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5-17-2012 comments (FaceBook)
We wait for a follow-through day. Since we keep making lower lows we have not yet seen a potential rally count of 1 yet. We need a rally count of 4 before a valid follow through day can show up, this would be next Tuesday at the earliest. A rally attempt begins with a positive close or on a down day a close in the upper half of the range. Any intraday lower low resets the count. If the bulls want to move in we have pulled back to the 2011 market top, a logical place for this to occur. I am reminded that all bear market begin with a correction however.
Today is the fabled Facebook (FB) IPO. In general I do not buy IPOs when they are announced but wait for a first consolidation to appear. This can be an initial legal length base or if you go back and look at the 2004 Google IPO, a tight three week consolidation and break above the pattern. The recent KORS IPO offers a slight variation on the theme with a buy point on January 17. Early this year I did some analysis of the FB product adoption rate by fitting their published user base into a standard double-exponential adoption S-Curve. An image from a presentation is inserted below showing that FB has reached the slowing phase of product adoption. On that image is a statement that FB needs a China adoption stategy. Given the current government this is unlikely. The analysis I did was done in February. Now that I see FB's financials it seems that the user base growth rate slow down is showing up in earnings by a marked deceleration. Here are the last 8 quarters of FB EPS growth: +100%, +100%, +300%, +175%, +83%, +83%, +17%, -9%
The last three quarters show deceleration and actual contraction in the last (March-2012) quarter. It will be interesting to watch if sellers come in to cash in while they can, a rational insider plan given the current financials. Then again investors might take a long view, that the giant userbase might be exploited for future income generating products. Only in price and volume will we determine their view.
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