The Gilmo Report

July 31, 2013

July 31, 2013

The Fed came out with their monthly policy statement today and apparently didn’t try to say anything that would rock the market’s boat. Continued bond purchases in the amount of $40 billion per month are set to continue, and the market’s initial reaction was to the upside as all of the major indexes streaked to new highs. By the close, however, the NYSE-based indexes had reversed with both the S&P 500 and the Dow closing in the red. The NASDAQ Composite Index, shown below on a daily chart, came in with what I call a “red day” where it closes below the level at which it opened the trading day even though it did close up .27% on the day. This stalling action on heavier volume, combined with yesterday’s churning action on heavier volume, doesn’t look all that constructive on an index basis. But the uneven action in the indexes is likely symptomatic of the action in leading stocks, some of which is very positive and some of which is not so positive. Such is the tone of “earnings roulette” season, but if you are in the right stocks at the right time, it is possible to make progress. If the index action is flashing a yellow flag, then it is simply a matter of watching your stocks first.




Three-D Systems (DDD) bolted out of the gate on Monday as it broke out on heavy volume but missed earnings on Tuesday morning, sending it back down into its base. I would have liked to have seen some support come into the stock today along the 10-day line, so for now I’m cautious on DDD as its future remains unclear, at least on a technical basis.




Facebook (FB) has continued higher following last week’s buyable gap-up move, but resistance at the 38 level at which it came public last May of 2012 is logical in the near-term and I would not be surprised to see the stock move sideways here for a bit. I would view pullbacks to the 36 or better as buyable.




Invensense (INVN) finally sprung to life this morning after beating earnings by a penny after-hours yesterday. One didn’t even have to own the stock going into the number as it was quite buyable this morning just above the 16 level as it flashed a huge-volume breakout to new highs. This is extended here, but pullbacks below 17 are buyable, in my view.




Over the weekend I mentioned Canadian Solar (CSIQ) in passing as a solar stock I liked right where it was as of last Friday’s close. The stock bumped around the 14 level to start the week out, but today flashed a pocket pivot buy point as it emerged from a point up and off of its 10-day moving average on a breakout from a short flag. This is extended here, but buyable on pullbacks to 14.50, in my view.




Taking a further tour of the #1 ranked solar group, we can see that First Solar (FSLR) was able to regain its 50-day moving average after violating it last week. Volume was light, so the action was not buyable, and my guess is the stock moves sideways from here going into its earnings announcement on August 6th.




Sunpower (SPWR) announced earnings after the close, but is trading down about 2 percent or so after-hours as I write. SPWR flashed a continuation pocket pivot yesterday, but like DDD’s action on Monday, this was not a harbinger of a big earnings beat, proving that earnings roulette is exactly that: a gamble.




SolarCity (SCTY) has been able to hold above its 50-day moving average as it tracks tight sideways along the confluence of its 10-day, 20-day, and 50-day moving averages. Like FSLR, this probably continues to track sideways going into its earnings announcement which is scheduled for August 7th.




I like the action in Under Armour (UA) following its buyable gap-up of last week when it came in with 167% earnings growth. UA is forming a tight little flag following the BGU as volume dries up, which is constructive. The 65.35 low of the gap-up day provides a tight stop.




The $60,000 question these days is whether one should hold LinkedIn (LNKD) into earnings tomorrow. I don’t have a crystal ball, but I’m not planning on holding the stock into earnings. If you are, then it is a simple matter of deciding how big of a position you want to own if a worst case scenario unfolds, nothing more, nothing less. Meanwhile, the stock is just tracking along its 10-day moving average as it awaits tomorrow’s number.




Gigamon (GIMO) took flight following earnings on Monday as it cleared to all-time highs yesterday. I tend to like to buy this stock on weakness and sell into strength, so for me a pullback to the 33 level would get me interested in the stock again. It still trades very thinly, and I would like to see it “thicken up” a bit with respect to average trading volume.




Trulia (TRLA), which we first picked up in late June following its “bottom-fishing” pocket pivot buy point, had a bit of a wild day today before rallying up and off of its 20-day moving average going into today’s earnings announcement. After-hours the stock is trading up to the 40.50 level on strong earnings, setting up a potential buyable gap-up move tomorrow, so this is something to watch for tomorrow morning at the open.




Valeant Pharmaceuticals (VRX) has been working on a handle to its cup formation after coming up and off of its 10-day moving average in late June. Today VRX flashed a pocket pivot buy point off the 10-day line ahead of its earnings announcement on August 7th. If you own it closer to the 10-day line, it is possible to add a small amount here ahead of earnings.




I do not like the “ants” breakout failure on the part of (AMZN) as in my view it should have continued higher following last Friday’s big-volume continuation pocket pivot and “ants” breakout. Generally, when these fail to move higher I sell right away, but I think at the very least the stock should hold the 20-day line at 299 on this pullback if it is to survive.




Another example of a quick failure is Ambarella (AMBA), which had pulled right back to its prior pocket pivot breakout point at the 17.65 level. My rule when buying a pullback like this is that it should hold the original breakout point, and if it doesn’t it is summarily punted. The stock violated its 50-day moving average today, which seals its fate as far as I’m concerned.




Over the weekend I talked about Apple’s (AAPL) “bottom-fishing” pocket pivot gap-up last week, and the stock is so far proving out that hypothesis as it continues to move higher this week. As it moves higher it runs into resistance along the way, but I think it has a decent chance of getting up to its 200-day moving average at 477.87.




After-hours today as I write I’m noticing that Yelp (YELP) is gapping higher after announcing a loss of a penny vs. estimates of a loss of 5 cents, while U.S. Silica Holdings (SLCA) is gapping lower after missing on earnings. Earnings roulette season continues! The best way to avoid the stress of earnings roulette is to not own a stock going into earnings. Otherwise, risk is always present.


My favorite way to play in most cases, as I’ve written frequently in recent reports, is to simply wait for a buyable gap-up move to occur after earnings. FB is a good example, and situations where you see a stock, say like UA or Lumber Liquidators (LL), for example, gap up and then track tight sideways for a few days with volume drying up are quite buyable and can lead to further upside. In some cases, as with INVN, the stock remains within buyable range following earnings as it moves very little after announcing earnings in after-hours trade, and you can simply move in right at the open the next day.


The indexes currently strike me as looking a little wobbly here, but even with the past two days of churning and stalling action on the index charts, the market is still right up against the highs and it would take a further and more concerted breakdown to put the rally into any meaningful jeopardy. The Fed as of yet has not announced any specifics with regards to actual tapering of QE, and there is much talk of this occurring in September. I suppose that is a possibility, and it will be interesting to see how the market reacts once such an announcement take place. In the meantime it is enough to simply watch your stocks. Stay tuned.


Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in INVN and UA, though positions are subject to change at any time and without notice.

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