The Gilmo Report

August 19, 2012

August 19, 2012

The last two days of the trading week saw the market push to higher highs in its choppy, summer rally off the early June lows, with the last two days taking the NASDAQ Composite Index, shown below on a daily chart, up and out of the short six-day consolidation it was working on as of this past Wednesday. Thursday’s strong upside move was accompanied by a strong upside volume thrust that carried into Friday. While some might try and make something out of Friday’s move to higher highs on lighter volume, I consider that Thursday’s solid volume increase creates a sufficiently constructive context in which to consider the market’s current action, which can only be viewed as a de facto continuation of the rally as more breakouts among potential leading stocks make their presence known. This also shows up in a sharp upside move by the NASDAQ Advance-Decline line, not shown, to a higher high after making lower lows in late July. Meanwhile the S&P 500 closed Friday within 4 points of its highest daily close and at its highest weekly close since the March 2009 bear market lows. As the market moves higher, skeptics see the rally as driven primarily by the mere hope of QE to come, but that appears to be what the “crowd knows” currently. I think investors should simply take price/volume action for what it is, without having to come up with an alibi.

mentioned in this report Gilmo Report Stock Chart

                

Certainly, the rally could be fueled by the possibility of QE to come, given this past week’s comments from one Fed head who indicated that the Fed might be willing to raise its 2% inflation target in order to provide some sort of QE stimulus for the purpose of resurrecting faltering employment numbers. One possible clue might be the action in gold which has been trying to round out a bottom over the summer, and I have been waiting patiently for a technical sign, any sign, that gold is ready to turn to the upside again. Looking at a daily chart of its proxy, the SPDR Gold Shares (GLD), we can see that the GLD issued a bottom-fishing type of pocket pivot buy point on Friday as it pushed up above its 10-day moving average from a constructive position that was already above the 50-day moving average. The GLD is therefore potentially buyable on this basis, using the 50-day line as a selling guide. Is gold’s action a harbinger of more QE and possibly higher inflation coming down the pike? Most Americans already know that inflation has been here for some time as the prices of just about everything have been rising for some time. Meanwhile, gold has spent the last year consolidating what is now more than a decade-long uptrend, and in my view, if it is going to turn, this is a logical point for it to do so.

SPDR Gold Shares (GLD) Gilmo Report Stock Chart

And while the crowd is well-indoctrinated into the “QE thesis” for any potential market rally, I might also suggest that there still remains the potential for a “Romney Rally,” as the market begins to potentially perceive a change in the policies of the current Administration as a positive inflection point for what is still an entrepreneurially based economy. And no company represents the concept of making creative, innovative products that increase productivity and that people want to buy than Apple (AAPL), shown below on a daily chart. As I’ve been writing in recent reports, AAPL has continued to look like it simply wants to go higher. While little upside volume had come into the stock during August as it moved toward all-time highs, we can finally see that above-average buying interest, 19% above-average to be exact, propelled AAPL on a clean breakout to all-time new high price ground on Friday. In my view, AAPL is on its way to 700, and maybe beyond. With a new pivot buy point of 644, the stock closed Friday well within range of this new-high buy point which is also a pocket pivot breakout.

Apple (AAPL) Gilmo Report Stock Chart

Amazon.com (AMZN), which flashed a pocket pivot buy point on Wednesday of this past week as I discussed in my report of that day, followed through on Thursday with a clean breakout to new highs, putting the stock within 6 points of its all-time price high of 246.71. In my view, if AAPL continues higher, AMZN will also lend a hand by doing likewise, and with so many skeptics who misunderstand the real story behind AMZN, the stock is primed to do so. If you look at a weekly chart of AMZN, which I don’t show here, you can easily see it poised to emerge from a one-year cup-with-handle formation and into new-high price ground. Investors who cite the stock’s current negative earnings growth are not taking into account that while next quarter’s earnings growth is expected to come in at -157%, the stock is really looking out beyond the next couple of quarters. Two quarters out AMZN is expected to report 45% earnings growth expanding out to 71%, 4,500%, 475%, and 100% in the ensuing quarters, respectively. So when people tell me AMZN is “overvalued,” I don’t see the “beef” behind this argument given the upside shift in earnings growth that should occur over the next several quarters. I believe AMZN is a buy right here.

Amazon.com (AMZN) Gilmo Report Stock Chart

I have to take some time to discuss LinkedIn (LNKD), which I discussed in my report of this past Wednesday as being in the process of consolidating its sharp move up off the 200-day moving average following its earnings announcement as it flits around the 50-day (10-week) moving average. We can see in the weekly chart below that LNKD closed below the line, albeit on lighter weekly volume, which, on its face, may be the only thing constructive in this past week. The whole social-networking craze, which many, including myself, thought might provide the market with a big new investment theme in a new bull market, has pretty much fallen flat on its face, from Facebook (FB) to Groupon (GRPN) to Zynga (ZNGA), all of which have moved to lower lows since coming public. FB is under particular pressure now, given that its share lock-up has expired, and I tend to think that the pressure on FB, as well as the whole social-networking “space,” is weighing on LNKD. This may put the stock in the position of having to further work on its base before it will be ready, if ever, to break out again. In the meantime, while I myself might nibble a bit as the stock pulls down towards the $100 price level, and I mean “nibble,” there are other, more rewarding stocks to play right now, and so that is where one should force-feed precious investment capital, in my view.

LinkedIn (LNKD) Gilmo Report Stock Chart

In other words, follow the money, and money is flowing quite strongly into resurgent leaders like Michael Kors Holdings (KORS), which I discussed in my report of this past Wednesday after it flashed a huge-volume buyable gap-up move on Tuesday. Using the Thursday pullback, which acted exactly according to script as it pulled down within 2-3% of the intra-day low of the gap-up day of four trading days ago, it was a low-risk proposition to pick up shares around the 48 level earlier in the day. By Thursday’s close, KORS was back in the black on volume that was 78% above average. Another 51% increase in trading volume over average on Friday sent the stock to all-time highs as it cleared the top of a “cup” base. At this point, I would be adding to my admittedly aggressive KORS position on any pullback to the 50 level. Remember, as I discussed on Wednesday, KORS is coming out of a first-stage base, in fact the first real base it has formed since coming public in December of last year. In my view, if one is looking to be long anything in this market, KORS should be a primary buy target based on its powerful buyable gap-up move on Tuesday and Friday’s strong-volume breakout to new highs. KORS remains potentially buyable right here using the intra-day low Thursday at 47.53 as a maximum selling guide.

tMichael Kors Holdings (KORS) Gilmo Report Stock Chart

I remain a big fan of Regeneron Pharmaceuticals (REGN), which has been working on a reasonably well-shaped cup-with-handle base formation that also has the look of a double-bottom-with-handle, as we see on the weekly chart below. However, we can dispense with the need to label consolidation patterns and focus on the stock’s pocket pivot of four weeks ago as it came up through the 50-day/10-week moving average and the fact that it has closed very tight over the past four weeks. This past week saw a slight increase in volume as the stock pulled back on news of Roche Holding’s (RHHBY) allegedly cheaper macular degeneration drug gaining approval. This news simply became a reason to buy REGN shares on weakness as the stock closed up off the intra-week lows for a little bit of supporting action with volume slightly picking up on the week. Any move from here to the upside on volume that exceeds 769,000 shares, the highest downside volume in the pattern over the prior 10 trading days, would constitute a pocket pivot buy point. But I might add that as I see it REGN is primed to break out of this tight formation at any time. And for now, at the very least, I would think the stock should hold the 132.28 low of this past Monday after its news-related pullback.

Regeneron Pharmaceuticals (REGN) Gilmo Report Stock Chart

I have not discussed Mellanox Technologies (MLNX) since my report of July 22nd after it staged a buyable gap-up following earnings two days prior. Since MLNX has managed to move higher along its 10-day moving average, the magenta moving average line in the daily chart, below. MLNX remains a primary leader in this market, despite its extended state, and has closed tight over the past two weeks above the 110 price level. Even at such lofty price levels MLNX is still trading at 30 times forward earnings, with next quarter’s earnings expected to come in at $1.13 a share, up 265%. Thus I tend to think the stock has a fair bit more upside left in it. Consider that if the stock broke out in January 2012 at a P/E of 26 and annual earnings of $1.07 a share, we can extrapolate out a 120% P/E expansion on expected 2012 earnings of $3.75 to come up with a price target in excess of $230. Therefore, I would be watching very carefully here for a continuation pocket pivot move off the 10-day moving average on volume that exceeds 866,308 shares, the highest down-volume in the pattern over the prior 10 trading days.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

The good news for the market this past week was the expanding breadth, and the growing number of breakouts like that seen in KORS, AMZN, and AAPL, as well as others like Francesca’s Holdings (FRAN), Chico’s Fas (CHS), and Ann (ANN), Transdigm (TDG), and Equinix (EQIX), for example. EQIX, in fact, plays into two strong areas of the market currently, REITs and the “stack stocks,” such as Rackspace Holdings (RAX), Akamai Technologies (AKAM), and Amazon.com (AMZN). When I speak of “stack stocks” I mean those stocks related to the growing issue of network or “cloud” capacity, and all of these stocks have acted well recently. Thus EQIX, shown below only a daily chart, becomes potentially buyable here on a pocket pivot breakout from a short three-week flag formation that formed along the 10-week/50-day moving average. The stock appears to be potentially buyable on the basis of the pocket pivot breakout this past Friday, with the idea that it should hold the 10-week line on any pullback.

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The market continues to hit on more and more cylinders as it moves to the highest highs seen since the March 2009 lows, and there are very clear, buyable situations manifesting themselves in the market’s current real-time action. Therefore, there is little more to do here than simply follow the money as it flows into potential new leaders and produces technical buy points in each. I’ve discussed my favorites in this report, and these are most of the stocks I am currently focused on playing right now. One only needs a couple of big winners, sometimes just one, to make big money, and of course some nascent breakouts in stocks like KORS (which I prefer to FRAN based on liquidity) have the earmarks of further upside in the making. I also think that MLNX remains a leader to keep an eye on, and have patiently been waiting for a new buy point in the stock. Certainly, the fundamentals, combined with standard P/E expansion analysis or even plain old point & figure price targets, yield a much larger upside potential for MLNX than the crowd might assume given that it is “way up there.” As well, AAPL and AMZN offer some “big stock” underpinning to this rally that for now appear to provide a solid foundation for further upside in the general market.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

 

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