The Gilmo Report

April 13, 2011

April 13, 2011

The market sits at an interesting crossroads here as both the NASDAQ Composite Index, shown below on a daily chart, and the S&P 500 Index are both trying to find support around their 50-day moving averages. Despite a rally this morning, volume was lacking on both indexes as some divergence was seen with NYSE advancers falling behind declining stocks 1377 to 1595, while breadth was slightly ahead on the NASDAQ which traded weak volume as it rose just above its 50-day moving average, but did gap higher on the opening as it spent most of the day churning around in a wide range and closing below its opening levels. The market’s bounce today was led by a handful of continuing leaders that refuse to die, such as BIDU, LULU and CMG. But the road can be quite treacherous if one is long other areas of the market, such as oils, metals, and machinery stocks. As I wrote over the weekend, given the extended state of most leading stocks, there were not a large number of stocks I was interested in taking new positions in come Monday. That view still stands, although if one owns one of the leaders that continues to act well then one can certainly afford to sit out the current market pullback, keeping your trailing or initial stops in mind if your names get into any trouble.

NASDAQ Composite Index Gilmo Report Chart

While I have not discussed oil stocks as long ideas in recent reports even as they have acted quite strong, at least up until yesterday, I have discussed “stuff stocks” like mining machinery stock Joy Global, Inc. (JOYG), shown below on a daily chart. JOYG is a fairly representative example of what happened to a lot of stocks we might consider related to “stuff” like metals, coals, energy, etc. JOYG staged a very nice breakout to new highs two weeks ago but has failed to hold that breakout as it plummeted below its 50-day moving average yesterday and today attempted a little “gap and churn” move up into the 50-day moving average. This is not what you want to see in a leading stock and it shows why breadth has deteriorated sharply over the past several days as the market has come down. The key point with a stock like JOYG is simply that if you take a new position in a new breakout and the stock does not hold AT LEAST the pivot point, which in this case I see as a trendline pivot point at around 96, you need to get out of the way, and fast. If this is a late-stage failed-base then what you are looking at is a shortable LSFB set-up using the 50-day moving average as a guide for a stop, give or take 2-3%.

Joy Global, Inc. (JOYG) Gilmo Report Chart

One interesting divergence I see in the market that adds to my cautiousness is the behavior of the Philadelphia Semiconductor Index, the “SOX” as it is known, as represented by the daily chart of the Direxion Daily Semiconductor Bullish ETF (SOXL), shown below, which tracks the Philly Semi Index, shown below. Interestingly, the SOXL has diverged from the general market as it has not rallied nearly as strongly off the mid-March lows, and two days ago gapped down through its short, weak uptrend line to a lower low. Generally, a healthy market rally will see the SOX participate, and I would note that while we did see the SOX lag in September as this current market rally got going back then, it did hold up in a shallow uptrend before finally moving strongly into year-end 2010 to play “catch up” with the rest of the market. Since then, the action of the SOX appears to be sending a cautionary signal, although if the general market turns back to the upside it is always possible that the SOX could play catch-up as it did in late 2010.

Direxion Daily Semiconductor Bullish ETF (SOXL) Gilmo Report Chart

It was clear to me when listening to today’s “Obamarama speech” on the budget deficit that the Democrats and Republicans are hundreds of billions of dollars apart on what they view as an acceptable deficit, and when the President continues with his loop tape babble about “investing” in things like the economy, infrastructure, clean energy, education, etc. one message is quite clear: It is simply not in the DNA of the U.S. government to think about anything else besides the idea that more spending by the government is always the solution, even when it is the problem. But the chart of the U.S. dollar has known this for a long time. This occurs as the dollar hovers above lows that I have never seen in 20 years of being in this business. In addition, the only solution the President offers is increasing taxes, with the assumption that increasing taxes will automatically lead to increasing tax revenues, when it may very well derail the economy. It is clear that the U.S. Dollar does not agree with this premise, and from the looks of the daily chart of the U.S. Dollar Bullish ETF (UUP), shown below, the dollar looks poised to move even lower.

U.S. Dollar Bullish ETF (UUP), Gilmo Report Chart

And of course we know that as the dollar continues to fall, silver and gold continue to rally. Yesterday Goldman Sachs came out with what was billed in the media as a “sell on commodities,” but in fact the recommendation they made was to sell a basket of commodities which was up 25% from where they first recommended it as a buy. This basket was made up of four commodities: crude oil, corn, copper and platinum, the so-called CCCP trade. This had the effect of knocking down commodities-related stocks, as well as silver and gold, but the pullback in both was rather minor as neither silver or gold pulled back more than 3% off of their recent highs of three days ago. As we see in the iShares Silver Trust (SLV) daily chart, below, a close proxy to silver itself, the white metal has held up quite well in the fact of the Goldman call, which in fact had nothing to do with the precious metals. While commodities stocks and other commodities got whacked pretty good, I consider it a sign of silent strength that neither silver nor gold has pulled back much, and in fact both recovered slightly today as the sell-off was not sustained.

iShares Silver Trust (SLV) Gilmo Report Chart

Today I was on Fox Business News discussing gold and silver, and I have to admit that I’ve been on the network so many times now discussing precious metals that I’m beginning to feel like some sort of “precious metals pimp.” Pimp or not, the bottom line is that silver remains ensconced in a very strong uptrend that shows no signs of abating just yet, while gold is emerging from a five-month consolidation extending back to November 2010. As I wrote last week, gold’s nascent breakout could be the start of a sustained uptrend in the yellow metal, and so I consider its current position just above the 140 level as an easy, low-risk entry point with the idea that it should hold that 140 level, more or less. Using Point & Figure chart analysis, I can generate a potential near-term price target of 172 on the GLD which, as long as it holds this current breakout, would stand as my upside price target on the move to new highs. With silver, I maintain my $50.50 upside price target. Interestingly, I continue to meet with skepticism whenever I indicate my view that both of these precious metals are headed higher, as the question, “Are silver and gold in a bubble?” seems to dominate the thinking as opposed to, “How high can they go?”

GLD Gilmo Report Chart

Among the leaders hanging in there, Netflix, Inc. (NFLX) was able to bounce off a region just above its 50-day moving average, as we see in the daily chart below, and as I see it the stock is trying to build a handle to its current cup formation. Of course, NFLX may also be in a late-stage pattern, and so it bears monitoring as upside volume appears to be drying up here as the stock approaches the upper end of the cup. Notice how NFLX moved to new highs two weeks ago on very light upside volume, a cautionary signal, which then led to a relatively sharp pullback down towards the 50-day line. Yesterday’s support above the 50-day line came on just about average volume while the move up today came on much lighter volume. My best guess, if I had to make one, is that NFLX will have to do some work here if it is in fact going to move higher, which I would see as constructive. It seems that every company on the planet that can has already announced their own streaming movie service, from Amazon.com to Apple, Inc. to Best Buy, and still such developments fail to kill NFLX.

Netflix, Inc. (NFLX) Gilmo Report Chart

Chipotle Mexican Grill (CMG) is going Asian as it plans to open up a line of new restaurants called “Southeast Asian Kitchen,” using the same buffet-oriented “build your own” type of format it uses with its Mexican line of eateries. This news sent CMG up through its 10-day moving average yesterday, as we see on the daily chart below, as the stock posted a bona fide pocket pivot buy point, and today CMG flashed a second pocket pivot buy point in a row which also coincides with a new-high breakout. In a poor economy CMG continues to address the needs of diners looking for value by offering a reasonably healthy yet inexpensive option, and by expanding into Asian food the company is likely making a strong move by adding some “food diversification” to their format. Is this all in the stock already, or does CMG have further upside? The bottom line is that the technical action is showing two pocket pivots in a row while the selling over the prior five days did not occur on very heavy volume. CMG strikes me as one of those leaders that could continue higher even IF the general market topped, which is not uncommon among the strongest leading stocks.

Chipotle Mexican Grill (CMG) Gilmo Report Chart

Last month Deckers Outdoor Corp. (DECK) was starting to look like a late-stage failed-base type of short-sale set-up, but like CMG and LULU the stock has managed to build a sort of base-on-base formation and today broke out from this formation on what was both a standard new-high pivot point and a pocket pivot point as it came up through its 10-day moving average. DECK may be another one of these leaders that comes back to new highs and defies the bears in the same manner that CMG and LULU have. LULU remains extended, but DECK, which can be considered a cousin stock, is right at a buy point with the idea that it should at least hold today’s intra-day low at 88.29. Interestingly enough, several Form 4 filings were made public on April 9th showing that insiders have been buying the stock, even at these high prices.

Deckers Outdoor Corp. (DECK) Gilmo Report Chart

Adding some weight to the positive action in these consumer stocks like LULU, DECK, NFLX, and CMG is the action in Fossil, Inc. (FOSL), shown below on a daily chart. FOSL is fairly extended from its last base, but if you already own a position in the stock then this is a potential add point. Aggressive players (like me) could conceivably take a position here with the idea that the stock will at least hold the 10-day moving average or the intra-day low of today at 92.07. Not that I would necessarily, but I show FOSL’s chart here as an example of how well, even surprisingly well, these consumer retail situations are acting and have continued to act even as the general market has engaged in some sloppy action over the past couple of weeks.

Fossil, Inc. (FOSL) Gilmo Report Chart

And with apologies to the spirit of Billy Maze, let me add, “But wait, there’s more!” Under Armour, Inc. (UA), which I discussed in my report of April 3rd when it broke out of this recent base you see in the daily chart below, has flashed two pocket pivot buy points in a row along its 10-day moving average two and three days ago. Like FOSL, this would be considered a continuation pocket pivot buy point in UA, but unlike FOSL the stock is not as extended from its recent breakout level at around $70 a share. If you bought that breakout, this could be considered an add point. Note also that over the past three days as the major market indexes moved below their 50-day moving averages UA was showing contrarian strength by staging the two pocket pivot buy points along the 10-day line. Again, the strength in some of these consumer retail names is quite striking and very interesting, as I see it.

Under Armour, Inc. (UA) Gilmo Report Chart

Last but not least I would note that Green Mountain Coffee Roasters (GMCR), which staged a buyable gap-up in the earlier part of March, as I discussed in my report of March 13th. Since then, as we see in the daily chart of GMCR, below, the stock has slowly trended higher in a type of “ascending flag” formation. Interestingly, both yesterday and today would qualify as continuation pocket pivot buy points off the 10-day moving average. While yesterday’s up move was a clear pocket pivot buy point, today’s action would also qualify even though the stock barely closed down by 3 measly cents. Given the long “tail” or lower intra-day range as the stock first sold off earlier in the day but recovered very strongly going into the close, this is a supporting-action type of pocket pivot buy point. GMCR has not given up much ground as the general market has pulled back, which lends some credence to the stock’s contrarian strength.

Green Mountain Coffee Roasters (GMCR) Gilmo Report Chart

If you don’t find this environment challenging, then chances are you aren’t involved in it. The market has become somewhat bifurcated, as depending on what stocks you own you can be experiencing various forms of pain or pleasure. The surprising aspect, at least to me, is the strength in some of these strong leading consumer retail stocks, of which I’ve discussed several examples in this report. These all look okay to buy to me, either as outright pocket pivot or breakout buys or continuation pocket pivot buys that can be utilized to add to a position. Meanwhile, I continue to view gold and silver favorably, and gold in particular remains in a low-risk buyable position here just above the 140 level on the GLD. But if you are trying to buy breakouts in stuff stocks like JOYG, things are less sanguine. My view is to take the market on a stock-by-stock basis, reverting to my idea of viewing the market not as a “stock market” but as a “market of stocks,” watching the indexes less and your stocks more.

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, DECK, DGP, and GLD, 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.