The Gilmo Report

July 27, 2011

July 27, 2011

As I wrote over the weekend, the lack of breadth that has accompanied the general market’s bounce off the 50-day moving average appears problematic, and so far the market’s sloppy action bears some testament to this. Earnings “roulette” season continues to present long investors with a dangerously sharp-edged knife that cuts both ways. Earnings roulette winners this week were Baidu, Inc. (BIDU), Questcor Pharmaceuticals, Inc. (QCOR) and Amazon.com (AMZN), while Netflix, Inc. (NFLX), Panera Bread (PNRA), and Illumina, Inc. (ILMN) were big losers. As we see on the daily chart of the NASDAQ Composite Index, this market is dangerous, and with the daily flux of news regarding a debt ceiling agreement that is on or off the table at any point in time the environment is challenging at best. Meanwhile, economic news continues to show deterioration, and much of this may be overshadowed by the media’s focus on the debt ceiling debate. The market, on the other hand, might not be so sanguine, and what looks like weak action based on the current lack of a debt ceiling “deal” may be weak action based on something else, namely continued deterioration in the economy. Today’s huge-volume distribution should be taken at face value as it now brings the 50-day moving average support level into play. In my view this is a tenuous positon for the markets, at best.

NASDAQ Composite Index Gilmo Report Chart

Conventional wisdom, e.g. that promoted and hyped by the media, is that a debt ceiling deal will right all that is wrong with stocks and send precious metals careening to the downside like a Jedi starfighter that has just been hit by a Death Star proton beam cannon. Obviously, as we get closer to the alleged August 2nd deadline for a debt ceiling, some may move to sell their precious metals holdings in anticipation of an imminent agreement on just how much deeper of a debt hole the U.S. should be allowed to dig itself further into. Given the sharp move up in the precious metals over the past couple of weeks, a pullback is not to be unexpected. Nervous holders of the precious metals could always sell ½ their positions and sit back to wait and see how the whole “crisis” evolves as we approach the figurative deadline. I would also be concerned about precious metals if the market’s sell-off today is not just a debt ceiling related issue, as a continued sell-off in stocks could easily spread to all asset classes, including gold and silver, so this must be watched for. For now, on the SLV, the 10-day moving average is my nearest support level, but I would be inclined to take some profits in the precious metals here as a pullback to the 20-day line at 36.85 is a possiblity.

silver Gilmo Report Chart

Gold, as represented by the SPDR Gold Shares ETF (GLD), shown on a daily chart below, also got hit with its third high-volume, one-day sell-off on its recent run since breaking out through the 151.86 price level. The first two high-volume sell-offs were shrugged off as the GLD continued higher from those prior levels, and the SLV has similar action in its daily chart, which I show above, as well. Given that this is the third such sell-off it may be that the “Rule of Three” comes into play here, whereby the third time something occurs it becomes too obvious and hence fools the crowd. Thus with the GLD and SLV seeing their third high-volume, one-day sell-offs since flashing their respective buy points a couple of weeks ago, this one may not recover right away as it potentially fools the crowd. I would keep this firmly in mind as one manages their precious metals positions here. This environment gets more treacherous with each day, and my concern is that some of this treachery will spread to my beloved precious metals, which of course only remain “beloved” as long as they keep going up.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

In essence, the action this week so far tells me that we are dealing with a market environment that presents so many twists and turns that it in effect becomes impossible to navigate, like a river that alternately starts to flow back on itself. Thus my focus mostly remains on the precious metals as I have continued to indicate in my previous reports, although I would expect to have to deal with some volatility as the debt ceiling deadline looms ever closer. If you are sitting with profits in precious metals positions, then you are so far sitting pretty, but one must remain alert, and taking partial profits might be advisable here depending on one’s own personal risk tolerance. Otherwise, my advice is to stay away from stocks until things begin to clear up, as the situation remains extremely fluid and still quite dangerous, in my view.

Potentially, the short side could come back into play here, and I would look for something to possibly set up optimally on the short side if the market stages a “decoy rally” on news of a debt ceiling agreement. From an economic standpoint, the debt ceiling is the least of the market’s problems, and so once that is out of the way we will get a better idea of whether all this distribution and lack of breadth is something that has more material, negative consequences for the market going forward. In my report of July 20th I discussed F5 Networks (FFIV) and Aruba Networks (ARUN) as potential short-sale targets, but both of these have come down several percent since then, hence are not in low-risk short-sale areas currently.

My guess is that over the weekend we may find some potential short-sale opportunities but for now I would tread lightly on the short side as a sharp rally could always ensue following a debt ceiling deal, and it is that rally that I would look to short into. That’s what I’m looking for now, and my weekend report will cover whatever I’m seeing in that regard in more detail if there is anything I consider worth monitoring as a short-sale target. For now, this is a short report, and for good reason, as I see little in the way of low-risk opportunities either way currently as we wait to see how things are resolved in the coming days. Sometimes, doing little to nothing is the best course of action, and I see the market, in this moment, to be in just such a predicament. Thus there is no reason to make the market’s predicament your predicament!

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, and GLD, 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.