The Gilmo Report

February 9, 2011

February 9, 2011

The shining star of this current market rally remains the Dow Jones Industrials Index, shown below on a daily chart. The Dow continues to rip and snort on the heels of stocks like General Electric (GE) and Walt Disney Company (DIS), and the move is starting to take on the slight proportions of a nascent parabola as the uptrend in the Dow has accelerated over the past two weeks. While this looks very positive, and the media is trumpeting the Dow’s performance, I tend to think that a market being led by the Dow is potentially a cautionary sign. Certainly, we still continue to operate on the basis of what individual stocks are telling us, treating the market as a market of stocks rather than a stock market, but when the media is asking me to come on their shows with the idea of discussing “Dow 14,000,” I naturally start to get nervous! J Trying to make prognostications about whether the Dow will get through 14,000 again is not my thing, but I’m sure that if QE continues to have its way then “Dow 14,000″ may very well occur at some point; it’s just not relevant to making money in the markets in the here and now. And so the Dow keeps trucking along, making its eighth higher-high in a row today on increasing volume.

Dow Jones Industrials Index Gilmo Report Chart

The NASDAQ Bullish Percent Index and NYSE Bullish Percent Index, shown below on monthly line charts, reflect just how bullish the market has been with 80%, or four out of five, industry groups showing buy signals on point & figure charts among NYSE-listed stocks. The Bullish Percent Index can give you an idea of when a rally may be “long in the tooth,” but it does not necessarily allow you to predict tops right at their inflection points. What I find interesting about these roughly 12-year charts is that on both we are seeing levels we have not seen throughout the past 12 years. Is this a sign of extreme QE driven upside power, or a sign that the rally could be losing steam?

NASDAQ Bullish Percent Index Gilmo Report Chart

NYSE Bullish Percent Index

NYSE Bullish Percent Index Gilmo Report Chart

And while the Dow was up on higher volume today, the NASDAQ Composite and S&P 500 Indexes both had distribution days, and breadth was decidedly negative on both exchanges with advancers leading decliners by a margin of 1881 to 1108 on the NYSE and 1685 to 969 on the NASDAQ. This is a somewhat interesting divergence, so at the very least I am only interested in high-probability plays, as I discussed over the weekend. A couple of Fed heads have been in the news recently being quoted that they would not support the continuation of the Fed’s continued purchase of Treasury bonds, the spigot from whence QE2 flows. Meanwhile the debate over raising the U.S. government’s debt ceiling beyond its already ridiculously high limits begins to heat up. How will the market discount the dynamics of these uncertain yet brewing developments? In my view it is necessary to play a tight defense here, as there are some divergences that lead me to be somewhat cautionary here. However, that doesn’t mean running for the hills necessarily, but it does mean that one needn’t get aggressive here. Stay with quality and stay with what’s working until your trailing stops are hit, and have trailing stops clearly in mind for each of your positions.

NASDAQ Composite Gilmo Report Chart

General Electric (GE) showed up as a buyable gap-up on January 21st, which I discussed in my report of January 23rd, and the stock has continued higher from there. This has been one stock helping to drive the Dow.

General Electric (GE) Gilmo Report Chart

Extrapolating from GE we might consider Walt Disney Company’s (DIS)
gap-up today to be buyable as well, using the 42.72 intra-day low as a stop.

Walt Disney Company's (DIS) Gilmo Report Chart

And as long as we’re looking at stocks in tandem, we can focus on Netflix, Inc. (NFLX) and Baidu, Inc. (BIDU) on daily charts, below. Both of these staged buyable gap-ups two weeks ago, more or less, and as I wrote in my report of this past weekend, if the market is going to go higher then so are these, and so they remain two of my favored plays for now as they do in fact go higher here. If these get into trouble, then that is going to be telling you something about the general market, so if I’m going to be long here I’m going to prefer being in “big stock” leaders like these.

Netflix, Inc. (NFLX) Gilmo Report Chart

Baidu, Inc. (BIDU)

Baidu, Inc. (BIDU) Gilmo Report Chart

While markets in Japan and Germany for example have been moving to higher highs, emerging markets have not fared so well. I don’t show a chart of it here, but the iShares FTSE China 25 ETF, also known as the “FXI,” gapped down through its 200-day moving average today to make a lower low since topping in early November, while the “EEM,” or the iShares MSCI Emerging Markets ETF, which I show below on a daily chart, looks to be rolling over pretty hard here. The issue here is money flowing out of emerging markets, and while it is not clear necessarily whether this is a problem for the U.S. markets I do think it is something to take note of.

iShares MSCI Emerging Markets ETF Gilmo Report Chart

When I look over the evidence at this current juncture, I see some reasons to be cautious here, and so my approach over the past couple of weeks remains in force, which is to stay with what works, don’t get too top heavy, and focus on the very best, leading stocks. In this manner, stocks like NFLX and BIDU fit the bill and have been effective vehicles so far this week, but that can change. In the meantime, if the Dow continues to lead, does DIS become another “gap-up mover” helping to the keep the Dow in its divergent upward spiral as GE has? It’s still too early to tell, but my advice here is to keep your trailing stops in mind, and if you buy any new shares in any stock do not let that trade go too far below your purchase price on those shares. In other words, don’t get top heavy. In the meantime, the situation remains fluid here. Review my reports of the past two weeks for specifics on individual stocks, but as it stands right now I do not advocate getting aggressive here on the long side, at the very least. Stay tuned.

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.