Market Comment

To Have or Have Not

December 12, 2011

“If you cannot make money out of the leading active issues, you are not going to make money out of the stock market. That is where the action is and where the money is to be made.”

                    — Jesse Livermore

With Europe still dominating the backdrop, the foredrop, and everything else in between, shares have been unable to build upon the positive momentum of Nov. 30, shown in the below chart as the last accumulation day.

</p

The rally off the Nov. 25 low was precipitated by a feeling that the Eurozone would not fall apart, that the global banking system was not in dire straits. Whether this is the case or not – and we believe not – the market needed an additional confirmation that perhaps the tide had turned. This level of confirmation would have occurred last week via another powerful day up in the averages.

At this writing, the additional confirmation could still occur sometime this week. Until it does, however, the market does not have enough of anything to merit much of a campaign from the long side.

In terms of leadership, the lack of dynamic growth stories dominating the market’s best actors is an objective indication that the speculative sentiment is in hibernation. Many recent new issues are cowering at distances far off their highs.

When one or a few new issues sell down materially, it can be a sign of fundamental problems or valuation excesses in the months following an IPO. It is another thing altogether, however, when most of them break down and are unable to lift their heads off the mat.

A look at the growth sector – the types of titles that normally lead a bull market – reveals the haves and the have-nots.

The haves: Starbucks (SBUX), Hansen Natural (HANS), Dollar Tree (DLTR), Intuitive Surgical (ISRG), Netsuite (N), Petsmart (PETM), Chipotle Mexican Grill (CMG), Golar Lng (GLNG), Ulta Salon (ULTA), Questcor Pharmaceutical (QCOR), Tractor Supply (TSCO), and Rackspace Hosting (RAX), among others.

The have-nots: Priceline.com (PCLN), Watson Pharmaceuticals (WPI), Tibco Software (TIBX), Cerner (CERN), Sociedad Quimica (SQM), Cash America (CSH), Baidu (BIDU), Amazon.com (AMZN), Lululemon Athletica (LULU), Accretive Health (AH), and Fusion-Io (FIO), among others.

In the middle: Apple (AAPL), Athenahealth (ATHN), and Under Armour (UA), among others.

The haves and have-nots are about equally split. The haves do not contain the more-dynamic growers that we would prefer to see, other than RAX, N, QCOR, and GLNG. The latter is a hybrid, as it does not fit the definition of “growth stock” in its truest sense. The haves represent those growth shares that are believed to possess the leadership credentials should any advance in the averages materialize.

Among the haves, Golar LNG (GLNG). The last report mentioned “A potential entry would be a takeout of the Nov. 17 high of 44.26.” This level was since taken out, though volume was not strong enough on the breakout day to merit entry.

Netsuite (N). The last report mentioned “Potential entry point above Nov. 15’s high of 44.53.” This level was taken out, and the stock is a few percent above this level.

Petsmart (PETM). The last report noted that “Potential entry would be above Friday’s high of 49.15.” This level was taken out, though volume was not strong enough on the breakout day to warrant entry.

Dollar Tree (DLTR). The last report said “Potential entry would be above the Dec. 1 high of 83.14.” This level was cleared, though volume was not strong enough on the breakout day to warrant entry.

Rackspace Hosting (RAX). The last report mentioned “A potential entry could be above the 44.11 high of Dec. 2 or the Nov. 8 high of 45.46.” We would remove the former potential entry and focus on the latter suggested entry of 45.46.

Rackspace Hosting (RAX).  Gilmo Report Chart


Ulta Salon Cosmetics & Fragrance (ULTA). The last report noted “A potential entry would be a takeout of the Nov. 7 high of 75.69.” This level was surpassed, but just by a penny, not quite enough to have warranted entry. Ten cents past a pivot entry is a more-reasonable amount to use when considering whether price has sufficiently triggered an entry. Obviously, this is not a science, as 10 cents means much more on a $13 stock than an $80 issue.

Chipotle Mexican Grill (CMG) is still worth watching. It fits the retail sector theme that is in vogue, and is about 5% below its Oct. 31 high of 347.94 which could be used as potential entry should the averages show some additional confirmation behavior.

Chipotle Mexican Grill (CMG) Gilmo Report Chart

In summation, uncertainty related to Europe leaves shares on a short leash. Better-quality growth titles cross potential entry points but do not see the necessary participation by large investors. For the long-only player, cash is advised until black-and-white evidence in the form of powerful breakouts and additional confirmation in the averages suggests institutions are ready to put Europe behind us.

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.