The Gilmo Report

April 28, 2013

April 28, 2013

The market is trying to outdo itself when it comes to v-shaped recoveries, as this time the NASDAQ Composite, shown below on a daily chart, leads the charge back towards its early April highs. As I wrote in my mid-week report of April 24th, the day that the market had halted its then three-day rally off of the lows of last week, “perhaps it simply pauses as it did in late February…and just continues higher on an index basis.” So far this is what the market has done, as it pulled back on Friday with volume declining on all of the major market indexes, which is relatively constructive action.




The small-caps, however, as represented by a daily chart of the iShares Russell 2000 Index Fund (IWM) ETF, are lagging to some degree as the Russell remains in a six-week correction. So far the IWM remains in a pattern of lower lows and lower highs, in contrast to the larger-cap indexes’ lower lows and higher highs.




And there are more cross-currents to this market as, interestingly, the NASDAQ Advance/Decline line more resembles the chart of the Russell 2000 ETF than it does the NASDAQ Composite itself. To me this speaks of highly rotational movement in this area of the market.


GR042813-NAZ AD


In sharp contrast, the NYSE Advance/Decline line is moving to a higher-high before any of the NYSE-based indexes have done so, and on its face one would consider this to be very bullish action.


GR042813-NYSE AD


One might not guess that the most smoothly trending index of them all is in fact the traditionally defensive Dow Jones Utility Index, up 17.4% in 2013 and well outperforming all of the major market indexes when compared to the S&P 500’s 10.9% gain and the NASDAQ’s 8.6% upside slog.




Meanwhile “earnings roulette” season continues to take its toll, as a weak report from big-stock NASDAQ name (AMZN) sent it on a nosedive for its 200-day moving average on Friday. This could develop into a late-stage failed-base short-sale set-up, but it is currently close to undercutting the prior lows in its base and just above the 200-day line which could cause a bounce here – I’ll be following this closely as it develops from here.




Another big-stock NASDAQ name, the much weaker-acting Baidu (BIDU), was also hit after missing earnings on Thursday after the close, gapping down on Friday but managing to hold above the lows of its recent sideways consolidation extending from mid-March to late April.




Qualcomm (QCOM), another big-stock NASDAQ name, also took the plunge on Thursday after it too disappointed on earnings, and now this becomes a potential short-sale target on rallies back up into the 200-day line, using that level as an upside guide for a stop. Despite these big NASDAQ names getting hit on Friday, the NASDAQ Composite was able to hold up reasonably well as it pulled back on lighter volume.




Perhaps in the spirit of this market environment Apple (AAPL) will pick up the slack and play a role as a market-leading “junk-off-the-bottom” stock, otherwise known as a “JOB-stock” as I first coined it back in 2009, and help to power the NASDAQ Indexes higher. Looking at the weekly chart of AAPL, I note the possibility of a “three waves down” move in the stock that may indicate it is set up for a more substantial rally off of its lows that could help to support the NASDAQ Composite’s potential for a higher high.




Overall the situation with respect to individual stocks remains a hit-or-miss affair, but poor economic fundamentals continue to battle against the irresistible force of QEternity, and this alone could drive the market indexes higher while making the situation difficult for growth stock investors. We’ve seen the Japanese market continue to rise as its government and central bank have gone all in on what I refer to as “Kamikaze QE,” and with the Fed acting in a similar manner, we could continue to see the U.S. stock market slop its way higher. The question is whether any bona fide opportunities within the realm of our methodology exist in this market, and I would have to say that while they aren’t numerous, they are out there as a number of stocks like LinkedIn (LNKD), Regeneron Pharmaceuticals (REGN), Krispy Kreme Doughnuts (KKD), Celgene (CELG), Gilead Sciences (GILD), and a few others have proven. However, one has to be in the right stocks, and as I see it this current environment is one where one could be down 15-20% for the year just as easily as be up 15-20% for the year. Thus I will try to focus on those situations that I currently see as potential opportunities should the market continue higher.


I discussed Netflix (NFLX) in my mid-week report of April 24th, following its second earnings-related buyable gap-up of the year, and I must admit I am heartened by its action over the past three days since posting this big-volume BGU. I’m using a candlestick chart from my HGS Investor software ( to illustrate the tight action in NFLX as it continues to hold above the intra-day low of this past Tuesday. Notice also the small “hammer” on Friday with the stock closing in the upper part of its daily range as volume dries up in the extreme. NFLX is a true turnaround situation, and it has so far posted the numbers to prove that point. NFLX came in with 488% earnings growth this past quarter with estimates for next quarter showing 264% expected growth on a hard number of 40 cents, according to First Call, while Reuters shows estimates of 291% earnings growth on 43 cents. Either way these are strong numbers, and Tuesday’s buyable gap-up remains a viable trade using the 209.51 intra-day low of that day as your stop.




LED-lighting maker Cree (CREE) provided some interesting fireworks this week after they announced earnings on Tuesday after the close and immediately dropped 9% after Wednesday’s opening bell. While the stock did close down on Wednesday, it made an impressive recovery off of the lows of the day on big volume, as we can see on the daily candlestick chart, below. While CREE came in with 70% earnings growth, meeting expectations, it beat sales estimates with a 28% increase. It looks possible to nibble on shares on the lower-volume pullback to the top of its prior range and the 10-day moving average. If you look at the red and blue revenue and EPS lines in the fundamental window of the chart, below, you can see that both lines are showing forward acceleration to the upside. This makes sense given that the LED lighting industry is at the beginning of a new up cycle which should benefit CREE over the longer-term. I’ve noticed that CREE’s LED light bulbs are often hard to get at my local Home Depot (HD) store, which I consider an indication of just how popular their products are. CREE is expected to produce 38% annual earnings growth in 2013 and 2014, and this sort of steady growth in a new, burgeoning industry should keep institutions interested in the stock as the company now moves to begin a national media campaign to promote their bulbs.




I’ve discussed Workday (WDAY) in recent reports after it showed huge volume support on the day that its IPO share lock-up expiration hit the market, indicating healthy and robust institutional demand for the newly released shares. Last weekend I indicated that members should keep an eye out for some sort of pocket pivot buy point developing along the 50-day moving average. We finally saw that occur on Thursday as the stock first sold off and then recovered to close well in the upper part of its daily range. Volume increased strongly, which qualified this as a pocket pivot volume signature, as we see in the daily chart below. WDAY pulled back again on Friday but recovered to close near the peak of its daily range on volume that also qualified as a pocket pivot volume signature. This occurred despite the lower end of the price range being extended from the 10-day line. No matter, however, since Thursday’s action already gave us what we were looking for in the stock. WDAY doesn’t report until May 30th, so investors needn’t be concerned about holding into an impending earnings report, at least not at the present time.




I thought I would comment on Facebook (FB) since they do announce earnings after the close this coming Wednesday, May 1st and it is likely to be an important earnings announcement for the company. The weekly chart, below, illustrates the possibility that FB is trying to round out the lows of a base as it finds support along its 40-week/200-day moving average. If we analyze the current base, which is now 13 weeks long, we can pick up several supporting weeks where we see volume picking up and the stock closing in the upper part of the range. You can go in and study this closely for yourself, but notice that the stock picked up an increase in weekly volume four weeks ago as the stock moved above the 10-week line. Last week’s market sell-off took the stock back down to the 40-week line, but weekly volume did not increase. This past week saw the stock close right at the 10-week line on light volume as investors wait for earnings this week. My guess is that there’s a good chance we could see FB gap higher after earnings if the chart is any clue.




In my mid-week report of this past Wednesday I sarcastically commented that with bio-techs looking like they wanted to pull back, we didn’t need to worry as down-in-the-dumps homebuilding stocks would simply fly higher and resume their leadership role. I did not realize how prophetic that would be as a number of homebuilders have broken out to new highs as they come straight up off the bottoms of their bases. In the case of D.R. Horton (DHI), shown below on a daily chart, it gapped up to new highs on huge volume, bringing up the question as to whether this is a valid, buyable gap-up situation. The last time DHI gapped up was in late January, and the stock did not make much upside progress before rolling over to test its 10-week line. This gap-up move is coming after a prior four-day rally straight up off the lows of its base, which makes it risky, in my view. Thus I would avoid it, although I must admit this kind of rapid resurrection of the homebuilders is a wild thing to see, for sure!



Last weekend I reviewed the action in Krispy Kreme Doughnuts (KKD), pointing out that it was on the verge of a potential 50-day moving average violation. That did not come to pass, however, and the stock picked up some increased weekly volume, as we see on the weekly chart, below, in what is clear supporting action. KKD is now back above is 10-week line within a seven-week base. The company announces earnings on May 21st, and while the stock has seen some above-average selling days over the past seven trading days, it still appears to be doing little more than building a base as it consolidates the roughly 50% gains it has had since I first identified it as a buyable gap-up/pocket pivot move on January 2nd in my report of that same date. I’d be on the lookout for a potential pocket pivot buy point as the stock is sitting right on top of its 10-day moving average and just a hair above the 50-day moving average on the daily chart, not shown. Junk food stocks have been doing well lately, and among these I include Dunkin’ Brands Group (DNKN), which had a pocket pivot buy point within its base this past Thursday, McDonald’s (MCD), Jack in the Box (JACK), Domino’s Pizza (DPZ), and Papa John’s Pizza (PZZA). The bottom line for now is that if one has owned KKD since January it simply remains in a seven-week base within an overall uptrend and has yet to issue a sell signal.




Right now it’s very hard, if not impossible, to take sides in this market. While I can see constructive action in some stocks that either continue to base or jack to the upside after announcing a positive earnings report, there is also plenty of carnage for those stocks that have fallen short on their own earnings announcements. Thus we remain in the throes of “earnings roulette” season while the market sprays about in a choppy, trendless state. This is why I have made the comment that one might simply prefer to be out of this market wishing they were in, rather than in wishing they were out. If you don’t necessarily buy into the label that this market is in a correction, however, your best bets on the long side are likely buyable gap-up moves that occur after earnings as with NFLX and two other BGUs I discussed in my mid-week report of this past Wednesday in ILMN and LL. The alternative would be big-volume recoveries after an initial, negative reaction to earnings that leave a stock’s action intact relative to a prior base once the dust settles, as in the case of CREE.


In this market there can be no guarantees of success, but the fact that the indexes just don’t want to give it up might indicate that the intermediate upside trend will continue to hold, regardless of what one might want or need to label the short-term action. This week might be critical in determining whether this will indeed be the case, and so investors need only keep their eyes on the handful of opportunities that I see cropping up currently while maintaining a measured stance should the market falter and a more serious “correction” develop.


Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and 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 positions in CREE, NFLX, and WDAY, though positions are subject to change at any time and without notice.


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