The Gilmo Report

February 13, 2011

February 13, 2011

When I was a teenager I recall my younger siblings having these little toys called “Weebles,” which were basically little pudgy toy figures with rounded and weighted bottoms that kept them from falling over, like a floor punching bag. The catchy jingle in the Weeble commercials that many are probably familiar with was the phrase, “Weebles wobble but they don’t fall down!” And that’s what this market is all about – every time it wobbles it starts to look like it’s going to topple over, but just like a Weeble, it wobbles but doesn’t fall down. The daily chart of the NASDAQ Composite Index, below, shows numerous wobbles in the market, but each has simply represented another moment for the market to briefly catch its breath before moving to higher highs. The NASDAQ Composite Index came on strong this week as it matched the Dow’s higher highs on the back of strong action in a number of big stock NASDAQ leaders. Despite the wobbles, however, the soundest approach in this market has clearly been to focus on the action in individual stocks (and for the most part what has been working continues to work), and staying with high-probability “big stock” plays can provide some measure of comfort when the market begins to wobble.

NASDAQ Composite Index Gilmo Report Chart

On Thursday the wires carried news that one of the now infamous hedge fund managers who had been shorting Netflix, Inc. (NFLX) for months now, Whitney Tilson, decided to cover his short. Remember that this is the guy to whom NFLX CEO wrote the open letter urging him to cover his short back in December, but he insisted on getting up in the media and bad-mouthing NFLX repeatedly, albeit in a much more coherent manner than the other big short-seller in the stock, Manuel Asensio. As I wrote a week ago, playing this market is as simple as being long Baidu (BIDU) and NFLX, both of which have been buyable gap-ups that continue to march higher. As big stocks, both are also barometers of the market. Thus if you are long these stocks you know that as long as these continue to act well the market is probably not going to be topping anytime soon, which was the point I made in my report of this past Wednesday. NFLX continued to new highs on Friday on volume that would qualify as a pocket pivot volume signature, as we see on the daily chart below, but since the stock was extended from its 10-day moving average, it is riskier to buy as a pocket pivot. Otherwise, the action here is very strong and there are no concerns, but it is extended here so watch for a pullback into the 10-day moving average.

Netflix, Inc. (NFLX) Gilmo Report Chart

With both NFLX and Baidu (BIDU), as I wrote a week ago, I was looking for these stocks to clear the 220 and 120 levels, respectively, in relatively short order. BIDU was quicker to get above its own “20” level, as we see in its daily chart below, as it paused for all of five days before gapping up and moving to all-time highs over the past three days. Somebody asked me if BIDU’s price was “too high” given that the stock split 10-for-1 last year, so on a split-adjusted basis the stock is at $1,295.80-a-share. Anyone who has read this report for any period of time knows the answer to the question, but it does show that a “consumer mentality” persists among investors who don’t understand how to look at stocks. Obviously, the stock is well-extended here and is in upside “streak mode,” which is not a place to be buying the stock. It was, as I wrote in my report of last weekend, buyable under $120 on the basis of the previous buyable gap-up nine trading days ago. If you own it, as I do, it looks great, but a pullback can occur at any time, so be prepared for it psychologically as you perhaps start to feel a little giddy.

Baidu (BIDU) Gilmo Report Chart

Chipotle Mexican Grill (CMG) was a bit of a heart stopper on Friday as it had gapped up to around 279 on Thursday after-hours when the company announced earnings, only to reverse into the opening after the stock was cut to “underperform” by Morgan Keegan. By the opening bell the stock was back to 248.91 as it continued to drop to 243.36 and its 10-day moving average, as we see on the daily chart below, before closing up 12.10 at 268.73. This is a 10% range during the trading day, and another 4% could be added if you figure in the stock’s after-hours move up to 279.50. This is not easy to sit through, to say nothing of the potential emotional rollercoaster one might have watching their stock gap up after-hours and then blow up by the next morning’s opening before it finally reverses and closes higher on the day. CMG basically broke out of a cup base with no real handle to speak of, and this came after a pocket pivot type of move up through the 50-day moving average seven trading days ago. This break-out is buyable as long as the stock can hold the 258.42 breakout level, a stop of about 4%.

Chipotle Mexican Grill (CMG) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

Illumina, Inc. (ILMN) has been on my radar screen for some time, and it has been one of those stocks that has been in a slow, steady trend. The stock has a number of big upside volume spikes in its pattern since October of last year, although I do not show the weekly chart here, opting instead for the daily chart which shows this past Friday’s action as a pocket pivot buy point. ILMN announced earnings earlier and sold off to a point just above its 50-day moving average before rallying Thursday and Friday back up through its 10-day moving average. Friday’s volume spike qualifies as a pocket pivot volume signature, aside from the fact that it was 219% of average daily volume, enough to stand on its own merit. This also has the look of a little “shakeout & breakout” so the stock could get a little upside momentum going here as long as the general market remains favorable. Earnings and sales growth have been ramping up, and estimates are fairly big over the next two quarters, so this has the fundamental wherewithal to continue its price run, in my view.

Illumina, Inc. (ILMN) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

Rovi Corp. (ROVI) comes out with earnings Tuesday afternoon, and I’m inclined to think that the company will have a favorable announcement. ROVI is coming out with what they called Connected Platform which will be made available “pre-ported” to Android 2.1 or higher. This will enable Android devices to beam multimedia stored on their microSD cards to a multitude of devices like set-top boxes, PCs, or NAS devices, which in turn would be connected to a monitor or HDTV, according to an article on Engadget.com. New products are the lifeblood of leading stocks. The stock has been tracking sideways here after finding support at its 50-day moving average a couple of weeks ago, and is in position for a constructive pocket pivot, should that occur. Expectations are low for the stock with a paltry 8-10% earnings growth estimated, depending on which source you use. A pocket pivot move might provide a pre-earnings clue, and if this were to occur going into earnings on Tuesday one could take a measured position, say 10%, such that a 10% hit to the stock would cost 1% of your total portfolio value, while a 20% would cost 2% of your total portfolio value.

Rovi Corp. (ROVI) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

Our old cloud-related friend Radware Ltd. (RDWR), which at one time was supposedly an “acquisition candidate,” has decided to make a move on its own by gapping up and out of a cup-with-hande type of base which is also a little bit like a base-on-base, as we can see on the daily chart below. I might like this base better if it were formed during a market correction, but at the very least the stock has held its ground as it has built a reasonably constructive base from which it broke out with a fair amount of power on Friday. This is pretty simple to buy using the 40 level as your stop. The last time RDWR gapped up back in early December was on acquisition rumours/news, which is always a crap-shoot. This current breakout looks quite a bit better and sounder, so I would expect the stock to move higher from here this time around. RDWR is a reasonably steady earnings and sales grower over the past six quarters, and two quarters out is expected to achieve peak absolute earnings of 28 cents on growth of 55.6%, according to the estimates shown on the chart.

Radware Ltd. (RDWR) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

The last time I discussed Cavium Networks (CAVM) was back in late October (see October 31st report) when it cleanly broke out from an almost too perfect cup-with-hande base, as we see in the daily chart below. CAVM has all the requisite fundamentals, including strong forward estimates, and it has yet to build any significant second-stage base since its late October breakout. The stock was trending quite strongly to the upside until F5 Networks (FFIV) came out with their earnings in mid-January and FFIV got smoked, dragging down the other cloud-computing stocks with it. CAVM was a rare situation in that it held its 50-day moving average where it found support before gapping back up when it announced its own earnings two weeks ago. The stock now sits only 6% off of its 52-week high and has been tracking tight sideways as selling volume has dried up, and this pattern looks similar to those formed recently by Acme Packet (APKT) and Riverbed Technologies (RVBD) before they each broke out to new highs. This may be buyable right here using the 50-day moving average at 40.50 as your stop.

Cavium Networks (CAVM) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

Wabco Holdings, Inc. (WBC) has been riding the wave towards rising global requirements for vehicle efficiency, environmental sustainability, and advanced safety and driver effectiveness for trucks, buses, and trailers. For example, they make a compressor called the e-comp™ designed for the smaller engines used in electric or hybrid vehicles. Business is obviously good for them, judging by their earnings and sales over the past three quarters, including this past Friday’s earnings announcement. This current five-week base is the longest bona fide base the stock has formed since July of last year, and Friday’s move featured a pocket pivot type of move as the stock gapped up off of its 10-day, 20-day, and 50-day moving averages. This is buyable using the 50-day moving average at 58.22 as your stop-loss point. The stock might encounter some resistance up at the 64 price level, but the stock’s ability to hold the 50-day moving average well as it endured three waves of above-average selling volume, essentially shaking out weak hands, combined with the huge-volume move on Friday makes me think this can go higher from here.

Wabco Holdings, Inc. (WBC) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

In my report of January 26th I discussed Caterpillar, Inc. (CAT) and its little “shakeout & breakout” maneuver going into earnings in late January, and the stock has in fact continued higher from there. What is most notable is the fact that CAT is at all-time price highs, and is pushing up through the $100 price level for the first time. This invokes the Livermore “Century Mark” Rule (see discussion on pages 4-5 of my August 18, 2010 report) whereby Jesse Livermore noted that the first time a stock goes through a century mark like 100, 200, 300, etc. it should have a tendency to move up through that price level and continue higher with some thrust. We can see that CAT did exactly that on Friday, and I would look for the stock to continue to the $110 level in relatively short order. Of course, it could take a little longer, depending on the general market, but as long as the market continues to shrug off every pullback CAT will likely go higher. As we can see on the data portion of CAT’s daily chart, below, the last three quarters have shown some significant absolute earnings numbers as well as very strong Q/Q growth rates. As well, estimates are very strong over the next two quarters.

Caterpillar, Inc. (CAT) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

Cummins, Inc. (CMI), which as a manufacturer of diesel engines is a bit of a “cousin stock” to CAT, has also continued to act well since I first discussed it in my report of last weekend right after it flashed the second of two pocket pivot buy points along the 50-day moving average. CMI didn’t come in with huge earnings growth in the most recent quarter, but the absolute number of $1.84 per share is quite strong when viewed in context with prior quarters over the past couple of years, as we see in the data portion of the daily chart below. CMI has followed up on its dual pocket pivots along the 50-day line by moving a little bit higher above the $110 price level and then moving very tight sideways all week long this past week. Estimates over the next two quarters are very strong, and I believe CMI has the fundamental wherewithal to continue higher in any continuing market rally, and this current tight action appears to be setting the stock up for exactly that. In my view CMI remains buyable using the 50-day moving average at around 109 as your selling guide, with the idea that the stock should move higher from here.

Cummins, Inc. (CMI) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

Amazon.com (AMZN) probably typifies what this current market environment is like as it has performed its own version of the “Weebles wobble but they don’t fall down” routine after gapping down hard after its recent earnings announcement in late January. Two weeks later, the AMZN “Weeble” is standing upright once again as it clears to its second-highest closing price in its history this past Friday. Sequentially, from 2011 to 2015, AMZN is expected to earn $3.20, $4.46, $6.41, $8.98, and $11.66, respectively, which are some serious numbers as I see it. The only problem with AMZN here is that there is no coherent, clear buy point showing up here unless one wants to ignore the huge downside volume on the day after the company announced earnings. On that big gap-down buyers simply stood there and gobbled up every share that the sellers were throwing at them, fully absorbing the selling pressure which enabled the stock to slide right back up through its 50-day moving average. Stay tuned on this one, as it may need to back and fill a little here, hopefully setting the stock up for a clear re-entry buy point over the next few days or weeks.

Amazon.com (AMZN) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com),©2011 used by permission.

As I’ve been writing in recent reports, my take on this market has been that all you really need to do is be long NFLX and BIDU and let them do their thing until they stop. As two of the strongest “big stocks” in the market, if you own them you most definitely will have a “front-row seat” for any market top because it is likely that if these stocks get into trouble, then the market itself is definitely getting into trouble. But as long as these big stocks continue to act well, the market is okay, and we might also throw in the resilience of names like Apple, Inc. (AAPL) and AMZN as more evidence of a market that holds up well, even when it looks like it is starting to wobble. With each yank to the downside merely serving to shake out weak hands, the market could simply be setting itself up for a sharp, parabolic move as we move through the rest of winter and into spring. As well, there seem to be some emerging situations and set-ups that present viable, new opportunities, such as RDWR, for example, and in my recent reports I have focused on what I consider the best risk/reward plays given the extent of this rally that began on September 1, 2010.

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 BIDU and NFLX, 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. ©2010 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.