The Gilmo Report

April 8, 2012

April 8, 2012


One entire trading day has elapsed since my last report, and Thursday’s session was relatively quiet going into Friday’s jobs number. Technically speaking, that remains the case as I write this weekend’s report because the markets were closed Friday. However, a weak jobs number sent the futures sharply to the downside on Friday morning as the market remained closed, and this makes Monday’s market open look quite dicey. If it results in another distribution day on Monday that would make it seven distribution days out of the past nine trading days in a row for the NASDAQ. A number of leading stocks still continue to act fine, however, so it will be a matter of seeing how they hold up if the market’s downside pressure gets turned up a couple of notches on Monday, but the objective evidence for a more protracted correction continues to build.

NASDAQ Gilmo Report Stock Chart

In a sense, the prior action of the major market indexes was likely an early clue regarding the weak Friday jobs numbers, and the stream of distribution days showiing up in the indexes may be a foreboding of economic weakness to come. At the very least if one is still holding leading stocks that have continued to act well in the face of general market weakness then I would certainly not be looking to increase my holdings or buy new stocks. This correction could get worse from here, and based on Friday’s move in the futures it is certainly set to do so on Monday morning. As the S&P 500 daily chart below shows, a potential break of support at around the 1390 level appears likely, and the next stop would be somewhere near the 50-day moving average at around 1370, as I see it. Meanwhile the NASDAQ will have its own support at 3050 to try and hold on Monday.

S&P 500 Gilmo Report Stock Chart

As I’ve been discussing in recent reports, several big-stock leaders have been holding up very well along their 10-day moving averages, and in most cases one would be using the 10-day moving average as their selling guide. Another example is Intuitive Surgical (ISRG), shown below on a daily chart, which has been obeying its 10-week line for over nine weeks now. Invoking the Seven-Week Rule determines that a violation of the 10-day moving average would be your selling signal for the stock. The one close below the line in early March never resulted in any further downside, so it was not an actual moving average violation. We will see whether further general market weakness on Monday will shake some of these big-stock leaders loose from their 10-day moving averages.

Intuitive Surgical (ISRG) Gilmo Report Stock Chart

If you are using the 10-day and 50-day moving averages as your downside selling guides for any leading stocks you still hold and which continue to act well, be sure to distinguish which line is the ccorrect one to use as your guide. While ISRG has followed its 10-day line for more than seven weeks, we can see that big-stock leader Visa (V), shown below on a daily chart, violated its 10-day iine in early March by first closing below the line and then moving below that two days later. Thus with V the 50-day moving average would have to be violated to issue a bona fide sell signal. One, however, can always take profits at any point if one is not comfortable sitting through further general market weakness with the idea that a new buy point might show up if things settle down. Note how V has issued three pocket pivot buy points along the 10-day line over the past two weeks.

Visa (V) Gilmo Report Stock Chart

V’s close cousin, MasterCard (MA) has also moved higher along its 10-day moving average, as we see in is daily chart, below. It has issued two pocket pivot buy points over the past couple of weeks and on Friday moved to an all-time high price. With this kind of strength in V and MA, one might consider that these stocks should be able to hold their 10-day moving average and cut them quickly if they should start to breach the line. In MA’s case, a strict application of the Seven-Week Rule means you are using the 50-day moving average down at 407.16 as your selling guide, but that is some 8% from where the stock closed on Friday. If the distribution picks up in the general market, my own personal preference would be to dump the stock if it cannot hold recent support levels around the 10-day line, with the idea that a later buy point, perhaps a pocket pivot buy point, would emerge for re-entry once the market correction ends.

MasterCard (MA) Gilmo Report Stock Chart

Invensense (INVN), shown below on a daily chart, illustrates a breakdown in a leading stock that progressively forces you out of the position. Given the pocket pivot buy point that took the stock to new highs two weeks ago, INVN should have remained a strong stock, but it quickly failed to hold the 10-day moving average, and thus one should be cutting back their position in earnest as that occurs. Now with the true violation of the 50-day moving average occurring on Friday, this stock should have been unloaded in its entirety, as I see it. But as I wrote a week ago, the way INVN broke down sharply through the 10-day line after acting so strongly prior to that, a major change of character had occurred, and it would have been reasonable for an aggressive investor to unload all their INVN on that basis. Thus some discretion and judgment has to be employed at times, particularly in the context of a weakening general market.

Invensense (INVN) Gilmo Report Stock Chart

When a stock acts as INVN did, the sharp change of character makes it easier to exercise discretion and selling the position down more aggressively. With some of these other stocks that continue to hold up well, such as V, MA, and ISRG as I’ve discussed in these reports, we have not seen any change of character occur, so that will be something to watch for in the coming days.

Despite the long weekend, this will be a short report, because I would not be deploying fresh cash into this market, or even stale cash for that matter, based on the action of the general market indexes and the weakness we can expect on Monday as a result of the futures reaction to the jobs number on Friday. Members should refer to my recent reports for discussions of selling points on other leading stocks not mentioned in this report.

With the market weakening, this of course brings into mind the possiblity of playing the short side, but I would not be looking to jump in on the short side on a Monday gap-down opening, assuming the futures remain sharply lower until then. Right now there are very few, if any short-sale set-ups in strong short-sale positions, although I see the potential for a head and shoulders to continue setting up in (AMZN) now that it is back below its 200-day moving average, as well as potential Punchbowl of Death (POD) formations in stocks like Cummins (CMI) or Caterpillar (CAT), for example. Remember that should this turn into a few more days of downside from here in the general market, it would still be the first sharp break off the peak for the major market indexes, and so the short side is still just turning the corner from premature to actionable, as I see it, therefore I don’t think it hurts to let things develop further before looking to get aggressive on the short side, if at all. I expect a clearer picture on this by the time I write my mid-week report this coming Wednesday, so stay tuned.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 no positions,though positions are subject to change at any time and without notice.

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