Market Comment

Stop and Go

October 9, 2011

October 9, 2011

“What is important are not the events themselves – but the market’s reaction to those events.”
— Bernard Baruch

Shares act normally following Tuesday’s takeout of the August lows. The diminishing volume and reduced range of the past two sessions tell you that a higher-volatility move may be forthcoming. They do not tell you in which direction.

That buyers materialized Tuesday to support price was not a surprise. The August lows have been watched by many. Such a level instills a mantra of “if it breaks support, look out below,” or “if it breaks support, it will go down to such and such prior support level.” If only the market was so pat.

Yet when so many view the same level with the same expectation, the market frequently disappoints the masses.

Also, a Naz that had dropped 11.2% on an intraday basis from the most recent swing high to Tuesday’s low (see two red arrows in above chart) was not likely to be a candidate for a steep drop from that point. That is, unless things are really bad, á la ’08.

It appears as though the powers-to-be in Europe, namely the leaders of Germany and France – actually make that Germany alone – will agree to a way of recapitalizing European banks in order to protect the basic lending function of these vital institutions.

This may lead to some alleviation of the stresses placed on European markets, and perhaps this spills over into the US share market. Longer-term, however, this does nothing to attack the root of the problem, that being the overhang of debt plaguing both public and private sectors in the Continent. The debt itself is symptomatic of governments, in an effort to provide a great deal of services to citizens, living well beyond their means.

The other problem is the mountain of debt sitting on books of European banks whose principal value needs to be written down.

Otherwise, in spite of the expectation here that recession is likely when the deepest punch bowl in many decades, if not ever, fails to spark much in the way of jobs growth, the market itself appears to think otherwise.

Exhibit A: Technology, despite the experience of the ‘Nineties, is a late-cycle segment. The fact that it has outperformed handily since the summer says something about the capital equipment sector, and the economy at large.

Exhibit B: If the economy was on its way to the toilet, at least in the market’s mind, it would be selling off in spades. Yet the consumer discretionary sector has been a substantial outperformer for some months, and especially since the turbulence of mid-August.

The above charts represent a conundrum. The charts are saying something diametrically opposed to the big picture view that the economy is destined for a weaker standing, a view that we happen to share.

We like market conundrums. They often occur at or just after a market turning point, especially after a sharp move in one direction or the other and when sentiment becomes extreme. When everyone is sitting on one side of the boat…

Among the former leaders, Pricesmart (PSMT) shows obvious strength. There is no real base here, so there is not a low-risk entry at present. Worth monitoring in case the averages show strength.

Apple (AAPL) is an underperformer from here, we think, especially if the averages turn south again. Yes, the stock did bounce off the 200-day (not shown below). But this is a stock being distributed by large investors. Very little accumulation is being witnessed these days. Such a distribution campaign for the first- or second-largest stock in the market takes months to complete.

Chipotle Mexican Grill (CMG) is another former leader that has shown relative weakness on the three-day bounce of last week, and would be a potential short-sale candidate, we think, if the averages roll over.

Athenahealth (ATHN) is another former leader that is a candidate for a potential short-sale, in the event of a renewed descent by the averages, we believe. The stock obeyed the logical place for it to reverse, which is the low of its prior down leg. We expect ATHN to outperform on the down side.

Watson Pharmaceuticals (WPI) is a former leader with a business line and earnings stability that would lead one to think it would hold up better than other former leaders in the event of a renewed downturn in the averages. Tell that to the institutions who unloaded it a week ago, and to those who ignored it on last week’s rebound in the averages. We would expect this to also underperform, and serve as a potential short-sale candidate should the market move lower.

Elsewhere, a short-term model, which has been mentioned previously here, signaled richer quotations last week for a number of securities, mainly commodity-related. In an Oct. 6 (Thursday) report written for after Oct. 5’s (Wednesday) close, we mentioned that “On a very short-term basis, gold and silver may be candidates for upward revaluation.” The same was said for Morgan Stanley (MS), if it cleared its recent downward-sloping trendline. All are up since then.

The model, based upon discretionary factors, not mechanical, also signaled a rise in the DB Commodity Index Tracking Fund (DBC), though this was not mentioned in the MarketWatch report.

Meanwhile, last week’s showing by copper (iPath DJ AIG Copper Trust, JJC) intrigued us, in part due to the technical pattern (three days finding support at the same level, with explosive volume on the third, a bullish omen), and also due to the implications for the economy.

In summation, the first few days off a low in the averages are best ignored, as many will show the same pattern of declining volume seen presently. Thus far, leadership is not providing a hint that the low put in last week has meaning. As mentioned in our last report, “…seasonally, more market bottoms are put in during the September/October period than any other. Whether this plays out this year is not known, nor is it worth losing sleep over. More important is to simply judge the market’s character and health on a daily basis, keeping an open mind as to what could happen.” For the long-only speculator specializing in growth stock leaders, cash is king until current basing patterns mature.

Kevin Marder

Charts created using
TradeStation. ©TradeStation Technologies, 2001-2011. All rights reserved.
Earnings estimates and mutual fund ownership data courtesy Thomson Reuters.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Gil Morales & Company LLC (“GMC”) or Marder Investment Advisors Corp., held no positions, though positions are subject to change at any time and without notice.

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