The Gilmo Report

April 17, 2011

April 17, 2011

The NASDAQ Composite Index, shown below on a daily chart, has so far held support along its 50-day moving average in what has been a 2% short-term correction off its price highs of last week. The S&P 500 is in a similar position. Given the sharp, straight-up-off-the-bottom rally in the latter half of March, the market has certainly been entitled to a pullback, and so far this looks to be what is happening. Further evidence would be necessary, of course, to draw any further conclusions, so for now I would not assume anything. The best approach here, in my view, is to treat the market as a market of stocks instead of a stock market and focus on your stocks. Tuesday’s gap below the 50-day line occurred on less selling volume than we saw during February and March, so it may signal that most of the selling is done, but that remains to be seen, as selling volume could pick up at any time.

NASDAQ Composite Index Gilmo Report Chart

Things can change very quickly in the stock market, and the indexes could break below their 50-day lines and move lower, although the action of leading stocks would tend to argue that such a break may not be likely. Meanwhile, one thing that doesn’t seem to want to change is the massive uptrend in silver, as we see in the weekly chart of the iShares Silver Trust (SLV), below. You can see where the breakout occurred in late August 2010, and we are now on a tear over the past two weeks where we’ve seen the SLV close at the peak of the weekly range each week. Volume this week was exceptionally high, thanks to Tuesday’s “sell commodities” call by Goldman Sachs that was really a sell recommendation on crude oil, corn, copper, and platinum. Those who weren’t paying attention got shaken out of their SLV, AGQ, GLD, or DGP silver and gold ETFs as the dip was merely a pause that provided a buying opportunity I noted in my appearance on Fox Business News Wednesday morning.

iShares Silver Trust (SLV) Gilmo Report Chart

On Thursday the Bolivian government announced that it was considering taking over mines that the prevous government had sold to private interests, including silver miners like Pan American Silver
(PAAS) and Coeur d’Alene Mines (CDE) which got creamed on the news. This probably shows why it is simpler to own gold and silver rather than mining stocks, as there are so many variables involved, including whether a host country’s government can suddenly change their policy and arbitrarily confiscate a mining property. While this is bad news for the silver mining companies in question, it may be good news for the metal itself as this likely only serves to constrain the above-ground supply of silver even more. As well, with the dollar still sagging after last week’s gap to new lows on the PowerShares U.S. Dollar Bullish ETF (UUP), a move to lower lows would add additional fuel to the precious metals rally. News that the U.S. government’s alleged agreement on $38 billion in budget cuts was little more than accounting chicanery and that the actual cuts were more like $352 million confirms that the U.S. is simply going to inflate its way out of its debt crisis.

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

While the Investors Intelligence Advisor Sentiment poll is showing a slight up-tick in the percentage of bearish advisors to 16.3% this week, up from last week’s extreme low, we must remember that sentiment is not an absolute directional indicator in and of itself, and it is often important to assess a number of sentiment surveys to see when they may all be lining up together. A weekly chart of the S&P 500 lined up with the weekly Wall Street Sentiment survey (courtesy of DecisionPoint.com, ©2011 used by permission) shows that as the S&P 500 has formed a bullish-looking cup-with-hande type of formation over the past eight weeks, this survey is showing a spike in bearish sentiment to 53%, up sharply from three weeks ago when it was closer to 20%. You can read into sentiment whatever you want, but the final arbiter is the price/volume action of the indexes and leading stocks. Thus this brings us back to one basic premise about the stock market, and that is to assume nothing at all times!

Wall Street Sentiment survey Gilmo Report Chart

The market remains bi-furcated, and regardless of what the indexes are doing in this environment it is all about which stocks you own on which day. Friday was not a good day for two of the biggest “big stock” NASDAQ names as Google, Inc. (GOOG) gapped below support on huge volume, while Apple, Inc. (AAPL) is making a run at support with volume picking up on Friday, as we see in the daily charts of each, below. Last weekend I discussed that I considered AAPL a short more than a long, and so far it is starting to look that way, while GOOG was flashing warnings signs last week as its Relative Strength line had been making lower lows ahead of the stock. Whether the breakdowns in these two NASDAQ market barometers is trouble for the general market remains to be seen.

Google, Inc. (GOOG) Gilmo Report Chart

Apple, Inc. (AAPL)

Apple, Inc. (AAPL) Gilmo Report Chart

On the other hand, one could not call Netflix, Inc.’s (NFLX) action this past week anything but constructive as it works on the second week of a potential handle to this short cup formation it built prior to early April. NFLX will announce earnings on Monday, April 25th, so the stock may not do much of anything in the meantime. The company is looking for a nice earnings pop of 83.05%, according to the data shown below on the daily chart of the stock. I like the way the stock has held along the 20-day moving average (green line) as volume dried up in the extreme on Friday. At this point you could be setting up for a possible pocket pivot which would likely be a clue with respect to earnings if in fact volume kicked in and the stock moved above its 10-day moving average. Set a volume alert for NFLX at 5,982,700 shares, the highest down-volume for the stock over the prior 10 trading days as this would signal a potential pocket pivot move if it coincides with an up move through the 10-day line.

Netflix, Inc.'s (NFLX) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

Ametek, Inc. (AME), a maker of electric motors, among other things, raised first quarter earnings guidance on Friday from 46-48 cents to 55 to 56 cents, resulting in a big gap-up move on huge volume, as we see in the daily chart. Technically, this fits the definition of a buyable gap-up move as it gapped up 2.66, far more than .75 times the 40-day Average True Range of .89, as measured the day before the gap. Volume was massive at 507% over average. Given that the little area to the left above the $44 price level might provide a bit of temporary resistance, I would certainly be interested in buying any pullback towards 44 should that occur next week. AME got hit by the slowdown in business as a result of the recession, but in recent quarters has begun to turn things around with three quarters of strong, positive earnings and sales growth. AME announces earnings on April 28th, but with their pre-announcement on Friday the risk of buying the stock ahead of the actual announcement may have been mitigated somewhat.

Ametek, Inc. (AME) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

As the market bottomed in mid-March following its 8.3% correction as measured on the NASDAQ Composite Index, Rackspace Hosting, Inc. (RAX) was one of the first stocks to break out to new highs, as we can see on the weekly chart of the stock below. This recent base showed some tightness along the lows of the base in the 37-38 price area, and it is again displaying some very tight closes over the past three weeks as it forms what I see as a very constructive three-weeks-tight (3WT) formation. Note the long lower “tails” as each of the past two weeks have seen the stock pull lower on an intra-week basis only to find support and close back up at the peak of the weekly range, which is very constructive action. RAX announces earnings on May 9th, but could be buyable here based on the 3WT formation, particularly if a strong breakout or even a pocket pivot buy point showed up as a clue pointing towards a favorable earnings announcement. As always, scale any position in any stock you buy going into earnings on the basis of what you are willing to endure if the stock sells off as a result of an earnings announcement.

Rackspace Hosting, Inc. (RAX) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

I last discussed Endo Pharmaceutical Holdings (ENDP) in my report of March 30th as it broke out on huge volume, and the stock has moved higher since then. ENDP made a dash for the 44 price level on Monday of this past week after announcing that it would acquire American Medical Systems (AMS), but the stock settled back down to earth. Allegedly, the acquisition places them in the “sweet spot” as a leading player in the “continuum in urology and pain with a firm position in pelvic conditions.” ENDP’s revenues are thus estimated to potentially reach $3.3 billion in 2012, which would be a fairly large increase relative to 2010 revenues of just over $1.33 billion. Technically the stock is trying to hold its 10-day moving average and so I would monitor the stock for a potential pocket pivot buy point should it push up off of the 10-day moving average on volume greater than 2,560,500 shares, the highest down-volume in the stock over the past 10 trading days. With so many medical/pharmaceutical companies acting well, such as ALXN, BIIB, CBST, CPHD, ITMN, and VPHM, to name a few, this group is on fire right now, and I believe ENDP is one of the most fundamentally sound situations in this space.

Endo Pharmaceutical Holdings (ENDP) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

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For the most part I believe investors need to be selective here and somewhat cautious as we move through earnings season, which always has the potential to dole out as much pain as it does pleasure, as we saw from GOOG’s earnings. And among some of the ETF plays I’ve discussed recently, such as being short bonds via the TBT or long the JJS soft-commodities ETF, not all have panned out as well as silver and gold, which is likely the best place to be. The TLT is trying to move higher again, and may just be trapped in a range for a while, making the short-trade on bonds a dead money trade for now, at best, in my view. JJS, meanwhile, violated its 65-day exponential moving average, my ultimate selling guide on that particular ETF, as we see on its daily chart, below; hence it is out the window as well. JJS may need some time to correct and build a new base here, so for now it goes back on the watch list.

JJS Gilmo Report Chart

The bottom line as we head into the heart of earnings season is to be selective and avoid any aggressive moves here as we let the market work through this current pullback, which so far has been limited to about 2% on the downside. Meanwhile, the retail and medical/pharmaceutical/bio-tech area are your strongest areas. I discussed a number of retail plays in my report of this past Wednesday, and my discussions regarding those stocks all remain in force for now. As well, I do not consider it prudent to try and pepper you with a lot of buy ideas, preferring instead to focus on the best two or three new situations I might see as meriting inclusion in any single report. In the meantime, watch your stocks first, and the indexes second, as we deal with the market primarily as a market of stocks.

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, 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.