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Fall 2015 Commentary

Dear Valued Clients and Friends,

MARKET PERSPECTIVE: The stock market in the third quarter was a tale of two tapes. Over the quarter, the Nasdaq 100, the S&P 500, and the Nasdaq Composite were down –4.91%, -6.94%, and -7.35%, respective-ly. When you compare this to the Russell 2000 Growth Index decline of -13.20%, the picture you see is that a select list of high profile, large cap companies such as FB, AMZN, GOOGL, and AAPL masked the damage which had been done not only to the small cap sector, but to the majority of stocks in general.

The market, in general, corrected sharply in August, accentuated by the extreme weakness in the small cap sec-tor as the market was bombarded with macro news related to a theory that the weakness in China would become a contagion and spread to the US and the rest of the world. The result of this was that we experienced an intra-day collapse in stock prices as investors fled to safe havens. You have to go back to October of 2008 to find a period where the stock market acted in such an irrational manner. As I wrote in September, “while this type of action is sensation-al, frightening, and unnerving, it is very typical of a short term bottom.” August 24th‘s extremely volatile decline had all of the earmarks of a climatic low: a very large intraday trad-ing range, significantly increased volume, and a close in the upper half of the day’s range”. Since then, the market has had a very meaningful rally, recouping most of the losses with a number of the major indexes trading nicely above their 200 day moving averages. While this is very encouraging, I be-lieve additional gains are unlikely over the short term as we are getting into areas of resistance where I would anticipate increased selling. Our course of action has been to the trim overextended positions in portfolios while at the same time searching for new companies to add, assuming they meet our criteria and have good chart patterns. After reviewing, over 1500 charts recently, I don’t expect this to happen overnight.

TECHNICAL PERSPECTIVE: After looking “toppy” late in the second quarter, the chart patterns took a turn for the worse in mid-August when the US stock markets collapsed (as discussed above). As a rule, when prices get hit that hard in a very short time frame, the damage done takes quite some time to repair before a new advance can begin. In this case however, the market has had a remarkable recovery, in many cases turning chart patterns back to neutral, and in some cases positive. Of the stocks in our portfolio, we currently have 6 in up-trends, 12 which are neutral, and 3 that have remained in downtrends. The most likely outcome in the short term is a consolidation of the recent gains in the upper end of the range before we can make new highs for the year. With that in mind, the short term technical trend remains up so we will add our holdings, albeit cautiously. SECTOR COMMENT: After leading the market in performance over the last several years the Healthcare Sec-tor of the market rolled over and has had one of the most destructive corrections I have seen in quite some time. While there are a handful of subsectors in this group which have held well on a relative basis trimmed our hold-ings in this group and are unlikely to increase our exposure here until the dust settles. In the mean time we will focus our attention on the information technology groups including software, telecom- Fiber Optics, Infrastruc-ture and Software. We also like the Regional Bank sectors. The energy sector appears to be in the bottoming so continue to avoid. PORTFOLIO ADJUSTMENTS: Our portfolio activity in the third quarter consisted of 7 sells and 3 buys. The 3 companies that we added to our portfolio include HomeStreet, Inc. (HMST), Cross Country Healthcare, Inc. (CCRN), and Attunity, Ltd. (ATTU). These purchases were made after screening for our technical and funda-mental criteria. We sold Vasco Data Security Int’l, Inc. (VDSI), Silicon Motion, Inc. (SIMO), Envestnet, Inc. (ENV), Monotype, Inc. (TYPE), Ambarella, Inc. (AMBA), and Astronics Corporation (ATRO) because they broke down technically, fundamentally, or both.

ELLIE MAE, INC. (ELLI *$72.50) Ellie Mae is a leading pro-vider of innovative on-demand software solutions and services for the residential mortgage industry. Ellie Mae’s all-in-one En-compass® mortgage management solution provides one system of record that allows banks, credit unions and mortgage lenders to originate, fund, and close mortgages. In addition, this software streamlines compliance, an area with ever-increasing regulatory scrutiny, and drives efficiency. Due in large to the company’s Encompass® software, the firm has grown mar-ket share and is currently an industry leader that continues to experience growth in its top and bottom lines.

While we remain confident that the long-term trend is up, recent activity indicates that additional gains in the short-term are unlikely, as we have rallied into areas of resistance at levels where I would anticipate increas

ed selling. Bearing that in mind, we will be extremely diligent in plotting our next course of action.

As always, if you have any questions, comments, or concerns do not hesitate to call or email us at any time and we will get back to you promptly. Your continued confidence in Rocket Capital Management is greatly appreci-ated and we look forward to a long and meaningful relationship.

J.D. Hurd

President / Senior Portfolio Manager

Rocket Capital Management, LLC

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