The Gilmo Report

April 20, 2011

April 20, 2011

The market started the week out looking like the victim of a big blindside hit when Standard & Poor’s came out and downgraded the U.S.’ credit outlook to “negative” on Monday just before the open. At first the futures and the market reacted violently to the downside, but regained some of its footing by day’s end to close well off the lows. The news, while perhaps viewed as “shocking” in the media (blood on the street is always a good story), was in fact old news to the market, which has already been “downgrading” U.S. Treasuries for a while now, as we see in a chart of the Barclays 20-year+ Bond ETF (TLT), a reasonable proxy for the bond market.

Barclays 20-year+ Bond ETF (TLT) Gilmo Report Chart

While some may want to waste time arguing over whether a third-day rally off of Monday’s lows constitutes a follow-through day, I would simply say that it is irrelevant. The market corrected all of 3.8% on this recent correction off the 2815 highs as measured on the NASDAQ Composite Index, shown below on a daily chart, which constitutes little more than a short-term correction. Furthermore, the market was entitled to pull back as it ran straight up off of the mid-March lows, as is also evident on the chart. Thus it is not necessary to see a follow-through day (FTD) in order to take at least a constructive view of the market, leaning towards a resumption of the rally. But as I indicated over the weekend in my report dated April 17th, the most prudent approach to take in this market is one centered on the individual action of stocks. In this manner one simply treats the market as a market of stocks instead of a broader stock market.

If the market is to continue higher from here, then some rotation is likely to occur, and some of this helped drive the NASDAQ back above its 50-day moving average on heavy volume today as technology stocks of various stripes all sprung to life after VMware (VMW) and Intel (INTC) set the stage with their positive after-hours earnings news yesterday. After-hours today more of the same was seen as F5 Networks (FFIV) and Apple, Inc. (AAPL) both have vaulted to the upside after their respective earnings announcements. Assuming that these price moves hold going into tomorrow’s opening bell, then we can expect another gap-up move in the market again tomorrow. While things were looking dicey over the weekend, the market has again proved what I emphasized in my weekend report, and that is to assume nothing!

NASDAQ Composite Index Gilmo Report Chart

Although AAPL’s weighting in the NASDAQ 100 Index is being reduced, it will still have a decent effect on the market tomorrow morning if it can hold its after-hours gains. A couple of weeks ago I observed that Apple, Inc. (AAPL) looked more like a short than a long, and three days ago it appeared to be confirming that prognostication, but by the end of the day AAPL had reversed back to the upside on strong volume as we see in its daily chart below. This came on the heels of “three waves” of selling in the stock’s base which may have served to shake out all the weak hands and set up a potential buyable gap-up or pocket pivot buy point above the 50-day moving average tomorrow. That is certainly something to watch for tomorrow, as further evidence during the trading day tomorrow will be required to confirm any such move. Keep in mind also that AAPL’s 40-day Average True Range is 6.34 as of today’s close, hence a move above the $350 level and the 50-day moving average would easily qualify as a gap-up of sufficient magnitude IF trading volume is at least 1.5 times average. At the very least, AAPL is likely to add some juice to the current rotation back into technology names, in my view.

Apple, Inc. (AAPL) Gilmo Report Chart

One problem with trying to enter new positions right now as the market shows very impressive strength here is the fact that many tech stocks still have to announce earnings. Investors must be patient and wait for the proper set-ups to come to them. Thus the optimal set-up occurs when a buyable set-up presents itself in a stock that has already announced earnings. VMware, Inc. (VMW) rose from the dead yesterday after-hours when it announced earnings and beat estimates of 42 cents a share with a 48 cent number. The company also raised forward guidance, resulting in a very buyable gap-up move today, as we see in its daily chart, below. With earnings out of the way and VMW staging both a buyable gap-up and a new-high pivot point move to new 52-week highs on massive volume, this presents a perfect opportunity right here, in my move. VMW acted very strongly today as it cleared the 97.61 high from mid-January, a new high pivot buy point.

VMware, Inc. (VMW) Gilmo Report Chart

Salesforce.com (CRM), in sympathy to its cousin VMW, also launched today and cleared this little consolidation it had been working on throughout most of April. As we can see on the daily chart below, CRM might have a little overhead to work through as it comes up through the $140 level as well as the uncertainty of earnings coming out in May, but that is about a month from now. However, VMW’s earnings report might provide a clue with respect to just how robust the cloud-computing space has remained. With RAX, which I discussed over the weekend ( see discussion in April 17th report), coming out of a three-weeks-tight formation today and the CEO on record in an IBD story earlier this week saying that the cloud-computing space was going to continue to grow rapidly for several years, we may see a resurgent cloud-computing group launch out of bases which they have been forming over the past weeks and even months in some cases. CRM flashed a bona fide pocket pivot buy point here on very strong volume, and I would expect it to hold the 135-136 area on any pullback.

Salesforce.com (CRM) Gilmo Report Chart

A buyable breakout occurred today in a smaller cloud-computing name that is relatively new on the scene, Intralinks Holdings, Inc. (IL), shown below on a daily chart. IL is expected to announce earnings at the end of April, so anyone buying this breakout should keep that in mind. IL priced a 7.5 million share secondary offering two weeks ago at 25.50. The additional supply was absorbed well enough to produce a pocket pivot buy point as the stock pushed up off of its 50-day moving average with a valid pocket pivot volume signature 10 days ago. According to one analyst, IL’s software platform allows for collaboration in the cloud “in ways that other software vendors will struggle to replicate.” Last quarter’s earnings were up 1300%, and next quarter is expected to show absolute earnings growth of 1099%. This breakout is still within buyable range of its 29.56 high in the base, as I see it, with a standard 7% downside stop.

Intralinks Holdings, Inc. (IL) Gilmo Report Chart

In addition to AAPL, F5 Networks, Inc. (FFIV) is hopping higher after-hours as I write, and presents an interesting case to examine as well. Up until recently it has acted like a perfect example of a Head & Shoulders topping formation, with one exception: it hadn’t broken its neckline yet. The weekly chart, which I show below, also shows that the stock did not build another right shoulder as it held its neckline but instead moved tight sideways over the prior four weeks. The chart below includes some after-hours trading and shows what the weekly chart might look like if tomorrow’s upside move holds, give or take a few points. Currently the stock is trading above both its 50-day (10-week) and 200-day (40-week) moving averages at around 111-112 as I write and could present a possible “bottom-fishing” pocket pivot move tomorrow, so this is something else to keep an eye on. Review my report of October 17th, pages 4-6, for my discussion of bottom-fishing pocket pivots in GOOG and PCLN for an idea of how such a move in FFIV might work.

F5 Networks, Inc. (FFIV) Gilmo Report Chart

I’m often asked by Gilmo Report members whether I think the top in silver is near, and the only answer I have is to go watch the video of my last appearance on Fox Business News where I called for $50 in silver at:

https://www.virtueofselfishinvesting.com/news/2011/04/gil-on-fox-business-channel-3/. Looking at the daily chart of the nearest futures contract we can see that silver continues to move almost inexorably towards that $50 price target as it cleared the $45-an-ounce level today. While silver could pull back at any time, for now there is absolutely no change in the uptrend and any effort to determine where it will finally stop is pointless unless you have a crystal ball and/or want to get shaken out of your position. For now silver is a hold while gold is in a similar situation given that it is somewhat extended from its recent breakout, but in my view gold is just getting started here. If you don’t own the SLV, AGQ, GLD, or DGP by now, it isn’t because I didn’t tell you to, that’s all I know! J

SLV Gilmo Report Chart

Over the weekend I discussed electric “stuff” maker Ametek, Inc. (AME) which had staged a buyable gap-up move last Friday. As we can see on the daily chart, AME ran into just a little bit of logical resistance from the prior highs of about two weeks ago above the 44 price level as well as the market shakeout on Monday morning from the Standard & Poor’s downgrading of the U.S. credit outlook. It never closed below the intra-day low of the gap-up day at 43.84, and today was able to push back to new high price ground. In my view this remains in buyable range, and given that the company pre-announced their earnings last Friday this removes some of the risk that would otherwise be inherent going into earnings at the end of the month. AME also falls into the broader “tech” area as well, which puts it roughly in synch with my “rotation into tech” theme.

Ametek, Inc. (AME) Gilmo Report Chart

I last discussed Endo Pharmaceuticals (ENDP) in my reports of March 30th and April 17th, and since then the stock has announced the buyout of another company, American Medical Systems (AMMD), which led to a move higher before the stock settled back in, as we can see in the weekly chart of the stock below. As the AMMD buyout deal gets finalized, I am not surprised that ENDP has pulled back to its new-high breakout point around 38 and its 10-week (50-day) moving average. In my view it is possible to nibble on the stock as it comes down and retests its original buy point with the idea that it should hold the 10-week line at around 37.

Endo Pharmaceuticals (ENDP) Gilmo Report Chart

The bottom line right here, right now is that the market is showing some material strength here, and this is simultaneously being accompanied by clear rotation back into some of the big-stock cloud leaders and other tech names that have been basing over prior weeks and months. If technology is going to start moving again, then I want to be in those resurgent big-stock leaders that are presenting the most optimal buy points, and for now that looks like VMW to me. Meanwhile, we could see a buyable gap-up or pocket pivot buy point in AAPL tomorrow. After-hours I note that Chipotle Mexican Grill (CMG) is getting kicked around, down nearly 10 points as I type here, and as I see it this confirms my theory here that we may see hot retail consumer stocks back off here as technology surges to the forefront. Meanwhile watch tech stocks as they continue to announce earnings, because many may surge higher and present buyable gap-up or other optimal buy points.

Gilmo Report members should look to catch me again on Fox Business News tomorrow at around 9 a.m. Pacific Time, Noon Eastern where I’ll be discussing some general topics regarding stocks and commodities with host Cheryl Casone.

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, ENDP, GLD, and VMW, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.