Monday, August 25, 2014

Traders Remain Frustrated Despite Record All Time Market Highs

Leading growth stocks as a group continue to lag the general market even though growth stocks are outperforming value stocks. Everyday a new growth stock or two breaks out in well above average volume, and this would normally be good news, unfortunately, literally, only a handful of all strong breakouts have made any progress passed their first day. This would be a positive if the markets were moving sideways or pulling back, showing relative strength, but the markets have been making new fifty two week and all time highs, while moving higher almost everyday for the last three weeks.

Autohome (ATHM) broke out of a cup shaped base and Emerge Energy Services (EMES) finally cleared a flat base in well above average volume. (JD), Priceline Group (PCLN), Facebook (FB), and Bidu (BIDU), continue to try and break free of their respective breakout areas. Bitauto (BITA), Gilead Sciences (GILD), and Salix Pharmaceuticals (SLXP), are historically over extended and due for a consolidation. Intermune (ITMN), a regular on the leading growth stocks analysis, has doubled in price since its May 19th breakout from a cup and handle base, being bought out for $74/share by Roche (RHHBY).

The number of proper short setups has diminished but not disappeared. Many need some time to setup in lower risk areas to breakdown. Almost no recent setup has been able to follow through for longer then a day. Better to wait for some distribution to hit the market before venturing into these waters.

Traders remain frustrated. Even with a decent gain on a leading growth stock or two, it is not enough to offset the small losses that have been taken to protect from larger losses on positions that haven't made progress and are falling back below breakout levels. Traders should remain very tight with protecting profits and minimizing losses. If the past few short rallies were any indication, profits will vanish very, very quickly when distribution hits the market. Is it vacation time yet?

Fracking Material Producer and Supplier Bouncing- Hi-Crush Partners LP (HCLP)

Hi-Crush Partners LP (HCLP) advanced 343% since breaking out of a first stage cup and handle base on May 31, 2013 and is currently forming a late stage pullback to the fifty day moving average. Price volume has been positive with two shakeouts, August 1st and August 22nd, holding the fifty day moving average in heavy volume.

The companies sales and earnings are expected to grow 27 and 56% over the next three years, respectively, but that's slower then the current triple digit pace. Analyst have been revising estimates higher over the last ninety days despite the companies inconsistency in beating them. Margins have been decelerating for the last few quarters, year over year and quarter over quarter, and quarterly sales and earnings growth are expected to decelerate under 20% over the next six quarters. Return on equity has been north of 40% for the last two years. 

Considering the stock reached its pe expansion target already, the expected growth slow down over the next two years, and the late stage nature of the current base, this should only be considered for a quick trade, not an investment at this time. Based on current valuations and strong technicals, the stock could trade north of $80 (approximately 30% higher) and as high as $90 on a climactic move on a breakout above the current range of $62.50 - 63.50. Protective stops should be place just under $61.

Full Disclosure: Hold Position

Thursday, August 21, 2014 (JD) Attempts IPO Base Breakout Ahead of Ali Baba (BABA) IPO (JD), considered the Amazon (AMZN) of China, has grown annual sales by 85% over the last three years and is expected to grow annual sales by 47% over the next three. Earnings are not expected to turn positive for at least another year and a half, but could grow at a triple digit rate once the company turns profitable.

The stock attempted to breakout out of an IPO base on August 19th in volume 121% above average. But the stock reversed and closed at the lows of the day below the $30.80 breakout (not unusual action for a volatile stock). The stock has spent the last two days consolidating around the breakout level and could be in a position to run another 20 - 30% in anticipation of the Ali Baba (BABA) IPO. Traders can attempt to take positions in the current range with tight stops just below $30. 

Full Disclosure: Hold Position

Wednesday, August 20, 2014

Priceline Group (PCLN) Prepares Third Breakout Attempt out of Cup and Handle Base

The Priceline Group (PCLN) advanced over 80% since breaking out of a fifteen month cup and handle based in May 2013 and over 1,000% since the bear market bottom in 2009. The stock broke out of a later stage cup and handle base on August 4th in volume 88% above average and again on August 11th in volume 174% above average. The left side of the base is a bit wild and the relative strength line is in a downtrend, but there are several signs of support on the daily and weekly chart (high volume reversals, reverse churning, and tight closes). The stock has pulled back to the breakout level again and should be considered on a new breakout attempt.

Quarterly and annual sales and earnings growth are expected to grow 22%+ for at least the next three years, and have grown over 25% over the last three. Margins are at their highest levels historically and expanding, and return on equity has been consistently north of 30%. Expanding margins and strong sales growth have helped the company beat earnings by an average of 7.7% over the last four quarters.

Positions can be initiated anywhere between here and the $1,300 handle high breakout. Protective stops should be placed below $1,250. Take the wild and loose, potentially late stage consolidation into account when managing the trade. Limit losses and expect improvement in price volume action as the stock advances or consider quick profit taking.

Our valuation model prices the stock around $1,591 over the next few months, and between $1,800 - 1,916 (39 - 50%) over the next twelve to eighteen months if the company delivers steady growth with expanding margins.

Full Disclosure: No Position

Tuesday, August 19, 2014

Market At New Highs BUT Major Red Flags Persist

The major indices continue their seemingly unabated charge to new and all time highs despite threatening to fall into a correction multiple time over the last few months. But, all the red flags present near the last few attempted tops, still persist today. 

There has been little accumulation since the market bottomed in early August with most rally days coming in diminishing volume. Complacency seems to be settling back in despite a lot of uncertainty around geopolitical events, intra-day volatility is high, the NASDAQ advance decline line is unable to come off the lows even though the Nasdaq is leading into new highs, and the small cap, Russell 2000 and SP 600, and mid cap, SP 400, appear to be setting up a second leg down. About the only good news is the lack of distribution since the below average volume follow through on August 13th, but that can change very quickly in this environment.

Leading growth stocks as a whole continue to under perform the market and fail to follow through on breakouts. The handful that have followed through are well extended from low risk entry points and appear to be climaxing or running out of steam (volume diminishing). The rest are mired in wide and loose consolidations unable to breakout despite the market rally over the last two weeks. Baidu (BIDU), Facebook (FB), Under Armour (UA), Polaris Industries (PII), and Chipotle Mexican Grill (CMG) have stalled after gapping up in strong volume on earnings, Bitauto (BITA) reversed in heavy volume from what appears to be a climax run, (JD) attempted to breakout in heavy volume only to reverse to close near the lows of the day and below the breakout point, and Jumei International (JMEI), a recent Chinese IPO, gapped and closed down over 10% after reporting strong earnings. Not the type of action expected out of leading growth stocks during a strong rally. About the only good news here, growth stocks have out performed value stocks during this rally, but that is little consolation with so few making progress.

This appears to be another one of those short lived rallies the market has served up over the course of the last few months, in which making much portfolio progress is extremely difficult. Investors and traders have had to be fast to book profits and minimize losses, or they found themselves quickly under water with most trades building little to no cushion. With all the red flags, traders should once again tighten stops to protect profits and minimize losses. Few positions are worth holding past a few days/weeks if they've made no progress, especially if they are under water. Better to be under invested in this environment, then over exposed.

Monday, August 18, 2014

Chinese Real Estate Company Prepares to Breakout on Earnings - Leju Holdings (LEJU)

Leju Holdings (LEJU), a Chinese online to offline real estate company, is reporting earnings on Wednesday, August 20th, before the opening bell. Analysts are expecting the company to report a profit of $0.15 and sales of $109M, which would represent growth of 88% and 52% respectively. Over the next three years, the company is expected to grow sales and earnings by 31% and 37% respectively. The company beat analyst estimates by 100% in its first earning's report as a public company.

The stock broke out of a cup and handle base on July 23rd, in volume almost 500% above average, but shook out most traders and investors as it fell 8% below the handle high along with the market. Volume on the shakeout was tepid, a good sign. It has recently formed a three week tight pattern on top of the cup and handle base and has been attempting to breakout since.

Based on current valuations and growth rates, the stock could double over the next 12 to 18 months on continued strong earning's reports. Look for a breakout out above the $14 - 14.75 range in heavy, above average volume. Protective stops should be placed around $13. The stock is thinly traded and should be expected to trade in a volatile manner.

Thursday, August 14, 2014

Home Furnishing Stock Ready to Bounce Higher - Restoration Hardware (RH)

Restoration Hardware (RH) gapped up and broke out of a cup and handle base on a strong earnings report, June 12th, in volume that was over 600% greater then average. The company beat analyst earning's expectations by 63% and raised guidance. That was the third time in the last four quarters the company managed to beat expectations by at least 14%. The company has grown sales and earnings over the last three years by 27 and 102% respectively, and is expected to grow sales and earnings by 23 and 207%, respectively, over the next three years.  Margins are razor thin, but have improved slightly over the last few quarters, and return on equity is around 14%, which is normal for a high growth retailer.

The stock has spent the last seven weeks digesting the earnings gap up by pulling back to the fifty day moving average in below average volume. A good sign institution aren't exiting the stock. The stock can be entered between the fifty day moving average and the recent high of around $86. Based on current valuations and an expectation for further earnings surprises, the stock could trade above $100 before the end of the year, as long as the market cooperates. Protective stops should be placed around $80.

Full Disclosure: No Position...Yet

Wednesday, August 13, 2014

Craigslist of China Prepares to Breakout - (WUBA) (WUBA) is considered the Craigslist of China. The stock has more then doubled in price since its IPO in November 2013 and is currently setting up a first stage cup and handle base. Volume patterns have been mostly bullish with several weeks of tight closings inside the handle area showing institutional support.

The company delivered triple digit sales and earnings growth in the most recent quarter and is expected to grow sales and earnings over 50 and 100%, respectively, over the next three years. Margins have expanded from 3.2% to 15.6% over the last three quarters with return on equity registering over 50%.

Based on current valuations, the stock could double again over the next 12 - 18 months if it can breakout above the $55 - 57.50 range. A shakeout below the $48 handle support area could present an earlier entry into the stock for aggressive investors/traders.

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