The Gilmo Report

August 22, 2012

August 22, 2012

The market finally got a bit of froth going on Tuesday as reluctant buyers capitulated, sending the S&P 500 Index to new highs in the macro-rally that extends all the way back to March of 2009. The NASDAQ Composite Index, shown below, also flirted with a higher high before being turned back on heavier volume. Given the sharp move in the indexes over the prior 2½ weeks, the market was in a logical position to pull back, and with the allegedly all-important Fed meeting minutes due out today profit-takers were in the driver’s seat. But the action appeared palatable within the overall context of where the market has come from and where it is now. The Fed minutes revealed that more Fed members are leaning towards some sort of “additional accommodation” (translation: money-printing). The market immediately found its feet as it pushed towards positive territory, as the S&P 500 and NASDAQ Composite both positive territory for the day. The action in gold last week, which was noted in my weekend report, indicated that the market already knew which way the Fed is leaning. The bottom line in an environment where the market rally remains well-intact and the Fed is in position to unleash QE3 at any time is that it’s a lot simpler to be long than short. Weakness can be used in an opportunistic manner by buying leading stocks on pullbacks.


Gold has followed through on the bottom-fishing pocket pivot buy point it flashed on Friday, as I noted in my August 19th report of this past weekend. Yesterday the precious metals both gapped up sharply, and this came on the heels of silver also issuing a bottom-fishing pocket pivot on Monday, one trading day after gold did, as we see in the daily chart of the
iShares Silver Trust (SLV), shown below. The best way to play this move would have been to simply buy the SPDR Gold Shares (GLD) on the basis of Friday’s bottom-fishing pocket pivot in the GLD last Friday, or to simply buy the SLV on Monday with the idea that it will correlate to the GLD, which it did one trading day later on Monday by flashing its own pocket pivot. The precious metals ETFs are both well-extended at this point, and the 200-day moving average looms ahead for both of them. However, if one was able to take the GLD pocket pivot buy signal of last Friday and make the trade on Monday, then one is in a good position to work and pyramid a position in precious metals ETFs. Personally, I favor the 2-times leveraged ETFs for the GLD and SLV, the DGP and AGQ, respectively, but they are more volatile given the already volatile nature of gold and silver on a 1-times non-leveraged basis!

iShares Silver Trust (SLV) Gilmo Report Stock Chart

Apple (AAPL) went parabolic on Tuesday morning, pushing to an all-time intra-day high of 674.88 before reversing to close down nine dollars on the day. Rumors of AAPL splitting its stock in order to gain a spot on the list of thirty Dow Jones Industrial Index names reached a boiling point on Tuesday, fueling the morning rally. Trading volume was rather high on the reversal, giving it a decidedly “ugly” look, but this could simply be a short-term “ugly duckling” that will soon right itself and become beautiful again. Note that back on February 15th AAPL had a similar reversal but held the 10-day moving average on the pullback. It then paused a few days before taking off for new highs. This current pullback hasn’t even touched the 10-day moving average which is currently running through the 639.99 price area, so I’m not ready to classify Tuesday’s action as some sort of death knell for AAPL. I do think that the stock has been held a long time by some large institutions, and as it goes up it becomes a larger percentage size of a given institution’s portfolio, and in some cases they may be forced to sell some stock to keep the position’s weighting with a given institutional portfolio down to a “normal” level. Otherwise AAPL’s breakout remains intact, and pullbacks below 650 are potentially buyable.

Apple (AAPL) Gilmo Report Stock Chart

Over the weekend in my August 19th report I continued to beat the drum on LinkedIn (LNKD) as likely to move back above its 50-day moving average. The stock obliged by moving higher on Monday and then pushing above both the 50-day and 10-day moving averages on Tuesday, as we see on LNKD’s daily chart below. Based on my previous discussions of LNKD’s weekly chart and the sharp increase in institutional sponsorship over the last quarter, I still believe the stock has, overall, been under accumulation, although it tends to act somewhat sloppily around its 50-day moving average. Notice how the stock has held above the 10-day line rather quietly, and it did so rather well over the past two days as the market reversed and sold off. Today’s volume dried up considerably, and I am now looking for the stock to flash a possible pocket pivot buy point off the 10-day line in the coming days, should that occur. Despite the fact that the market has been in a “stealth” bull since June 1, the action in individual stocks has been uneven and leadership is in many cases still in the process of setting up. One of those stocks that I believe may provide nascent leadership if this rally continues to hold is LNKD, and so we wait for a pocket pivot to show up here.

LinkedIn (LNKD) Gilmo Report Stock Chart

This idea of identifying potential leaders and stalking the buy point in the form of a possible, near-future pocket pivot buy point is well illustrated by

Mellanox Technologies (MLNX), which I discussed over the weekend in my August 19th report. In that report I talked about watching for a continuation pocket pivot here as MLNX, an established market leader, moves along its 10-day moving average. That continuation pocket pivot occurred on Monday, as if on cue, and the stock carried higher yesterday before coming back into the 10-day line, as we see on MLNX’s daily chart below. I tend to think that news over the past 24-48 hours of Israel undertaking preparations to strike Iran, which they view as increasingly necessary, may have had some effect on the stock on today’s pullback. MLNX, as you already know from my previous discussions on the stock, is an Israeli-based company. But it is not clear to me that the threat of war, or even an actual war, wipes out the business. MLNX has two headquarters, one in Israel and one in good, old Sunnyvale, California in the heart of Silicon Valley. Either way, the pullback held the 10-day moving average and I consider the stock potentially buyable on the basis of Monday’s continuation pocket pivot, using at least a violation of the 10-day line as a stop.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Michael Kors Holdings (KORS) remains as my top buy among retailing stocks, based initially on last week’s buyable gap-up which I discussed in my report of August 15th when the stock was quite buyable around the 48 price level. On Friday MLNX broke out of its cup-like base to all-time highs, and has so far spent this week, the last three days on the daily chart below, moving tight sideways as volume dries up. If you are using the 50.69 peak in the base way over on the left side of the cup as a standard breakout buy point, then KORS is holding that price level quite well and remains quite buyable right here. There is always the chance that a general market pullback could cause the stock to test its 10-day moving average, but so far that hasn’t happened. In light of this I would simply operate on the idea that if I’m long the stock around 48 and then again around 50-51 then such a pullback is relatively moot. But if the stock fails to hold the 50.69 level, then any portion of the position purchased above that level could be sold just to keep one from getting top-heavy. So far this has enabled one to gain a favorable entry point on the basis of last week’s buyable gap-up, and one can afford to work that edge.

Michael Kors Holdings (KORS) Gilmo Report Stock Chart

You may notice that I continue to stick with a relative handful of names that I like currently, and in the spirit of staying on point, I note that Regeneron Pharmaceuticals (REGN) flashed a pocket pivot buy point in the handle of its current cup-with-handle base formation, as we see on its daily chart below. Over the weekend I noted the constructive manner in which the stock is holding up extremely tightly in its weekly chart with a series of very tight weekly closes. This constructive action on the weekly chart is confirmed by today’s pocket pivot buy point, a bona fide, legitimate early entry point that we would expect to hold above the 10-day line if not presage a breakout through the peak in the handle at 140-and-change in the coming days. This is the first sign of any truly decisive action in the stock as it has built this current handle. But it follows up on a series of constructive movements in the stock, including the initial pocket pivot buy point coming up through the 50-day moving average on a big blue volume spike towards the end of July. This is potentially buyable right here, using whatever stop one might like to use, but no more than 6-7% on the downside.

Regeneron Pharmaceuticals (REGN) Gilmo Report Stock Chart (AMZN) has continued to hold its recent breakout, despite the hate pieces emanating from bears who continue to view the stock as “wildly overvalued.” The market certainly doesn’t seem to think so, and over the weekend I discussed the idea that the real story behind AMZN is all about its role as a “stack stock,” related to the growing issue of network or “cloud” capacity, and while I do not show it on a chart here it continues to hold last week’s pocket pivot buy point around the 237-238 price level. Another “stack stock” I mentioned in passing over the weekend is Rackspace Holdings (RAX), which has been holding up well since its big earnings-related gap-up two weeks ago. In fact, it has been holding up so well that it moved to a higher high today on a strange-looking continuation type pocket pivot buy point just up and off of the 10-day moving average but which is also a type of breakout pocket pivot move as I’ve outlined on the daily chart below. This becomes potentially buyable using a 6-7% maximum stop on this basis, and I would not be surprised to see the stock get to resistance up around the 60 level.

Rackspace Holdings (RAX) Gilmo Report Stock Chart

As I see it, the market was primed for a pullback, and one could certainly sense just a hint of frothiness on Tuesday. The subsequent reversal on Tuesday, along with the pullback this morning strikes me more as a healthy “working-off” of bullish momentum than a market top. Thus I am interested in buying leading stocks when they pull in on such weakness. Since I tend to run very concentrated positions, I will also tend to lighten up and take some profit as the market and the stock in question gets extended in the short-term, and so far the market has accommodated this tactic by pulling back sharply at times. However, at some point, if the market rally is more than just another upside chop maneuver, even with big, concentrated positions, it will have to evolve into a matter of sitting more and thinking less if truly big money is going to be made. Meanwhile, as QE is often pointed to as the reason for the market’s upside persistence since March of 2009, let us not forget that the potential for the current administration that governs the United States to be voted out in November could also fuel a strong market rally going into the end of the year. And so I leave you with a link to the video of my appearance this morning on Fox Business News:

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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