Today, Home Depot’s stock gapped up out of a long trading range. Volume was about 3x average volume. This is the type of reaction that automatically goes onto our radar screen. It does not mean it has to work. But from our studies of the markets, whenever action like this occurs, it is a wake-up call. The gap broke it out of resistance (give or take $1) that capped the stock for approximately 10 months. We consider this akin to a breakaway gap. On occasion, the stock will just keep going but most often, the move will stall. This enables the stock to digest the move, take in a little profit taking, before potentially moving higher. This would show itself by the stock sitting around for a bit, either putting in a flag-like pattern or slightly pulling back on lower volume. One would then look for another higher volume day as it moves through those highs. We are not advocating buying, selling ort holding this stock. We are just saying it now goes onto our radar.
“Investors face IPO frustration, missed earnings fuel market skepticism.” Out of the USA Today front page. “Initial Public Offers are supposed to be a great opportunity for investors to jump into the ground floor of the next big thing. But, it turns out that investors may be buying into companies that are about to disappoint and can’t keep up with expectations. So far 165 of 244 companies that sold shares to the public for the first time between the second quarter of 2013 and the first quarter of 2014 including restaurant chain Noodles, water park Sea World and gaming company King Digital have missed earnings’ expectations at least one quarter.”
So, here is my dissertation again. Please listen carefully. The IPO market is your best friend and can also be your biggest enemy. Listen carefully. The biggest winners of the next 20 years, of the next 10 years will come from Initial Public Offerings. There may be some that go up 50 fold if not more. Seriously, we can go back through history. There have been many of them, companies that started with 20 million in revenues and ended up at 10 billion in revenues if not more. But, on the other end of the spectrum is the opposite. Unfortunately, Wall Street very often brings out a lot of ka-ka and I am not equating Noodles and especially Sea World because I love that place, with ka-ka. I’m talking about the ones that are being foisted upon you with big losses and some with no sales. Once a month I go through the recent IPOs. I go to their websites. I check out the companies. If they are retail or a restaurant I go visit them. If it is something that goes into an Apple IPhone, I want to know about it. Then I strip away the crap and that is easy to do and I watch the ones that I think I have the makings. Companies that are growing have great earnings or maybe they are losing money right now but they are growing big sales and estimates are for them to start making money. But, I will stay away fromthe 18 billion dollar market cap with a 100 million in sales and losing 90 million on that 100 million. It is simple logic. Stocks like that have gone up big in the last year and they have also gone down big. So, I just want to make note of this again. I think probably in the future, I’m going to do a better job with you guys about talking more about IPOs, companies that just came public. In fact, what we may do is what Investor Business Daily does is highlight an IPO maybe once or twice a month, especially one that is showing itself with the goods.
FRIDAY’S EVENT-DRIVEN WHIPSAW
The market opened well. The market was doing well, led by the Nasdaq and the Nasdaq 100. Now as you know, I am not one that believes in events and event driven things on a daily basis but I am going to have to give it today because, we hit 4481 on the Nasdaq at about 10:30 in the morning because the Nasdaq gapped up. From 10:30 till 10:55 the Nasdaq dropped like 40 points. It went as low as 4427 at noon, before recovering for the rest of the day. Basically what happened, there was something out of Russia. That was the excuse and to try to explain this best, you know we look for patterns of fear and greed here, when I look at all of these other major indices that are lagging badly, if we closed badly today it would have been ominous. But, due to the fact that we closed better it tells me that the money crowd is still out there helping this nascent bounce off of the lows of last Friday.
The S&P looks better than the Dow. The Russell 2000 and Smallcap 600 really are still underperforming. But, the transports are a smidge above the 50 day moving average and I repeat, Nasdaq 100 and the Nasdaq, when you have a chance go look at those charts vs the Russell 2000. There is a stark contrast between these areas. So, we don’t know when that changes. We just know that it is going on now. The place to be is the Nasdaq and the Nasdaq 100 and we will let you know as she goes. Biotechs are really starting to help the Nasdaq again. The market is finding right now a narrow group of names in these areas. Everything else is waffling all over the place or just downright bearish. That is the story, and if I was to title it, I would call it narrower and narrower and you know my thoughts on narrowing markets and what can ultimately happen, but it happened four times this year and four times the market came out of it. In a printing money market, all is possible.
GARY: Well, looks like we may just have another 5-10% correction…churn for a few days and forget the correction ever happened. This has happened 4 times previously in the past year. Just keep in mind, every rally up continues to take fewer and fewer stocks with it as well as an anemic number of yearly highs. The good news is the recent low looks like a decent low for now. Keep in mind, a break below would change a dynamic that has been going on for a while…which means a break would invite heavy selling.
That all said, ENERGY and ENERGY prices continue to head south. We gather a bounce is in order but overall, not a pretty sight.
RETAIL remains suspect with only a few names in good shape with many acting horrid.
REGIONAL BANKS…yuck…BIG BANKS…a little better but not much there as most trade below the 50 day.
The NASDAQ 100 (QQQ) remains the cream of the crop while the smaller caps (IWM,IJR) continue to woefully underperform the larger caps.
EUROPE acts poorly but is now bouncing off of a recent nasty drop. Many areas of Europe have announced they are back in recession but in QE markets, this is good news as investors recognize a bad economy means more easy money and money printing.
ASIA acts very well as the HANG SENG has really come on which means a slew of CHINESE ADRs are on the move also.
BIOTECHS are again finding a life…ignoring Mrs Bubble’s worries about over-valuation in the group. BIOTECHS have been an important cog in the wheel since the bull started.
The TRANSPORTS are back above the 50 day…quite important.
The SEMIS (SOX) still remains below the 50 day.
Most leading growth names continue to act fine. Most just pulled back or sat on light volume while market corrected. This is good to see. A few have already popped into new high ground.
All in all, there are still plenty of termites in the market as the internals continue to lag the indices but the lows have held for now with the NDX and NASDAQ leading.
In the pre-market, I want to talk about this King Digital. It was a $23 IPO and we questioned the IPO here for you, just like we questioned Groupon and Zynga. We questioned Facebook at $40 and watched it go down to $15 before finally kicking in gear. King Digital comes out and as we simply told you, a large humongous percentage of their business was this Candy Crush, and it does not take a rocket scientist to know that all of these games go in and out of fashion. It seems to me that they brought this King Digital public at the peak of the Candy Crush phenomena and things were already heading south just about the time they were going public. They have a couple other games in the hopper but to repeat something like a Candy Crush, no way Jose. So, it was a $23 deal that never got above $23.50, the stock was down $4.25 to $14 and let me be clear, this thing is probably going to single digits if not more. The bottom line is simple; things are heading south, games only last so long. Candy Crush will not be around forever even though my family is insane with it.
So, that is the Candy Crush story. Again, it is very important that you recognize that there has been a ton IPOs that came public in the next couple years. Here is the good news, a bunch of them are going to go up threefold, fivefold, tenfold and there maybe one or two of them that go up twenty fold if not re. Here is the bad news. There is going to be a ton of them that go to zero. So, please pay attention, especially to those bio-techs that have been brought public when they should not be brought public. They have zero sales. I have told you on this show that when I was in the penny stock business we brought out things public at five cents a share that had more revenues then some of this crap that is being foisted upon you, the investing public, by these wonderful and fabulous investment banking companies that almost brought down the system a few years ago. They are repeating what they did in 1999. Know that you have somewhat of a hottish type market so they just bring anything out that breathes because they know you guys are going to go after it.
What is the message? Read the fine print. Check the stuff out. Remember that during a bull phase you can get away with some things. During a bear phase, the curtains come down. Any company that is losing money is going to get clipped big time. Any company with no sales, see you! 90% to the downside. This is not me being opinionated. This is me telling you we have studied all the bear markets out there and the same thing happens every time. The investment banks go into their bunkers, hear no evil see no evil speak no evil, while you guys lose a ton of money. Of course the regulators say nothing because when they come out with the IPOs they are not saying to buy or sell, but that we are just bringing it out. They don’t care if you lose 100% of your money.They never have and they never will. Back in 1999 they slapped .com on companies’ names just because they knew the stock would go up because of it. Some mutual funds did that too. And of course when the .com went out of fashion, they just took .com off the mutual funds’ names or the companies’ names. Welcome to the marketing machine that we call Wall Street.
But, guess what? It is your job to do the leg work. It is your job to understand that a company with no sales should not have a five billion dollar market cap. If you don’t understand that, get out. That is the best message I can send you guys as I am watching some of this nonsense go on. I found about 15 companies with no sales brought public in the last six months. That is just a cursory look. 15! No sales! Open up a lemonade stand on your corner, sell the first glass of lemonade, you will have more sales than these companies that are actually in the public domain. Way to be Mr. Investment bankers.
Most of you probably haven’t heard of Kate Spade, but they are apparel and accessories. It’s Liz Claiborne, Juicy Couture and Lucky Brand. I have been watching the stock for a while. Why? Because it is trading up near the tips, the tips near the highs. We waited to see what earnings will do. So, the stock closed yesterday at $38.87. And then they reported, and the numbers looked pretty darn good. It opened up at $40.83 from $38.87, two bucks. By ten o’clock it was $42.86 up a nice 11%. And it constituted at that time what I consider to be a decent breakaway gap out of range. Well…it finished down $9.87 to $29 on 52 million shares. Its average daily volume is only 1.5 million. It traded half the float on the sell down. So, what happened? ‘Gary, you like buying high volume breakouts off of good numbers on earnings. Why not Kate Spade?’ Well, this is a very good question. This takes me into my little lesson.
Kate Spade had not had their conference call. We are very careful about not getting in front of conference calls. Kate Spade handled the whole earnings horribly. They came out with earnings and had other material information that would have affected the stock negatively and held off until the stock was already opened. People were making money, people were excited and then oops, guidance is not so good. If I am an investor in Kate Spade and I got my you know what kicked in, I am suing them. This is a lawsuit. I am not a litigious guy, but this is a lawsuit. Withholding material information, especially negative information, while the stock is trading up on supposed good news, would be shirking their fiduciary responsibility of full and fair disclosure. But, the lesson in all of this is simplistic. Wait for the conference call because you never know if what they will say will affect the things that go on with the stock and it turns right back around. And, by the way, that goes for the upside too.