The Gilmo Report

February 8, 2012

February 8, 2012

Everybody loves the market these days, and we even have talking heads from big hedge fund type asset managers like Blackrock telling us all that we need to get into the stock market – now. Of course, I’m sure that Blackrock just got into the market yesterday, but they are nevertheless entitlted to their opinion. And of course, the market’s action has confirmed this. At best I’m willing to call any playable market move to the upside as a “confirmed rally,” and so far that’s what we have here. The chart of the NASDAQ Composite Index doesn’t need any annotations – you can see that the index moved higher today on increasing volume. Clearly, institutional money is flying into this market as money managers are forced into the market lest they fall behind the indexes and “underperform.” There is a great deal of bullishness on the airwaves right now, and with the market up sharply there is always potential for a sharp pullback. As the market streaks higher there can be a tendency to get “top heavy,” and for the most part this is what you should be trying to avoid. Therefore when you add to a position don’t allow that additonal part of the position to get underwater – cut it back. It’s easy to get excited when stocks are moving up, but one should stick to their rules. Stay safe, stay sane, because there is still a little “whippiness” underneath the surface of the market.

NASDAQ Composite Index Gilmo Report Chart

The chart of the National Association of Active Investment Managers (NAAIM) sentiment survey, shown on the chart below (©2012, used by permission), shows that indeed, active managers have been forced to come into this market. You can feel it in a stock like Apple, Inc. (AAPL) as it moves inexorably higher. No money manager on the planet is going to get in trouble deploying cash into AAPL stock. At 11 times forward earnings there is enough “prudent man,” due-diligence research around to justify that decision so nobody can lose their job over that. And the money flows into tech and stocks like AAPL have sent the NASDAQ Composite Index to higher highs while the S&P 500 Index, which is shown in black on the chart below, remains belows its 2011 highs. Like I said, the market is in a position to pull back anywhere in here so the key is to simply be able to go with the flow by not getting over-extended in your position-sizing. Other than that, there is not a lot to say if your positions are acting well and within reasonable parameters. I would certainly like to see how the market acts on any “real” pullback, but for now the signature of its strength has been its unwillingness to do just that. There have been a number of good-looking stocks, and the market’s first real pullback in a rally phase is usually the first test that separates the wheat from the chaff when it comes to leadership.

National Association of Active Investment Managers (NAAIM)  Gilmo Report Chart

As I see it, most of the first wave of buy points in leading stocks has passed, and the task is left to finding secondary buy points, such as would be the case with Monster Beverage (MNST), shown below on a daily chart. Earlier this morning MNST looked primed to bust out to new highs on a pocket pivot buy point move off the 10-day moving average. The stock ran into resistance at the 110 level and turned tail, just barely closing up on the day. Technically, however, this is a pocket pivot buy point, and if you added to your position earlier in the day, for example, at 110, you could consider trimming that if the stock violates or simply moves below the 10-day moving average. I found this move today somewhat disappointing, but MNST is not “done for” because of this, necessarily. Some pocket pivots can stall a bit and still work, but the issue here is that this market has been moving higher for some time, and as it moves higher the likelihood of profit-taking as stocks hit short-term highs rises. This appears to be the case with MNST, and I need to see it hold the 10-day line here, roughly, for it to remain viable in my mind.

Monster Beverage (MNST) Gilmo Report Chart

Some stocks show strength without really going anywhere, and Viropharma (VPHM) is one of these stocks. As we see on the daily chart below, the stock continues to hold above its 10-day moving average. Even when the stock was hit with “bad news” yesterday it showed resilience by picking up some volume and holding above the 10-day line. Apparently, the FDA had rejected their proposal to expand manufacturing capacity for one of their drugs, Cinryze. The stock gapped down at the open but managed to close unchanged on the day as volume picked up. Today the stock held the 10-day line again as volume declined. VPHM announces earnings at the end of the month, and the market is likely waiting for that. Yesterday’s action was in fact a pocket pivot buy point off the 10-day moving average, but it did not lead to any upside in the stock today, unfortunately. That seems to be the case in a number of pocket pivots in recent days as they haven’t seemed to gain much traction. Not that this is a problem, but it tells you that in some cases these stocks are just not ready to move higher yet. As long as they continue to act okay, however, they can be held.

Viropharma (VPHM) Gilmo Report Chart

And then there are those stocks that are entitled to pullbacks, such as one of my favorites, Spirit Airlines (SAVE), which I show below on a daily chart. As we can see, we first picked up SAVE as a buy on the pocket pivot coming up through the 50-day moving average over a couple of weeks ago, and since then it has broken out to new highs on heavy volume. The past three days have seen the stock stage a normal “reaction” as it pulls back and consolidates the prior gains. Selling volume on this pullback is drying up, which is constructive. I would expect that SAVE will try and build some sort of consolidation here, at the very least a three-weeks-tight pattern, before trying to move higher. Otherwise it is just barely extended from the breakout point at the top of the base, roughly in the 17.50 price area. I would view pullbacks to this area as potentially buyable, and notice that the magenta 10-day moving average line has caught up enough with the price to get above the new-high, base-breakout level.

Spirit Airlines (SAVE) Gilmo Report Chart

Even the precious metals are more or less biding their time here as they run along their 10-day moving averages. The iShares Silver Trust (SLV), shown below on a daily chart, illustrates this as it holds above the 10-day line, pulling back today on light sellng volume. Remember that both the SPDR Gold Shares (GLD) and the SLV have had sharp moves up off of their lows since late December and deserve a little time to rest and digest these gains. That is why for now I’m mostly sitting and not thinking when it comes to my core precious metals ETF positions. We can see that the pocket pivot type move of five days ago was a bit premature and also improper in that the stock was slightly extended from the maroon 10-day moving average. Thus the SLV backed up last Friday and pulled into its 10-day moving average where it continues to find support in the short-term. I should make it clear that both the SLV and the GLD do not have to hold their 10-day moving averages since I’m using the 50-day moving averages as my stops for them currently. However, as they meet up with the 10-day line this is a logical place for a possible pocket pivot from here.

iShares Silver Trust (SLV), Gilmo Report Chart

If you’re looking for something to buy right here and now I suppose the buyable gap-up in Buffalo Wild Wings (BWLD) is technically playable using the 78.82 intra-day low of today’s gap-up trading range as your stop. BWLD blew away earnings, apparently, and this sent buyers flying into the thin stock. BWLD has a float of 18 million shares and about 3 million of those had been sold short as of the date of the last reported period, so I’m sure a fair bit of today’s volume was made up of bone meal from crushed shorts. My only issue with BWLD is that it is thin, trading only 505,000 shares a day, but the gap-up here is certainly buyable, in my opinion, as long as one sticks to a reasonable risk-management plan, which in this case is the intra-day low of today’s trading range on the gap-up.

Buffalo Wild Wings (BWLD) Gilmo Report Chart

There’s not a lot to say here, and members should refer to recent reports for discussions of any names not mentioned in this report. For the most part, if stocks are acting right, then one can hold and let things play out and evolve as they will. I do think this market is in need of a pullback here soon, and with just about every commentator on the boob tube talking bull market it is also possible that the move is getting obvious for now and it’s time for a cooling-off period. The crowd’s expectation seems to be that an agreement regarding the Greek situation that has dominated the headlines as of late is in the cards, and that this will keep the rally going. That may be true, but I would not assume anything, just keep a close eye on your stocks and leave the noise for the talking heads on television. Yes, I know that on occasion I am also one of those talking heads, but that’s television, and for me that is not relevant to remaining fluid in the markets while sticking to your discipline. What distinguishes me from the other talking heads is that I will turn with the market if there is enough evidence to do so. For now, the evidence argues that the uptrend remains intact. And pending further evidence to the contrary, that remains the story for now despite the fact that a pullback at any time in here would be normal. Just watch your stocks!

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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