from: Gilmo Report
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reply-to: Gilmo Report
date: Fri, Apr 9, 2010 at 10:27 AM
subject: Marder On The Market
April 7, 2010
S&P 500: 1182.44
What, Me Worry!?
“The four most expensive words in investing are ‘This time it’s different.’”
-- Sir John Templeton
The big picture remains that of shares discounting a continued recovery in jobs and incomes for H2, something that the market has been telegraphing for quite some time, all the while confounding the majority. Short-term, the averages look tired. Given that practically none of the individual leaders are offering low-risk entry, a pullback would be a plus for the momentum player as it would create new opportunities in some of the leading lights.
It has been less a case of the market moving up on strong demand than the market rising amid a lack of sellers. The Industrials have not printed a major accumulation day in eight weeks.
[Click for Chart]
As seen above, price has moved sideways for the past 10 days. With that said, there is nothing that says that the market needs to pull back by x% before an overbought posture evens itself out. In other words, expect the unexpected.
By various measures, the market’s level of being technically overbought is rare. For example, the QQQQ has stood above its 10-day moving average for 38 days in a row, the most since the ETF was conceived in early ’99, and well past the previous high of 28 days. We would note that the unexpected is what is worth paying attention to, and in particular, any sort of message that this – the market’s extreme resilience – may be giving. The message is believed to be all about the US economy, i.e. that it will prove stronger in H2 and into ’11 than is commonly expected. By the time this is evident and publicly accepted, further upward revaluation will have taken place.
We have witnessed this many times. The message is never known at the time; this due to the market’s discounting mechanism. And the discounting nature of the market is why general market analysis based on today’s fundamentals alone makes it difficult to stay ahead of the curve and anticipate trends.
Of import has been the buoyant speculative sentiment. One example of this is the slope of the “sentiment curve” since the Feb 5 low as it relates to the performance of an array of securities, each with its own risk factor. So a more conservative issue like the S&P is up 12% since Feb 5, while a step up the risk ladder shows small- and medium-capitalization indices, as well as emerging markets ETFs for China (FXI) and Brazil (EWZ) all in the +17%-to-19% range post-Feb 5. Moving even further up the risk ladder, one passes the Russia ETF (RSX) at +20% since Feb 5. At the top of the ladder sit some of the higher risk names, though with correspondingly higher return potential: the coal (KOL), metals & mining (XME), and steel (SLX) ETFs. These are up 25%-32% since the Feb 5 low.
The above sentiment curve shows that risk-taking is alive and well. This is important because risk-taking goes hand-in-hand with a healthy market. What you want to see are the higher risk segments such as the materials, aggressive growth stocks, recent new issues, etc. perform better than their lower-beta counterparts. If you graphed the securities in the previous paragraph on a chart according to their performance, the slope of the line would be positive. If the slope was negative, the market would be characterized as defensive in nature, and thus, not as healthy.
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The above chart of the US small-capitalization market is another reflection of the underlying health of this market. Smaller issues normally peak in advance of the ultimate top in a bull market.
The MSCI Emerging Markets Index ETF (EEM) (below) has been a favorite barometer of the speculative sentiment. It bottomed 3.5 months ahead of the March 2009 beginning of the bull market in US stocks, and actually began outperforming 4.5 months ahead of the March 2009 lows in the US market.
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If there has been one concern in this corner, it has been the underperformance of China, which began in late July. The Chinese market has been saddled with investor worries over its overheated property and debt markets, in addition to the Chinese government’s attempt to reign in loan growth. Combine these with other things, including corruption in local government, and China, in our opinion, may well be an accident waiting to happen. Certainly, if there was an asset bubble to be found somewhere, it is more likely to be found here than anywhere else. The good news is that the price behavior for Chinese stocks and materials producers should serve as an early-warning system in advance of anhttps://www.gilmoreport.com/_test/motm/motm040710-05.jpgy dismemberment.
Speaking of which, the iShares FTSE/Xinhua China 25 ETF (FXI) has outperformed the SPX over the last eight days, underscored by similar action in coal, steel, and metal ore producers. As the chart below shows, the price structure of the FXI has lost much of the herky-jerky volatility that it had in the last half of ’09. This, and the two days of major accumulation seen last week, augurs well for a test and eventual breakout of the FXI’s four-month base.
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The SPDR Gold Trust ETF (GLD) cleared a technically important level today on fair, but not strong, volume. The view here is that the aggressive momentum player can use a break above the 113.00 level to establish a position, with a 5% stop loss. Longer-term, we continue our long-
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standing bullish view on gold due primarily to a belief that the probability of the US government materially reducing its budget deficit is slim – let alone reducing it amid the stiff headwinds of exploding entitlement spending in coming years – as well as an appreciation for history, which has never seen a fiat currency survive.
Within the list, broad sector leadership remains, as it has for some time, in consumer discretionary and industrials, while newcomer financial joins the group.
Among the names, the following are considered among the true leaders in the current cycle, are extended in price and therefore do not offer attractive entry, but may be monitored by the intermediate-term speculator for basing behaviour in the weeks to come: Apple (AAPL), Aruba Networks (ARUN), Baidu (BIDU), Clean Energy Fuels (CLNE), Cree (CREE), Express Scripts (ESRX), F5 Networks (FFIV), Finisar (FNSR), Lincare Holdings (LNCR), Lululemon Athletica (LULU), Mellanox Technologies (MLNX), Mylan (MYL), Netflix (NFLX), Netgear (NTGR), Newport (NEWP), Parexel International (PRXL), Perrigo (PRGO), Priceline.com (PCLN), Salix Pharmaceuticals (SLXP), Veeco Instruments (VECO), and Webmd Health (WBMD).
Mercadolibre (MELI). Worth watching. The Latin American version of eBay (EBAY) is technically under mild distribution as it builds a three-month cup. Of note is its quarterly earnings estimates of 51%, 47%, 32%, 20%, 34%, 23%, 21%, and 26% according to First Call. Revenue forecasts are even stronger. Net margins have strengthened in the past two quarters. The stock is nearly ¾ of the way up the right side of its base after rising from about $8 to $55 in the bull market. Not ready yet, but worth watching.
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Brigham Exploration (BEXP). Earnings estimates at this oil & gas explorer for the next eight quarters are among the most explosive in the entire market, with triple-digit percentage increases expected, according to First Call. Revenue estimates are for 42%, 224%, 113%, 136%, 135%, 100%, 79%, and 75%, over this period. Fund sponsorship has increased for the past three quarters. BEXP has gone from $1 to $18 in the bull market, breaking out of a five-week base yesterday on volume 68% above average to stand 1.6% above the top of its base.
Cliffs Natural Resources (CLF). Haplessly extended above the top of its most recent base. Has five quarters of fat earnings and revenue estimates ahead of it before its growth rate is expected to slow down. Fund sponsorship has increased steadily for the past year. Does not offer attractive entry at present, but this producer of iron ore is worth watching due to its expected growth rate, high relative strength, and history of being a leader in the materials sector during ’07-’08.
Generally, we do not pay much attention to traditional measures of sentiment, having learned a few lessons along the way in this regard. (To sum, from a purely intermediate-term perspective, price/volume nicely encapsulates everything.) However, by one indication, there are many doubting Thomases sitting on the sidelines, a plus, as it represents potential fuel for the fire.
This indication occurred in the form of a comment to a column that we wrote a few weeks ago for www.marketwatch.com. Of note was not the comment itself, which disagreed with the tone of the column, the column being similar to what was written in this space just a few days previous. Rather, it was the 41 respondents who agreed with the comment out of the 50 respondents who cast their vote. This meant that 82% disagreed with the bullish posture of the column.
This would appear to be a validation of the retail-is-still-on-the-sidelines-licking-their-wounds-from-the-bear-market notion. If correct, this would seem to dovetail nicely with the economic backdrop’s early-recovery stage, the market’s strong technical underpinnings, and the particular point in the cycle at which shares appear to be.
Translation: The view here is that there is plenty of time left for the retail investor to become enamored with this market before the economy peaks and the bull is ready to retire. Were the bull market to have begun three years ago, leading indicators to have peaked six months ago, leadership to be sparse, interest rate hikes to have mowed down the interest-sensitive sector, speculative sentiment to be shot, breakouts to be failure-prone, etc., the story would be quite different.
In summation, intermediate trend, breadth, and leadership are positive, while volume is neutral and the averages are under short-term distribution. Given the latter, as well as the unusual degree of the averages’ overbought posture, some backing and filling is anticipated in the short term. Not surprisingly, in light of the extended nature of the averages, the intermediate-term speculator is faced with a sea of fundamentally sound stocks that are extended above their most recent bases. Therefore, a pullback in shares would be welcomed, as it would reset the price patterns of many stocks, creating new opportunities and better, lower-risk entries.
In the meantime, several ETFs, including GLD, FXI, and XME, are poised for upward revaluation.
Shares’ care-free “what, me worry?” attitude may strike some as off-base, given high unemployment, the potential for higher rates, sovereign credit risk, and other worries du jour. However, to ignore the market’s technical underpinnings, most of which have been quite positive, is to ignore not only the way the market has actually worked since its inception, but also the four most expensive words in investing.
This time it’s different.
Kevin N. Marder
More market analysis of the cycle's leading stocks, and Actionable Stock Ideas with specific buy points on their charts, may be found by going to www.GilmoReport.com and subscribing to our twice-weekly updates.
Gil Morales & Company, LLC ("GMC"), 1925 Century Park East, Suite 1050, Los Angeles, California. 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 officers, directors, employees, customers, 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. ©2008 Gil Morales & Company, LLC. All rights reserved.