The Gilmo Report

July 17, 2011

July 17, 2011

A surprisingly strong earnings report from Google, Inc. (GOOG) sent the market gapping up sharply at the opening bell on Friday morning, as the NASDAQ Composite Index, shown below on a daily chart, led the charge with a 0.98% move on the day. Volume was lighter on Friday, however, and technically the market finished the week with three distribution days. In fact, the market didn’t look like it was going to make it on Friday either as the NYSE-based indexes veered into negative territory while the NASDAQ gave up about 2/3 of its opening gains within the first hour of trading. By the close, however, the indexes recovered and closed near their highs for the day as they all remain above their 50-day moving averages on this six-day pullback off the peak of two Thursdays ago. The sharpness of the move up off the 200-day moving average puts this current pullback in a less severe context, as we might expect the market to form a “handle” here following such a rapid upside move back to the highs. The question is whether three distribution days in one week are signaling weakness that will send the indexes further to the downside. So far, on the NASDAQ chart below, the 50-day line has served as support on this pullback, and we remain in this uncertain, choppy environment where stocks can take on a “Jekyll & Hyde” character, acting strongly one day while fading the next.

NASDAQ Composite Index Gilmo Report Chart

As I wrote over the weekend, the one consistent trade that I prefer is the one in precious metals, all of which continued to move higher into the end of the week with gold posting an all time high, as we see in the daily chart of the GLD, below.. It is fascinating to hear President Obama say that we have “run up the credit card” and must now raise the debt ceiling in order to act like “responsible adults” and “pay our bills.” Orwell would be proud, as getting deep into debt is now used as an excuse to get deeper into debt for the purpose of acting “responsibly.” This exacerbates the root cause of the problem, but it is certainly the tactic being utilized by the politicians, both in the U.S. and Europe, that are responsible for the mess in the first place. Raising taxes, which really means raising tax rates, may not necessarily raise tax revenues, which is the true objective. But politicians live in the Land of Unintended Consequences, and often their simplistic solutions lead to more complex problems. Hence their reliance on the continued issuance of debt leads us back to the simple equation of “default or devalue.”

GLD Gilmo Report Chart

Silver, as represented by the iShares Silver Trust (SLV), shown on a daily chart below, outperformed gold with a 9.3% move on the week vs. the GLD’s 3.2%. Given that silver is generally two to three times more volatile than gold, this relative performance between the two metals looks to be well within normal ranges. Silver cleared its highest high since May 4th in the midst of a five-day break off the late April peak, where we last unloaded silver into its climax run. Both silver and gold are a hold for now, although the GLD remains within 5% of its 151.86 buy point, but we are using the 50-day moving averages on each as our downside guides, corresponding to 148.59 on the GLD and 35.09 on the SLV. While the ride will not necessarily be a smooth one, particularly in silver as the more volatile metal, the trend for both is clearly up. Currently I am looking for the GLD to reach 170, corresponding to $1700-an-ounce in gold, while silver should make a run for its prior late April peak at the 48-49 price level in the SLV.

iShares Silver Trust (SLV) Gilmo Report Chart

When the metals start to move this almost always brings into play the mining stocks, most of which are erratic and volatile at best. When silver was approaching the $50 price level in late April silver miners like First Majestic Silver Corp. (AG) were simultaneously running just as quickly to the upside. AG, as we see on the daily chart below, had a climactic type of move going into early May which then led to this current 14-week base which has the look of a double-bottom base. In the past week mining stocks have vaulted from a #91 industry group ranking to #37, quickly bringing them into the top 40, what I consider to be “top-performing industry” territory. I prefer AG to other miners in that its most recent quarterly earnings growth was 2200% on sales growth of 211% according to IBD data, and 700% on 188.5% sales growth according to HGS Investor data. AG flashed a pocket pivot buy point four days ago off the 50-day moving average after a period where selling volume dried up along the lows of this current base. A pullback below $22 would be very buyable in my view, with the idea that the stock should hold the $21 price level.

First Majestic Silver Corp. (AG) Gilmo Report Chart

If you’ve ever played a gold or silver mining stock, the one thing you learn rather quickly is that they rarely have big, sustained moves after a new-high or trendline base breakout. Generally the best way to play them is to catch a “bottom-fishing” or other type of early pocket pivot as the stock is coming up and rounding out the right side of a potential base. Another silver miner with 2,000% earnings growth in the most recent quarter, according to IBD data, is an old friend, Couer d’Alene Mines Corp. (CDE). The stock has built a 38% deep cup formation and is now trying to come up the right side, as we see on the daily chart below. Depending on what source you are using, next quarter’s estimates call for 73 to 78 cents. This is strong growth attributable to the fact that CDE is highly leveraged to the price of silver. If silver moves, CDE will move with it, as I see it, and the stock flashed a gap-up
pocket pivot buy point through the 50-day and 200-day moving averages three days ago followed by a pocket pivot up through the 65-day exponential moving average on Friday on the highest upside volume seen in two months. I see this as potentially buyable here with the idea that it should hold above the 200-day line at 26.34.

Couer d'Alene Mines Corp. (CDE).  Gilmo Report Chart

And with metals and miners moving, mining equipment stocks are also showing positive action, albeit with less upside thrust. Two weeks ago I pointed out pocket pivot buy points on Caterpillar, Inc. (CAT) and Joy Global, Inc. (JOYG) up through their 50-day moving averages, and both stocks are consolidating well here after moving up from their 50-day lines over the past two weeks. While CAT, not shown, is moving tight sideways here just under the $110 price level, JOYG is acting similarly but did flash a pocket pivot buy point on Friday as we see on its daily chart, below. In fact, the past three days have all had pocket pivot volume signatures, but the prior two closed below the 10-day moving average whereas Friday’s was a bona fide pocket pivot buy point as the stock cleared and closed above the 10-day line. On the weekly chart, not shown, JOYG has also constructively closed three-weeks tight. Upside volume as JOYG comes up the right side of this potential cup-with-hande formation is clearly overshadowing much lighter selling volume seen earlier in the week as the stock has held the $93 price level. This is potentially buyable using the 93 level as a quick selling guide.

Joy Global, Inc. (JOYG) Gilmo Report Chart

In general I remain somewhat suspicious of individual stocks, preferring to stick with newer merchandise when it comes to stocks, in conjunction with healthy positions in the precious metals. But with metals and miners and mining construction stocks working, it is interesting to note some percolation among those stocks in the proverbial “oil patch,” many of which flashed pocket pivot buy points on Friday. Among these, the biggest of the “big oil” stocks (just in case you were wondering who all those politicans are referring to when they use the term “big oil”), Chevron Corp. (CVX) flashed a pocket pivot buy point on Friday off of its 10-day moving average. Despite the government releasing oil from the Strategic Petroleum Reserve, oil prices are higher today than they were at the time the big “release” of oil was made a couple of weeks ago. I’m not so sure I’m ready to buy oil stocks, but I bring this up as a potential clue that precious metals and commodities, as well as their related stocks, are a critical clue in determining the continuance of fiat money-printing, and these all seem to be pressing higher in confirmation.

Chevron Corp. (CVX) Gilmo Report Chart

There is currently a great deal of consternation that LinkedIn, Inc.’s (LNKD) price isn’t “justified” by its fundamentals, prompting one analyst to issue a “sell” rating and $45 target on the stock. Obviously the market has a different view, as six days ago we had a very buyable pocket pivot type of breakout from a cup-with-three-day-handle formation reminiscent of stocks from the late 1990’s and the “dot-com” era, as I discussed in my report of last wekend. In my view, P/E ratios remain the most useless measure of a stock’s potential or absolute value. It’s all about how the market values the future earnings potential of a company, and currently the market appears to place a premium on LNKD in this regard as the stock moved to all-time closing highs this past week. My “fundamental” picture of LNKD is based on one simple fact: Social networking is the latest and biggest wave in the ongoing growth of the internet and its impact on our lives, and LNKD is the only pure play out there that enables investors to participate in the phenomenon. For now the stock is a hold using the rising 10-day line, currently approaching 100, as your selling guide.

LinkedIn, Inc.'s (LNKD) Gilmo Report Chart

Fusion I/O, Inc. (FIO), shown below on a daily chart, was somewhat disappointing this past Wednesday when it failed to hold the 10-day moving average on what was looking like a pocket pivot buy point, as I discussed in my report of that day. On Friday the stock reasserted itself by flashing a bona fide pocket pivot buy point in this little three-week flag it’s been working on as volume exceeded any down-volume days over the prior 10 trading days. It also cleared the 10-day line and the 33 price level for a 9.6% move on Fiday. While other stocks I’ve discussed have either showed tepid, halting action or simply come apart as QLIK did on Friday, for example, both LNKD and FIO catch my attention because of the dynamic new frontiers they both represent, LNKD in social networking and FIO in game-changing, cloud-based data storage, as well as the fact that they are new merchandise in this market. If the market is able to mount any sustained uptrend then I believe it will be the newer merchandise, such as these recent IPOs, that will offer the best performance. FIO is potentially buyable here using the 29.95 level as a hard stop, which is what I am using on my own FIO position. As I’ve said before, I’m willing to take smaller positions in FIO and LNKD and give them some room to work as I give myself a chance to be very right if these keep going higher.

Fusion I/O, Inc. (FIO) Gilmo Report Chart

As an example of the less-even action in established leaders, we can look at Netflix, Inc. (NFLX) as an example. NFLX staged a buyable gap-up eight days ago as I discussed in my report of July 6th, but the stock is trading below the closing level of the gap-up day and just below its 10-day moving average. NFLX doesn’t tend to follow its 10-day moving average, so this is not a problem, but I would keep an eye on this as it failed on two previous attempts to clear the 300 price level. Obviously, a sustained move up through the 300 level would bring into play the Livermore “Century Mark Rule,” but so far the stock has shown any eagerness to make such a move. NFLX comes out with earnings on July 25th, and it may be that the market is simply waiting to see what sort of earnings surprise may or may not be in store.

Netflix, Inc. (NFLX) Gilmo Report Chart

Perhaps a sign that liquidity continues to bathe this market is the action of Apple, Inc. (AAPL), which has been one of the most consistent movers of the past four weeks as it has closed right at the peak of its weekly ranges each of the past three weeks since finding a low in mid-June at around the $310 area. AAPL trades at 15 times forward estimates, and as the consumer-tech juggernaut of the New Millenium, likely attracts institutional money looking for an easily rationalized “value” situation that may offer downside protection based on its strong trailing fundamentals and low P/E relative to forward earnings estimates. AAPL announces earnings on Tuesday, and I have to admit that the action on the weekly chart is very constructive here going into this week’s big earnings announcement which will likely have a material effect on the stock as well as the market, similar to GOOG’s strong earnings report on Thursday after the close. I would not be so concerned about a D or C accumulation/distribution rating as leading stocks can often show such weak ratings while in the process of building a base.

Apple, Inc. (AAPL) Gilmo Report Chart

Below is the daily chart of Apple, Inc. (AAPL), which also shows that the stock flashed a pocket pivot volume signature on Friday, although this was not a pocket pivot buy point given that the stock was well extended from its 10-day moving average. This volume signature adds some weight to the breakout to all-time new highs for AAPL as money has steadily moved into the stock over the past four weeks. I’m not sure what Tuesday’s earnings report will bring, but I note the stock’s improving accumulation/distribution rating from D+ to C+ this week as the stock’s relative strength line has confirmed the new high. There is some consternation over AAPL’s “late-stage” base, but I would not draw any hard and fast conclusions on this alone as they are several countervailing factors here such as the constructive weekly action, Friday’s pocket pivot volume signature, and the RS line confirmation of the new high price move. Would I buy the stock going into earnings? Probably not, but it should be watched as I believe AAPL’s action is likely to have a broader influence on the general market.

Apple, Inc. (AAPL) Gilmo Report Chart

I will go out on a limb here and make the “bold” prediction that regardless of how the U.S. debt ceiling crisis is resolved, it will in the end lead to more fiat money-printing. This could turn out to be very positive for stocks, at least on a nominal basis, but I do tend to prefer to manifest and reserve my more aggressive buying tendencies to the precious metals, which I believe offer the potentially “cleaner” play here. Stocks have been something of a mixed bag, but I remain constructive on LNKD and FIO, my only two stock holdings currently. However, they still represent a far smaller percentage of my portfolio mix relative to the precious metals ETFs currently. If all of these continue to work, it will be interesting to see how pyramiding and force-feeding affects their respective weightings as we move forward. Thus I remain constructive on the precious metals as your primary trend play currently, with an interest in “new merchandise” stocks like FIO and LNKD, both of which represent the playable cutting edge in their respective industry spaces. For now it is just a matter of maintaining your stops and selling guides and giving positions enough room to work for you. As I wrote in my report of this past weekend, the market direction may not exactly be clear here, but some individual stocks and the precious metals may continue to work regardless of what the general market does, barring an outright downside bust and bear phase starting here, and so I want to remain in a position where I can control risk but still allow myself the chance to be right if things continue to work.

Some administrative notes:

My colleague Kevin Marder, who also contributes his own column to The Gilmo Report website, is again contributing on a regular basis to MarketWatch.com, a site he co-founded way back in the 1990’s. Kevin is also someone whom I have long considered to be one of the first, influential, and intelligent stock market commentators to emerge on the Internet during its infancy. I was introduced to and made aware of his work for the first time by Bill O’Neil himself back in the 1990’s, long before I began working with Kevin on The Gilmo Report website. And I remember the way Bill started off that phone call to me way back then by saying, “This is a guy you should get to know…” Back in the 90’s, Kevin produced his award-winning “Market on the Market” column, and MarketWatch.com has seen fit to bring his regular commentary back to that “first-mover” market website. Look for it at www.marketwatch.com.

On Tuesday of this week, I will be appearing on the Business News Network, Canada’s only televised news service devoted exclusive to business and finance news with “wall-to-wall” market coverage, in essence the “Canadian” FBN or CNBC. “Hit time” is 10:00-10:30 a.m. Pacific Time, 1:00-1:30 p.m. Eastern, and I will be participating on a panel dissecting Apple’s technical/fundamental picture going into their Tuesday after-hours earnings announcement. Canadian TV is a first for me, and their London bureau is also interested in potentially bringing Dr. K onto the network in the future. For our Canadian members, watch for it!

Dr. K and I have been asked by the Las Vegas MoneyShow to conduct an “intensive” four-hour workshop at the event to be held in November 16-19, 2011 at Caesar’s Palace, site of the last MoneyShow where we presented two one-hour breakout sessions in May of this year. More details will be forthcoming on the MoneyShow website which can be found here: http://www.moneyshow.com/TradeShow/las_vegas/traders_expo/main.asp

We anticipate conducting a “hands on” workshop focused on the techniques described in the book, “Trade Like an O’Neil Disciple.”

Finally, Dr. K and I have recently completed our chapter and contribution to the new John Wiley & Sons “Wiley Trading Guide” book which has just gone to the printer. Once it is out in print and available at brick-and-mortar as well as cloud book sellers everywhere we will let you know. The book is an annual compilation of chapters from varous investment/trading authors and professionals operating in Australia and the United States. Dr. K and I are honored to have been asked to participate in writing a chapter for the 2011 edition, and we look forward to seeing the finished product soon, so stay tuned.

Further, we are beginning initial conceptualization meetings with our publisher, John Wiley & Sons, next week as we begin to lay out Dr. K’s and my next book, tentatively titled, “Trade Your DNA.” Currently the book is still in its embrionic stages, but our publisher is interested in formally kicking off and moving forward with the process of pumping out our next book since our previous work, “Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market” is, to quote our publisher directly, “a standout success.”

It’s nice to be in demand, and we must remember that this all started in March of 2008 when www.GilmoReport.com first launched, so we extend our deepest thanks to Gilmo members for their continued support and interest, as they have accompanied us on the ride.

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, DGP, FIO GLD, LNKD, and SLV, 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. ©2011 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.