.