Market Comment

Taking a Breather

March 4, 2012

“…the inherent nature of a competitive market does not change very much over the years…’the same old patterns’ of human behavior continue to produce much the same types of market trends and fluctuations.”

–John Magee, Technical Analysis of Stock Trends, 1966

Under the cover of averages that essentially went east last week, leading stocks continue to look like the thin-waisted girl standing at the edge of the high school dance floor. Volatility, which tends to increase near a change in trend, remains in line with that witnessed since the start of the year, a plus.

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At this juncture in the post-December 19 move, a few minuses pop up, but nothing abnormal for an advance of this duration. Small-capitalization issues, which often benefit in January after tax-loss selling is out of the way, lag since Feb. 2.

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Ditto for the transports which have underperformed since Jan. 17.

These two negatives, in our opinion, are more than offset by the brokers…

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…not to mention the retailers and technology.

Among the names, Linkedin (LNKD) pulled back further last week, as it digests the excesses related to its recent jump to the mid-90s area. The Feb. 21 high of 96.31 still looks to be a reasonable entry pivot to use in the absence of additional evidence.

Linkedin (LNKD)  Gilmo Report Chart


Teavana Holding (TEA), seeking to be the Starbucks of tea, last week failed at holding its breakout of a cup-with-handle within a larger cup formation. Most analysts believe earnings grew 47% in the January ’12 fiscal year and expect 30% growth in the ’13 fiscal year. Earnings are expected out this week for the most recent quarter. Pending the reaction to the earnings release, last week’s high at 26.03 can serve as a preliminary entry pivot, pending further technical evidence.

Teavana Holding (TEA) Gilmo Report Chart


Netsuite (N) is a stock that is believed to have the necessary credentials to be an outstanding leader in the current cycle. Most analysts eye earnings growth of 40%/62% in ’12/’13. Mutual funds that own the stock have grown for at least the past seven quarters. As the below chart shows, price recently cleared a cup-with-handle formation on large volume. Since then, N has flatlined, with Friday’s range being tight. A reasonable entry point for an aggressive speculator would be a takeout of the Feb. 28 high at 50.20.

Netsuite (N)  Gilmo Report Chart

 


Spirit Airlines (SAVE) is a more speculative issue by nature of its industry, its lower price, and its liquidity ($12MM average daily dollar volume). This higher risk was illustrated by the Feb. 16 elephant bar, as shown below, which took price all the way back to its 50-day MA intraday, before recovering. Volume has been dimming over the past week, a plus. Price has been under strong accumulation over the intermediate term. The expected earnings growth rate of 51%/26% is not valued highly by the market, which assigns the stock a 15 multiple on trailing earnings. A potential entry for an aggressive speculator may be above the Feb. 21 high of 19.96, using a junior-sized position with a 7% stop in case proven incorrect.

Spirit Airlines (SAVE)  Gilmo Report Chart


Guidewire Software (GWRE) is not close to an attractive entry that makes sense from a risk standpoint, yet it gets added to the watch list by virtue of its near double in four weeks. Earnings are expected out soon. This is another speculative recent new issue, with average daily dollar volume of $10.7MM.

Guidewire Software (GWRE) Gilmo Report Chart


Fusion-Io (FIO) was mentioned here Nov. 6 as having “perhaps the best potential of any recent IPO to be a big-winning stock” by virtue of its next-generation data storage solutions. FIO has clearly offered nothing in the way of a logical entry point, so the stock has been relegated to “far back burner” status. This after FIO nearly doubled in its first three weeks of being a public company. Most analysts forecast earnings growth of 108%/44% for the June ’12/’13 fiscal years. As the below chart shows, some large investors have been scooping up the shares lately, and the distribution of Q4 has turned into accumulation in Q1. While the stock does not currently offer an attractive entry, it is being monitored here for a possible setup down the road.

Fusion-Io (FIO)  Gilmo Report Chart


Qihoo 360 Technology (QIHU), a Chinese member of the security software group, is nowhere close to offering a reasonably entry, but the recent accumulation seen in the chart below has it added back to the watch list for future reference. Most analysts predict earnings growth of 58%/60% in ’12/’13.

Qihoo 360 Technology (QIHU) Gilmo Report Chart

Meanwhile, the backdrop contains risk. The Greek drama may not be done if holders of Greek bonds do not accept the swap being offered by the government. This could potentially trigger credit default swap contracts.

In summation, given that most glamours have already broken out of bases and no longer offer attractive entry, as well as the duration of the averages’ advance, this is a time to tread lightly in terms of new commitments. Now is a good time for an intermediate-term speculator to proactively look at each position in a portfolio and decide where it should be offed in the event of a market reaction/correction.

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.