The Gilmo Report

April 10, 2011

April 10, 2011

As I surmised in my report of this past Wednesday the market has taken a brief respite as it has pulled back for two days off the peak of this rally off the lows of mid-March. As we can see on a daily candlestick chart of the NASDAQ Composite Index, below, we can see that this two-day pullback looks quite “logical” within the context of the overall chart action. The past two days have served to at least start what may simply turn out to be a handle to this cup-like shape it has formed since mid-February after correcting 8.3% from peak to trough. If we forget about the news noise from Congress and Japan we see that volume has dried up on the pullback, which I see as constructive. The fly in the ointment is that if one peruses a copy of Investor’s Business Daily one can see that the three biggest indexes, the NASDAQ, S&P 500, and NYSE Composite, are sporting Accumulation/Distribution ratings of D-, E, and D-, respectively. This is not what you would expect to see on a sharp rally up off the lows that included a follow-through day three Thursdays ago. Hence I would remain cautious here.

NASDAQ Composite Index Gilmo Report Chart

I am scheduled to appear on Fox Business News this coming Wednesday, April 3rd as a guest of host Brian Sullivan to talk about – what else – silver! I’m a stock guy, not a “silver bug,” as you all know, and so I find it ironic that I’ve become an “expert” in silver since I first got bullish on the white metal in September of last year. Back then, when I was on Fox stating that I thought the iShares Silver Trust (SLV) could get into the high 20’s I was greeted with skepticism. Last week I was on Fox saying I thought silver could get to $50.50, my point & figure chart price target as you all know from my February 20th report. I was greeted with more skepticism, and I note that even the “silver bugs” are getting “nervous.” As a stock guy and not a silver bug, I still know a strong trend when I see one, and as I wrote in my previous two reports silver does not seem to be showing any signs of slowing down. And so it hasn’t, as the spot price of silver exceeded $40 yesterday for the first time in 31 years. As well, as we can see in the daily chart of the iShares Silver Trust (SLV), below, the trend is accelerating as volume picked up sharply on Friday. The SLV can pull back at any time, but for now the trend is still our friend, and all we can do for now is ride it, because right now, in the present, there are no sell signals and no low-risk entry points. So if you aren’t riding it by now, then at least enjoy the show.

iShares Silver Trust (SLV) Gilmo Report Chart

While I love my silver, I also like gold right here on this new breakout to all-time highs, as we see on the daily chart of the yellow metal’s proxy, the SPDR Gold Trust (GLD), below. I’ve been banging the drum loudly on gold as being in a very buyable position in my last two reports, so if you never got on the silver train, you have, at least in my view, a low-risk entry point for gold as it potentially leaves the station to start a possible new up leg in its long-term price trend since Year 2000. The GLD closed at 143.66 today, well within 5% of its breakout level at 140-141, so this remains in buyable range. It could retest the 140 level again, but barring any unforeseen conditions of such a pullback I would tend to see it as imminently buyable. The driving theme for gold and silver is their role as alternative currencies, e.g., “money,” to the U.S. dollar and other global fiat currencies. The current row in Congress, regardless of the “deal” cut late on Friday night at the midnight hour, simply exemplifies the fact that there will never be enough budget cuts to turn the massive deficit cruise ship around; there is only a choice between “default or devalue.” After all, countries and societies have been devaluing their way out of excessive debt for about 1,000 years, and it has worked every time, so why not now? I believe it will be used again in such a manner, and so I remain bullish on silver and gold.

SPDR Gold Trust (GLD) Gilmo Report Chart

Despite some central banks intervening in the currency markets on Friday to buy dollars in order to prevent their own currencies from increasing in value, something most countries do not like to see as it makes their exports more expensive on a relative basis, the U.S. dollar broke to fresh lows, as we see in the chart of the PowerShares US Dollar Bullish Fund ETF (UUP), below. The UUP gapped down Friday on huge volume, moving to new lows, and this has come right on the heels of my discussion in my Wednesday report of this past week in which I pointed out that the dollar looked primed to move to new lows. With a compromise budget “deal” being worked out, maybe we see a bounce in the dollar Monday, but I would simply use it as an opportunity to take or add to equivalent short positions in the dollar. In my view, the signs we are seeing in the dollar, bonds, and commodities point to one thing: Inflation is going to get worse.

PowerShares US Dollar Bullish Fund ETF (UUP) Gilmo Report Chart

In my 20-year career I have never seen the Investors Intelligence Advisor Sentiment poll reach such an extreme with respect to a massive dry-up in bearish sentiment, as the chart of the poll from DecisionPoint.com (©2011, used by permission), shows. When I combine this with some of the uneven action in leading stocks, the low Accumulation/Distribution ratings in the major market indexes, as I indicated at the outset of this report, and the developments I see in the dollar, bonds, and precious metals, I have to become somewhat concerned here. And this is why I currently see virtually no stocks in which I am interested in taking fresh positions or adding to existing positions. That tiny little red bar I’ve circled on the chart indicates that a mere 15.7% of investment advisors polled are currently bearish, and with bullish sentiment at 57.3% the bull-to-bear ratio has spiked to an extremely high level. In my view, the market has some “negative feathers” in its cap currently, and so at best I would remain extremely cautious here. If you have leading stocks that are holding up, that’s fine, but watch key support areas as and if they pull back and do not let a profit turn into a loss.

Investors Intelligence Advisor Sentiment Gilmo Report Chart

Some of the strongest-acting stocks in this market have been the Chinese internets, and I’ve noticed some others of the more “legitimate” and substantial Chinese stocks also perking up as of late. We can see that Baidu, Inc. (BIDU), shown below on a daily chart, has held up near its recent peak prices, and when I try to put all the pieces together, such as the action in the dollar, bonds, and precious metals, one theory (and let me emphasize that for now this is just a theory and nothing more) is that they could be signalling a shift where the Chinese Yuan/Renminbi is finally un-pegged from the dollar, which would undoubtedly lead to a rapid increase in the Chinese currency’s value relative to the dollar, and this in turn would probably drive up the prices of Chinese stocks in dollar terms. Another piece in the puzzle? Perhaps, but the action in stocks like BIDU, NTES, SINA, SOHU, CEO, CHA, CHU, CTRP, EDU, FMCN, and PTR, all “substantial” Chinese concerns, is very interesting in this regard.

Baidu, Inc. (BIDU) Gilmo Report Chart

When it comes to U.S.-based stocks, most of the leaders are in pullback mode, including Netflix, Inc. (NFLX), shown below on a daily chart. NFLX appears to be in the process of building a handle here, and I would continue to operate on this assumption until further evidence proves otherwise. Technically, Thursday’s break below the 10-day moving average on a gap-down move with volume about average on the day sets up the potential for a 10-day moving average violation if NFLX moves below the intra-day low of Thursday’s price range at 231.03. While NFLX does not tend to hold its 10-day moving average, I might still look at such a violation as a cautionary sign. I own some NFLX here, and in my view the position may need to be sold if that happens, with the idea that I can always re-enter on a constructive pullback down to the 50-day moving average, which NFLX tends to hold, more or less. You might notice that it does hold the 65-day exponential moving average pretty well, which would be another reference low on any pullback. However, I would much prefer to see NFLX hold relatively tight in here as it tries to build a handle to what is so far a cup pattern formed over the past seven weeks.

Netflix, Inc. (NFLX) Gilmo Report Chart

If I have a choice between buying precious metals via the SLV or GLD and investing in precious metals mining stocks, I tend to think that the cleaner play is to just buy the precious metals ETFs. On occasion, some leverage might be found in the short-term by owning a strong silver or gold miner, for example, so I am always attracted to big breakouts in these stocks when I see them. One example is Pan American Silver (PAAS), shown below on a daily chart, which stormed out of a 14-week base on Friday after its CEO announced that the company’s Navidad silver project in Argentina has the potential to double PAAS’ annual silver production. While this project is still in the works and won’t come on line for a while, PAAS is still the world’s second-largest primary silver miner, and in 2009 pulled 23,043,539 ounces of silver and 100,704 ounces of gold out of the ground. At $40 an ounce, that multiplies out to $921,741,560 worth of silver. Earnings growth looks to be robust over the next two quarters, and I like this breakout, which remains within 5% of the 41.15 buy point, with the idea that it should hold the $40 level, roughly. The base is a little loose, but this is generally typical of mining stocks, and if it fails the $40 level is your quick out point.

Pan American Silver (PAAS) Gilmo Report Chart

As far as I’m concerned, the biggest things going on in this market have to do with precious metals, the dollar, and bonds. Long the metals, short the dollar and bonds seems to be the most optimal configuration right now, particularly with some of the subtle signs of deterioration I see in the major market indexes given their low Accumulation/Distribution ratings and a virtual drying up of bearish sentiment as the bears throw in the towel and go into a type of “spring hibernation.” As well, on a purely objective basis, the trade that has given me the most “love” over the past 3-4 weeks has been my silver position, and the AGQ has rocketed well over 100 from its initial entry point corresponding to the SLV’s breakout through the $30 level. Finally, I believe that investors can comfortably enter the long side of gold here, via the GLD or the two-times leveraged DGP, as the breakout by gold and the GLD, specifically, through the 140.61 buy point provides a nearby, ready-reference for a downside stop if the breakout fails. I tend to think, however, that it won’t, unless something very major occurs, and for now the probability of the U.S. Congress quickly turning around the massive cruise-ship of debt it has built up for decades is remote at best. Thus the ETF trades I outlined in my report of this past Wednesday still stand, while investors should keep a close eye on their long positions in leading stocks as they digest recent gains.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, and/or Gil Morales & Company, LLC held positions in AGQ, DGP, GLD, NFLX, and PAAS though positions are subject to change at any time and without notice. Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2011 Gil Morales & Company, LLC. All rights reserved.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.