The Gilmo Report

April 10, 2013

April 10, 2013

I’ve dubbed this the “Flying V” market, in honor of the Gibson electric guitar model of the same name and the wild v-shaped action of the major market indexes over the past four days and the past four months, something that is perhaps a symptom of a largely QE-driven market. The market indexes have sold off three times over the past 3-4 months only to form deep “V” formations and then fly off to new highs, each time shaking investors out, as the daily chart of the NASDAQ Composite Index, below, illustrates. The NASDAQ staged a third-day follow-through today, unless you want to call Friday’s long “lower-tail” type action a rally attempt day, in which case today would be a fourth-day follow-through. Meanwhile, most leading stocks are exhibiting v-shaped action of their own while remaining out of position for proper buy points to appear in association with the strong index action. Unless I see a playable entry point on the long side, I’m not willing to jump in on the long side after a four-day streak to new highs by the big market indexes. The Fed minutes from the more recent meeting were released today, and they showed that more Fed board members believe that the need for QE is diminishing. The alibi for today’s move was that the market interprets this as the Fed seeing a strong economy down the line, but we have to remember that the Fed heads are good at talking out of both sides of their mouth, down-playing the need for QE while they continue their QE policies. Big Dow and NASDAQ stocks were some of the biggest movers today as all the major indexes moved to higher highs.

 

GR041013-NAZ

 

The Fed’s comments sent gold and silver flying to the downside, with the SPDR Gold Shares (GLD) down the most as it appears headed for a test of its lows. For now we must steer clear of the precious metals.

 

GR041013-GLD

 

While there were some isolated spots of strength in individual stocks that are consistent with our methodology, a lot of these moves are difficult to act on given the v-shaped moves up off of last week’s lows. One of the better ones, however, was Proto Labs (PRLB). This looked pretty ugly as it broke down below its 50-day moving average last week, but the stock snapped out of its funk with a wild v-shaped breakout today. This is in buyable range of the 49.68 breakout point, which it should hold.

 

GR041013-PRLB

 

Exone Company (XONE), like PRLB, benefitted from positive comments regarding the 3-D printers, and it jacked to new highs today on a huge v-shaped move after the stock collapsed right back into its prior little base formation. The only way to have been involved in this today would have been to buy the pullback into the 30 price area.

 

GR041013-XONE

 

3-D printing stocks in general were on the move, and Stratasys (SSYS) joined the party by staging a pocket pivot move up through its 50-day moving average both yesterday and today. Look for this to hold the 50-day line at 72.10 on any pullback from here.

 

GR041013-SSYS

 

Sodastream International (SODA) fell below support within the recent region of tight action that I discussed in my March 31st report, looking quite ugly in the process. But it too made the big V-turn and ran up higher highs on below-average volume, thus is not buyable given the light volume.

 

GR041013-SODA

 

Facebook (FB) rallied up to its 50-day moving average again on positive reviews of its new “Home” software, but this time it managed to close just above the line on volume that qualifies the move as a bottom-fishing pocket pivot buy point. Despite my prior bearish view of FB, this buy point argues otherwise, and it may be that playing stocks coming up off of lows within bases is safer than buying into strength in this bizarre “Flying V” market.

 

GR041013-FB

 

Given all the v-shaped action in broken down leaders, I thought an opportunistic play in recent IPO Workday (WDAY) was possible after the stock had sold down going into today’s IPO share lock-up expiration. Sixty-three million shares were released for trade in the open market today, significantly expanding the company’s current 26-million-share float. Pre-open the stock traded down close to 55 before opening up at 56.22 and then trading back down to an intra-day low of 55.25. But by the close the stock finished positive and above the 50-day moving average, as we see on its daily chart, below. WDAY traded just over 15.5 million shares on the day, so one could certainly surmise that the IPO lock-up expiration supply was well-absorbed, at least on the first day of the release of shares. I consider this buyable using the 50-day line as a selling guide and with the idea that the stock pushes up and out of here as sellers are cleared out.  WDAY provides cloud-based enterprise applications for human capital management, payroll, time-tracking, and procurement but is expected to lose 77 cents in 2013. Nevertheless, a number of smart institutional players have recently moved into the stock, so this could be a very forward-looking situation.

 

GR041013-WDAY

 

WDAY might be a similar situation to Splunk (SPLK), a stock I’ve discussed in previous reports but which is also expected to lose money in 2013, albeit only 2 cents a share, according to analysts’ estimates. The similarity lies in the fact that SPLK, as I’ve detailed in previous discussions of the stock, has also seen some smart institutional buyers begin to move into the stock over recent quarters. This has resulted in a pattern that shows support for the stock each time it tries to pullback. SPLK has held up very well throughout the market’s recent v-shaped antics, and this move today to new all-time highs comes on strong, above-average volume. SPLK, however, has a tendency to not follow through on prior strength, and buying the stock on strength has the tendency to pull in and try to shake you out. Thus I would prefer to buy into a pullback following strength when it comes to handling any position in the stock. SPLK’s CEO recently commented that the company sees 30% revenue growth over the long term as it adds new customers and begins working on a smartphone app. Not a huge mover just yet, but the company announces earnings on May 30th, which may be the catalyst necessary to spark a sharper upside trend in the stock.

 

GR041013-SPLK

 

Over the weekend I discussed the fact that Friday’s action had more of the feel of an exhaustion low given that broken-down leading stocks had been selling off for most of the week prior to Friday’s action. This of course set up a bounce in the indexes, but I have to admit that the bounce has exceeded my expectations given the prior deleterious action in a number of leading groups, including financials and the housing stocks. Much of the action over the past four days has come in the form of v-shaped rallies in a number of stocks. But with the NASDAQ picking up volume over the past three days  and then producing a follow-through type of day today, the market may be in some sort of rapid-rotation mode as leadership shifts very quickly.

 

Thus I tend to like some of these situations where stocks are coming up off the lows of recent pullbacks and rounding out the right sides of potential new bases, as in the examples of say, FB and SSYS. So as the recent leaders have come off and broken down, we could see the resurrection of leaders from last year or earlier this year that then broke down sharply, such as the 3-D stocks. Even 3-D Systems (DDD) flashed some pocket pivot action today, but it remains below its 50-day moving average, so there is this uniform movement in the group which also includes PRLB, XONE, and SSYS. And though I hated FB a week or so ago, the action in the stock recently argues for further upside. As our discipline dictates, what you thought about a stock or the market goes out the window in the face of new evidence. In the meantime, we can move with the flow in measured fashion as actionable buy points present themselves.

 

None of this, however, takes away the fact that this has been a difficult market to play when buying leading stocks. In general the action has been uneven and this is why I’m looking to shift gears a little bit here by getting interested in stocks that may be rounding out the lower right sides of potential new bases without getting too carried away. Stay tuned.

 

Gil Morales

CEO, Gil Morales & Company, LLC
Managing Director & Principal, MoKa Investors, LLC
Managing Director & Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in FB and WDAY, though positions are subject to change at any time and without notice.

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