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MLR - PMP 7/31/14

Major market averages rose yesterday on mixed volume. Volume rose on the Russell 2000 which now sits just above its 200-day moving average. With the NASDAQ Composite and S&P 500 struggling to move into new high ground, and the Russell 2000 lagging both indices by a wide margin, this current divergence may resolve itself by the Russell 2000 outperforming the other major indices in the coming weeks, thus restoring itself.

Evidence this may occur is in the number of leading stocks that are forming or have formed quality basing patterns, plus the Fed's focus on keeping interest rates low for an extended period of time, despite the Fed's move that cut bond buying to the expected $25 billion per month.

The bearish argument is that the Russell 2000's weakness will pull down the NASDAQ Composite and S&P 500 is that this QE party has to come to an end at some point, and perhaps the divergences are an early warning signal, much as the Russell 2000 diverged in late 2007, which marked the beginning of the bear market in 2008. There are also a number of recent leading stocks that have broken down after earnings and which are in short-sale set-ups, including NFLX, AMZN, KORS, P, TRIP, and ILMN, to name a few.

Futures are down sharply this morning on news out of the Ukraine, an Argentinian default, and likely a reassessment of yesterday's Fed policy announcement, lending weight to the bearish argument. There is something quite Orwellian about government officials trumpeting 4% Q2 GDP growth while the Fed still feels the need to keep interest rates near 0%. How long such a paradox can go on is anyone's guess.

Prescription drug maker Salix Pharmaceuticals (SLXP) had a pocket pivot out of a tight, sideways pattern yesterday. Earnings and sales are accelerating strongly, institutional sponsorship has grown 5 quarters in a row, pretax margin 32.5%, ROE 34.3%, group rank 19.

Recent IPO Arista Networks (ANET) had a pocket pivot yesterday. ANET is a cutting edge, cloud networking software company. Earnings and sales have soared, ROE 87.9%.

Regeneron Pharmaceuticals (REGN) had a buyable gap up yesterday on news that its cholesterol drug significantly lowered bad LDL cholesterol levels. REGN, together with its partner Sanofi, will file for approval of the drug by year end. Some analysts think it could generate at least $3 billion in sales per year which would be significant to REGN's bottom line. Earnings strongly accelerating, pretax margin 44.4%, ROE 58.5%, group rank 90.

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