The Gilmo Report

July 24, 2011

July 24, 2011

“Earnings roulette” appears to be the order of the day, and investors who want to hold stocks going into earnings should expect to live dangerously, despite the fact that the general market is classified as being in a “confirmed uptrend.” As an example of this I might offer Travelzoo, Inc. (TZOO), a previous short-sale target of ours that worked out very well in early June. TZOO continue to rally up off its 200-day moving average, as we see in the daily chart below, flashed an improper pocket pivot buy point on wedging action, and then hideously blew to pieces when it announced poor earnings on Thursday. This is somewhat instructive in that TZOO’s pocket pivot action on Monday of this week was in fact wedging slightly before the pocket pivot, as we see in the daily chart below. As well, TZOO’s ascent from the lows was v-shaped on the weekly chart, which I don’t show here, but the cautionary action was seen in the slight wedging behavior where we see that upside volume declined while the stock drifted higher along the lows. The pocket pivot of five days ago was suspect from the start, and culminated in TZOO’s self-detonation on Thursday of this past week. Of course, we’ve seen a number of pocket pivots fail to pan out recently, which points out the uneven nature of this market environment.

Travelzoo, Inc. (TZOO) Gilmo Report Chart

While stocks are alternately gapping up or blowing up on earnings, the general market indexes are trying to chop their way to higher highs, as the daily chart of the NASDAQ Composite Index shows below. Thursday saw some strong upside volume while Friday’s volume was quite light. But the market has so far consolidated the sharp run-up in the second half of June by pulling back to its 50-day moving average. It is now flirting with a breakout from this wide and loose sideways range we’ve been trapped in for nearly the past six months. Some may even see a “reverse head and shoulders” formation, although I don’t see reverse H&S patterns, or even standard H&S patterns, as having any concrete predictive value when it comes to the major market indexes. We could see the indexes break out here, but it would likely be on poor breadth as this recent bounce off the 50-day moving average has not been accompanied by the Advance/Decline line which has lagged, indicating a narrowing of breadth. This is certainly logical given the anecdotal evidence we’ve seen in various stocks that have blown up or gotten hit on earnings recently which gives the market an ominous undertone, but it doesn’t mean it can’t keep rallying.

NASDAQ Composite Index Gilmo Report Chart

I would not be surprised to see the indexes break out here, actually, given that the dollar is looking like it wants to fall through the bottom of this very volatile range it has been in for about the past 2½ months, as we see on the daily chart of the dollar’s proxy, the PowerShares U.S. Dollar Index ETF (UUP), shown below on a daily chart. Depending on the context of such a breakdown in the dollar, stocks could rally, but it is also possible that a continuation of the deficit ceiling scuffle as the U.S. moves closer to a potential default on August 3rd could bring on a sharp decline in the dollar as well as stocks. The action of the dollar shows that it has reacted to a panoply of news over the past couple of months. It rallies whenever sovereign troubles in Europe rear their head as the euro gets dumped, and it falls as U.S. debt and deficit issues are again emphasized in the news headlines. As I’ve maintained, it all boils down to two choices: default or devalue. And as long as the solution to being deep in debt remains issuing more debt, then the longer-term trends for the dollar and the euro and other fiat currencies will be to the downside, In such a scenario, precious metals should continue to benefit.

PowerShares U.S. Dollar Index ETF (UUP) Gilmo Report Chart

As I’ve written in my past two reports, it is much easier to focus on precious metals, silver and gold, as long as “earnings roulette” forces investors to tip-toe through veritable mine fields that pose special risks for individual stocks. Gold has held its recent breakout to new highs as it hovers around the $1600-an-ounce level. Silver, as represented by the iShares Silver Trust (SLV) daily chart, below, tracks right along with gold following last week’s gap-up
pocket pivot buy point.The precious metals are subject to intra-day volatiilty in the form of “news swings” as reports of a debt ceiling agreement are confirmed and denied, sometimes all in the same day. The bottom line is that the SLV has rallied some 20% off its late June lows while pushing through two sharp pullbacks on the way up. The SLV held the 10-day moving average line on Wednesday of this past week, but it appears to me that a longer consolidation of a few days might be in order here as it digests the sharp gains off the lows. On the other hand, a crisis situation developing with all of the debt ceiling drama could send precious metals sharply higher. For now, the trend is your friend and we continue to use the 50-day moving average as our selling guide for both the SLV and the GLD. No other thinking is required at this stage.

iShares Silver Trust (SLV) Gilmo Report Chart

First Majestic Silver Corp. (AG), a Canadian-based silver miner in Mexico, remains my favorite mining stock, although I should emphasize that if one is going to play the move in precious metals I prefer “going direct” with the GLD, SLV, or any of the other leveraged precious metals ETFs. If gold and silver continue moving higher, of course, the miners are likely to correlate to a decent degree, and a stock like AG also provides investors with a little more upside (and downside) “juice.” Over the past four weeks as silver has rallied roughly 20%, AG has rallied 40%, so it is similar to the 2-times leveraged silver ETF, the AGQ, but still a little “juicier” to the upside. AG’s base could be considered a double-bottom with the breakout point in the middle of the “W” at 21.26, right around where I first discussed the stock in my report of July 17. Thus at this point I would like to buy into a pullback to the 10-day moving average at around 23. AG could also be forming a big cup and perhaps needs some time to build a handle right in here. In the weekly chart below we can see big-volume supporting action in the left side of the base as well as tight closes along the 18 price level in 6 out of the 9 weeks that formed the lows of the base. Coming up the right side we see weekly volume expanding as the stock closes near the top of the weekly range for four weeks in a row, all of which is constructive.

First Majestic Silver Corp. (AG) Gilmo Report Chart

Joy Global, Inc. (JOYG) sold off on Friday early in the day when its industry-group cohort Caterpillar, Inc. (CAT) missed on earnings and gave a weak outlook, gapping down to its 50-day moving average. JOYG held up however, and closed in the green for the day. In my report of last weekend I discussed both CAT and JOYG, but CAT admitted in their earnings report this past Friday that smaller mining machinery companies have been encroaching on their business, and of course JOYG is one of them. JOYG ended up closing in the green for the week, and this comes on the heels of three very tight weekly closes, which I see as constructive. JOYG doesn’t announce their own earnings report until August 31st, so it is not clear to me that the stock will do much more than bide its time in anticipation of its own spin of the “earnings roulette wheel” on August 31st. Since I tend to think that mining machinery stocks are likely to benefit from movements in precious metals, there might be some upside action here, but again I prefer to “go direct” by simply owning the SLV and GLD instead. Nevertheless, JOYG’s technical action is constructive on the weekly chart but still lacks any conviction that would be evident in a clean, upside breakout through the $100 price level.

Joy Global, Inc. (JOYG) Gilmo Report Chart

I’ve been watching rare-earths miner Molycorp, Inc. (MCP) very closely over the past several weeks as it has gone about the business of rounding out what may be the lows of a potential cup formation, as we see in its weekly chart below. MCP is much more attractive to me here than mining machinery stocks. The stock has corrected 41.38% off its peak price of 79.16 in early May, a constructive correction in my view given its previous upside rocket ride from an IPO price of $14 in July 2010 to the May 2011 highs, a 465% move. The fundamentals for MCP remain quite intact, and analysts are looking for earnings in 2013 in excess of $12-$13 a share while they put upside price targets of $105 on the stock. While these are nice projections, for my money I prefer to focus on the price/volume action. We can see in the daily chart below that MCP has flashed two “bottom-fishing” pocket pivot buy points over the past two days as it has pushed back above its 50-day moving average. MCP has rounded out the potential lows of a “cup” base with three downside waves in the pattern as selling volume has dried up sharply in the past week. This is potentially buyable here, but MCP could pull back to the 50-day line at 56.62 given its volatile nature. I would expect it to hold that line, which I would use as a selling guide.

Molycorp, Inc. (MCP) Gilmo Report Chart

I was stopped out on LinkedIn, Inc. (LNKD) this past week when the stock violated the 10-day moving average, but note in the weekly chart below that the stock was able to climb back above the $100 price level to close the week in the upper part of the weekly trading range. Getting stopped out at the 10-day line resulted in virtually no loss on the position, so there is no point in getting into the head-game of “woulda coulda.” We stick to our rules, end of story. Now we can see that the stock has formed the first week of a much more legitimate cup-with-hande formation, with the $110 level serving as your new breakout pivot point. Given the sharpness of the move up off the June low of $60.14, it might be reasonable to assume that LNKD will need to spend more time building a proper handle here, which I would prefer to see since this would help to set up a better potential upside move on any breakout. Meanwhile, we can watch for any pocket pivot buy points off the 10-day line that might appear within the handle. Otherwise, a clean breakout through the $110 level would be your standard O’Neil-style new-high breakout from the handle. In my view, LNKD continues to set up and should be monitored closely from here as it potentially finishes out this cup-with-hande base formation.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

I had a lot of fun appearing on Canada’s BNN financial news channel on Tuesday of this past week and playing devil’s advocate pointing out “negatives” on Apple, Inc. (AAPL) in humorous fashion prior to its Tuesday earnings report as I cited Gordon Gekko’s classic line from the first Wall Street movie, “Tell me something I don’t already know, pal, it’s my birthday!” Gilmo members who missed that can catch it at the following video link: http://watch.bnn.ca/#clip503176.
But let’s get real. To be completely objective as you may recall from my discussion last weekend on AAPL, the stock is showing four weeks in a row now on the weekly chart, below, where it has closed near or at the peak of its weekly range as volume expanded sharply this past week. Technically speaking there is absolutely nothing wrong with this action, and in fact it appears very positive. Maybe the analysts who currently have a $470 price target on AAPL are going to be right, and for now the price/volume action, which is in reality ALL that we ever pay attention to anyway, appears to be supporting such a thesis, at least for now. Given that AAPL sells for about 15 times forward earnings estimates, any form of QE3 that provides additional liquidity for stocks will likely find its way into AAPL.

Apple, Inc. (AAPL) Gilmo Report Chart

This market environment is fraught with cross-currents and minefields, but I find the cleanest way to “play” currently is simply to focus on the precious metals. We’ve been stopped out of stocks like LNKD and FIO, but it may simply be that these need more time to set up in more proper bases, so while I continue to favor these stocks based on their status as compelling “new merchandise” it is simply a matter of waiting for a better technical set-up in each case. Meanwhile defensive stocks like Phillip Morris International, Inc. (PM) and Coca-Cola Company (KO) have broken out this past week, and we have to wonder what implications that has for the market. I’ve heard of individuals hoarding cigarettes as a form of alternative currency, and maybe bottles of Coca-Cola are garnering similar status as a “liquid asset” hard-asset alternative currency! J MCP also plays into the “hard assets” theme as a producer of rare-earth metals, but will announce earnings on August 11th, so again the “earnings roulette” question comes into play there. While I am not averse to taking a measured position in MCP going into earnings, my focus remains on the precious metals for now as one of the best vehicles for playing the theme of continued fiat money-printing in the face of massive and growing sovereign debt around the globe.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

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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, GLD, MCP, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.