The Gilmo Report

February 20, 2011

February 20, 2011

As the market continues higher and one is firmly entrenched with positions in leading stocks, the investment problem, as it were, becomes less a matter of thinking and more a matter of sitting. Hence if one owns what is working then one should simply stay the course until it stops working, or until clear signs of a breakdown occur. While we have seen breakdowns in a leader here and a leader there, such a Rovi Corp. (ROVI), for example, most leaders remain within their uptrends. Friday’s options expiration day saw some leaders close off for the day while the indexes themselves cruised higher, even gathering strength into the end of the day. Of course, we must remember that one day in the markets is exactly that: one day, and options expirations can often be characterized by unusual movements. In the context of a continuing market rally, some might view the NASDAQ Composite Index’s action as a bit of “churning” as it closed the day by forming a “doji,” as we see on the daily candlestick chart of the index below. And while a candlestick chart does give us a little bit of a different perspective on the “Naz,” we might note that a “doji” in and of itself has not been a sign of anything if we study the index’s uptrend since late November.

NASDAQ Gilmo Report Chart

The NASDAQ Composite Index likely lags here a bit thanks to action in Apple, Inc. (AAPL) which sold off on heavy volume Friday, as we see in its daily chart, below. AAPL is a stock to ponder, as it remains one of the biggest “big stock” juggernauts on the NASDAQ Composite and NASDAQ 100 Index with strong earnings growth in the 50% range estimated over the next two quarters. Meanwhile, AAPL sells at 15 times forward estimates, which would qualify it as a “value” play given these growth rates and AAPL’s dominant position within the technology sector. AAPL has been hit with volume selling three times since the New Year began, and the first two times the stock closed well in the upper part of its daily trading range. This past Friday was the third sell-off but the stock closed at the lows of the day and right at its 20-day moving average. At 15 times estimates for a world-class leading stock, one must ask what gives here. My answer is that the market is discounting the potential for AAPL to lose its CEO and “mega-mind” Steve Jobs, something that on a personal level I don’t really care to think about, but this may be the investment reality we are looking at here. If you own AAPL, the 50-day moving average becomes your ultimate downside selling guide, so I would simply keep an eye out for that.

Apple, Inc. (AAPL) Gilmo Report Chart

As AAPL falters, however, there remain other “big stock” NASDAQ leaders that appear ready to take over the leadership role for the index, such as Google, Inc. (GOOG), as it subtly creeps back up towards its highs within a cup-with-hande type of formation as we see on its daily chart, below. Friday’s action saw the stock break out of this tiny formation on volume that was quite strong at 41% above-average. This was also a pocket pivot volume signature which gives added weight to the breakout . GOOG came under some sharp selling pressure back in mid-January when it came out with earnings, but with the stock expected to churn out solid 20-30% quarterly earnings growth the selling did not take GOOG below its 50-day moving average, which so far has served as support for the stock. GOOG’s Relative Strength rating is a paltry 59, which would make the stock a bona fide laggard. Nevertheless, it is slowly creeping back to life, and we might note that AMZN back in September 2010 had a Relative Strength in the 60’s as it slowly went about building a base from which it later broke out and moved higher. Technically, GOOG’s move on Friday makes the stock a buy here, using the 50-day as a selling guide.

Google, Inc. (GOOG) Gilmo Report Chart

And while the NASDAQ may have lagged a bit on Friday, the action of the other leading market indexes, such as the very broad NYSE Composite Index, shown below on a daily chart, remains robust and in a very well-defined uptrend. While we have seen oil-related stocks like Concho Resources (CXO), Halliburton Co. (HAL), and Baker Huges, Inc. (BHI) act well, other “stuff stocks” that we’ve been following like Walter Energy (WLT) or Arch Coal (ACI) were hit with selling on Friday, but for the most part these stocks may simply be going about the business of building new bases. Last month “Dow Theorists” were lamenting the fact that the Dow Jones Transportation Index was lagging the Dow Jones Industrials, which is considered a very negative sign by those who operate on the basis of what I consider a narrow and simplistic method. But the “Trannies” have now moved to a higher-high as well, as the market’s rally has broadened even further over the past week. And as the market grinds higher as each pullback simply represents the latest buying opportunity, my tendency is to think that an acceleration in this trend will have to occur before any serious profit-taking occurs.

NYSE Composite Index Gilmo Report Chart

If the debate over how to close gaping fiscal shortfalls in the budgets of state governments nation-wide cannot be settled, and public employees insist on having the taxpayer fully fund their pensions and health-care benefits instead of contributing to those expenses as every other worker or business owner in the private sector must do, then the dollar is clearly doomed. And this brings our attention back to my favorite commodity, silver, as represented by the Point & Figure chart of the iShares Silver Trust (SLV), below. As I discussed in my report of January 2nd, the Point & Figure chart projects an upside price target of $50.50 based on the vertical count on the breakout that occurred in the August/September 2010 time frame through the $20 price level. Now the SLV is coming out of a “bullish catapul” formation on the P&F chart, and I would not be surprised to see silver move into the $40 range in the next few months. As I wrote in my report of last Wednesday, silver looked ready to break out again, and over the past two days has done exactly that. I think it goes higher from here.

Point & Figure chart of the iShares Silver Trust (SLV) Gilmo Report Chart

Staying focused on the biggest and best-acting “big stock” leaders is likely the simplest way to ride the market’s current persistent uptrend, and of course I remain a big fan of Netflix, Inc. (NFLX), which provided a very obvious entry point on its big buyable gap-up in late January after announcing earnings. As I wrote two Wednesdays ago, NFLX’s sharp upside move would at some point bring about what Jesse Livermore would call a “normal reaction” or pullback, and over the past four days we’ve seen NFLX do exactly that. I note that this pullback has occurred in very coherent fashion as the stock has drifted downward right into its 10-day moving average, as we see on the daily chart below. This has occurred with a likewise very constructive volume pattern as volume dried up fairly sharply on Friday, even in the midst of options expiration, and the stock has “filled the gap” from this past Monday’s sharp gap-up and move higher. So far NFLX is acting just fine, and with the Wall Street Journal’s “Heard on the Street” column finding fault with the stock’s “valuation” I take contrarian comfort in the continued bleatings of naysayers.

Netflix, Inc. (NFLX) Gilmo Report Chart

A stock that I’ve liked since September of 2010 when it was around $16-18 a share, Aruba Networks (ARUN), has for the most part driven investors in the stock crazy as it has only begrudgingly moved higher in very choppy fashion since breaking out in early September 2010, as we see on its daily chart below. Because of this investors may find it hard to believe in ARUN’s massive-volume buyable gap-up on Friday after the company announced earnings. But what we must remember is that stocks that bounce around in ill-defined or tepid and choppy uptrends may finally “find their mojo” with a big-volume buyable gap-up that ignites a strong upside move in the stock. This is a buyable gap-up, period, using the 29.65 intra-day low of Friday’s price range as your guide for a stop, and with the stock closing at 31.22, a mere 5.3% beyond that intra-day low, this represents a low-risk entry point for a buyable gap-up move, and reminds me of the buyable gap-ups we’ve seen in other techs like JDS Uniphase (JDSU) and Finisar (FNSR), for example. I can understand that most investors find it diffcult to buy such a move, but the bottom line is that a buyable gap-up is often one of the most powerful moves to buy into – just go take a look at a daily chart of JDSU.

Aruba Networks (ARUN) Gilmo Report Chart

A number of these smaller networking, telecom, and just general “cloud-related” stocks have been acting constructively lately, and while ARUN has just flashed a big buyable gap-up move, Radware, Ltd. (RDWR), which I discussed in my report of last weekend, has flashed a standard new-high breakout on strong, above-average volume, as we see in its daily chart below. The Globe reported last week that RDWR had turned down buyout offers from HPQ and IBM at around $50 a share, and of course this sends investors scurrying into the stock. In my view, RDWR’s acquisition of the Alteon platform in 2009 is driving a big turnaround in its business over the past six quarters, and this is expected to continue. It also explains why HPQ and IBM may have expressed interest in buying the company. The stock closed right at the $40 price level on Friday, more or less, and I would not be surprised if this were caused by a burst of call-buying in the stock last week as a result of more buyout talk in the media. If the $40 calls were all the rage, then I am not surprised that the stock closed near that level on options expiration this past Friday. However, the pullback here is reasonably well-contained as volume picked up and the stock found support along the 10-day moving average, giving investors a low-risk entry point right here.

Radware, Ltd. (RDWR) Gilmo Report Chart

Another small cloud-related play that I discussed last weekend was Cavium Networks, Inc. (CAVM), shown below on a daily chart. As I wrote a week ago, CAVM looked primed to move up off the little consolidation it was forming along the 42-43 price area, and this past week it move a bit higher and held its gains near the $45 price level. On Friday, the stock pulled back very small as volume dried up in the extreme, 45% below average daily volume. CAVM has been throwing up some huge earnings numbers over the past five quarters and is expected to continue with that trend over the next two, as we see on the data portion of the stock’s daily chart below. In my view CAVM is simply preparing to move higher here, and I would not be concerned with the sharp pullback in mid-January as this was caused by F5 Networks’ (FFIV) earnings announcement which slammed FFIV and sent all cloud-related names gapping to the downside. CAVM found solid support along its 50-day moving average, however, and remains only 3% off of its 52-week high. I think its buyable here with the idea that it should breakout to new highs soon while holding the 43 level on any pullback.

Cavium Networks, Inc. (CAVM) Gilmo Report Chart

Riverbed Technology, Inc. (RVBD) remains one of the strongest cloud-related leaders in this market, and while its $6.24 billion market cap is certainly much larger than RDWR’s $796 million or CAVM’s $2.2 billion marke cap, it is still one of the smaller leaders when compared to Salesforce.com (CRM), for example. On an absolute basis, however, RDWR and CAVM have stronger earnings numbers, and this is why I think those stocks are also strong contenders for further upside when we consider how strong RVBD continues to act. Next quarter RDWR is looking for 24 cents a share, CAVM 28 cents, and RVBD 18 cents, but this has not stopped RVBD from moving to new highs on big upside volume seven trading days ago. Now the stock is pulling right back into its 10-day moving average on an extreme volume dry-up (a “voodoo”) as it consolidates the prior strong move. This looks quite buyable right here with the idea that it should hold the 40 price level. I also do not consider the stock to be in any kind of “trouble” here just because it has found support three times at its 50-day moving average – there is no hard statistical basis for this sort of rule, in my view, and I do not find it useful in my own trading.

Riverbed Technology, Inc. (RVBD) Gilmo Report Chart

Lyondell Basell Industries (LYB), a Dutch chemical conglomerate, has been a steady upside performer since coming out of Chapter 11 bankruptcy last year, but I have not discussed the stock since my Decmeber 5, 2010 report as it was coming up through the 30 price level. Since then the stock has moved up into the high-30’s, and on Friday the company came out with earnings, which immediately sent the stock lower at the outset of trading. By the close, however, LYB had recovered and closed back above its 10-day moving average and at the high of the range for the day, as we see on its daily chart below. Volume was huge, and given that the stock closed at the peak of the day with a very long lower “tail” on the trading range it gives the clear impression that the pullback was bought into heavily. As well, this might qualify as a type of reversal pocket pivot buy point, and I think one could buy the stock here with the idea that it should hold the 10-day moving average at around 37. Note the prior two yanks to the downside since mid-January, and Friday’s downside yank would constitute the third, so this leads me to wonder whether this serves to shake out all the weak hands and the stock as it potentially sets up to move higher.

Lyondell Basell Industries (LYB) Gilmo Report Chart

Given that I advocate thinking less and sitting more as the market’s uptrend persists, and the fact that any bouts of deep “thinking” I’ve gotten into in reports over the past 2-3 weeks with respect to any weakening of the rally prove how futile this sort of exercise is, I have tried to be very specific about where I think the actionable ideas lie in real-time. As with previous reports, this report focuses on what I see as actionable today, and if members need to “check-up” on other names I’ve discussed they should refer to reports over the past 2-3 weeks as my thinking on individual stocks does not change that frequently. Members can also always email me if they have questions regarding names that I’ve discussed in previous reports, and of course we always encourage that. The names discussed in this report reflect my best ideas for the coming week, and with the market trend remaining in force the long side of this market is the “right side” for now. Meanwhile, the persistent and stubborn upside grind leads me to believe that an acceleration to the upside is likely to occur before any kind of serious profit-taking occurs, and while this is not 100% guaranteed, I have yet to see a sell-off in this market take hold and set off any kind of meaningful correction. As long as I see stocks in position to buy, I will buy them.

As always I would like to thank my friends over at HighGrowthStock Investor (www.highgrowthstock.com) for allowing us to use their great charts, all of which are ©2011 by HighGrowthStock Investor and are used by permission. I consider their product to be one of the best values, if not THE best value for the money when it comes to a market and stock analytics and screening program. I should also mention that HGS Investor gives me nothing for recommending their system, and I pay for my own HGS Investor software out of my own pocket, but as I’ve said, I consider it money well spent. Dr. K and I will be using HGS Investor charts during our presentation this Monday, February 21st, at 1:30 p.m. Eastern, 10:30 p.m. Pacific at the 2011 New York Traders Expo and Money Show, and Gilmo members can watch a live webcast of the presentation at: http://www.moneyshow.com/video/details.asp?wkspid=645168CC11A9400BB007CCAD0D4CE078&pg=1&scode=021528.

Finally, because my schedule next week in New York will be hectic and Dr. K and I will be flying home to Los Angeles on Wednesday afternoon/evening, my colleague Kevin Marder, whom you all know as the author of The Marder Report and Marder on the Market, will be the guest writer for The Gilmo Report on Wednesday. I will be back at my post for the weekend Gilmo Report next Sunday, but I hope that as many of you as possible will be able to join us on Monday at the Marriott Marquis Hotel in Times Square or at least watch the live webcast of our presentation on Monday. Amazingly, after three years of writing The Gilmo Report this is still the first and only report that I myself will not have written, although I will be calling in ideas to assist Kevin on Wednesday. For more details on the Traders Expo presentation that Dr. K and I are giving this Monday, you can also click on the orange “Live WebCast” button underneath the buttons for The Gilmo Report and The Marder Report on the members page of the website.

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 AGQ, ,BIDU, NFLX, and RDWR, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.