The Gilmo Report

July 9, 2008

July 9, 2011

Tuesday’s one-day wonder rally was likely caused by panicking shorts scrambling to cover as the “oversold” condition that got everyone thinking “rally” quickly dissipated into selling again today. Now THAT’s a weak market – not only could it not even muster a second day of a rally today, but it got slaughtered, despite such a supposedly “extreme” oversold condition. And it is true that short-interest increased sharply in June. According to one report, NYSE short-selling is up 55% this year, and in June increased by 17.5%, 10.1% of which occurred in the second half of June. NASDAQ short-selling increased 8% in June. These are significant increases in short-selling – I just hope it’s not Goldman Sachs and the Fed selling short! But the way the market acts in the face of such heavy short-selling certainly gives one cause to at least wonder. And wonder it is, as one-day wonder rallies have been the market’s hallmark as of late, at least on the NASDAQ, as the daily chart of the NASDAQ Index below shows:

And the NASDAQ is supposed to be the strongest-acting index given that it has not as of yet broken down through the January and March lows in the same manner as the Dow Jones Index and the S&P 500 Index. However, that may change soon enough.

Everybody has their favorite “oversold-overbought” indicator, and so I have mine, although I tend to think of it as more of a “washout” indicator. Specifically, what I look at is the percentage of stocks above their 150-day moving average on a simple line chart with a full stochastic along the bottom of the chart, like so:

I like using this chart as a measure of how “washed out” the market it is and how much fear is in the market based on the number of stocks busting down through their 150-day moving averages. I use the 150-day moving average because it is situated between the 50-day and 200-day moving averages, and once investors start throwing stocks out the window, so to speak, most stocks start heading for their 200-day moving averages after showing initial weakness by breaking down through their 50-day moving averages. When this line starts to accelerate to the downside, sliding straight downward, the full stochastic reaches a low and rallies can often ensue from these conditions because the “fear factor” is increasing as more and more stocks start breaking their 150-day moving averages. Using an indicator like this that is based on a shorter moving average, such as the 40-day moving average, gives “oversold” signals too soon, and is better suited to determining “oversold” conditions in a bull market, not a bear market. One thing to notice about the percentage of NASDAQ stocks above their 150-day moving average, according to the chart shown above, is that we have not yet reached the extreme lows in this percentage that were seen in January and March of this year. Either this means there are some hidden pockets of strength in the NASDAQ market or that we are in a market that could have further downside before it is completely washed out. Often this chart gets way down there before a market bottom is found.

 

I would note the chart of the percentage of NYSE stocks above their 150-day moving average below, looks pretty much the same, except that the NYSE percentage is closer to the lows seen in March and January than the NASDAQ:

 

The full stochastic on this line chart gives a sense of how “panicky” the market gets in the short-term, and I often refer to this, along with several other factors, to get a sense if the market might be getting close to a bounce. Notice that the stochastic reaches an extreme reading below 20 when the percentage starts to decline very rapidly, indicating that investors are dumping stocks in force as more and more break their 150-day moving averages. Yesterday it was starting to show that, and we did get a bounce in the major market indexes yesterday. However, that bounce was short-lived, and the fact that these percentages of stocks still holding above their 150-day moving averages on BOTH the NYSE and the NASDAQ are still a fair bit above their lows seen in January and March indicates that the possibility of this market going lower is still very much alive, and today’s action certainly helps to confirm this.

This market may be getting ugly enough so that you can just throw darts and find stocks to short that will end up going down in this market, but, as always, the easiest way “to throw a dart” is just to short the Index ETFs, or go long the Ultrashort Index ETFs. But, as with short positions in stocks, be nimble, and, as I indicated “remain a moving target” covering at logical cover points such as areas of prior support or major moving averages, and then re-shorting at logical areas of resistance. For example, First Solar Ltd. (FSLR), a stock I guess I love to hate, ran right into its 50-day moving average today, as the daily chart below shows, at which point it was at an optimal short point this morning. Hopefully, readers have been paying attention and using these rallies into logical short points to put some short positions out, if that is something one wants to do.

, First Solar Ltd. (FSLR) Gilmo Report Chart

Intuitive Surgical (ISRG) rallied right up into prior resistance at around the 270 price level as well as its 20-day moving average and failed, as the daily chart below shows, right at a logical short-sale point:

Intuitive Surgical (ISRG) Gilmo Report Chart

Apple Computer (AAPL) was a similar situation to FSLR in that it rallied right into its 50-day moving average today, a logical short-sale point for AAPL, as the daily chart below shows:

Apple Computer (AAPL) Gilmo Report Chart

Here’s a rundown on the action in stocks we’ve discussed in previous reports as potential short sales:

APOL – consider shorting here – looks to be at top of right shoulder in possible head and shoulders formation. Use 5% stop.

BIDU – rallied right into 50-day moving average, a logical short-sale point.

CELG – should have been covered when it held above 50-day moving average a couple of weeks go.

DRYS – rallied right into 80 price area and near 200-day moving average, a logical short-sale area.

GOOG – consider shorting here with 5% stop.

GS – rallied right into 180 price area three days ago, a logical short-sale area.

LVS – no sign of a bottom yet.

LEH – no sign of a bottom yet.

MET – consider shorting here with 5% stop.

MON – consider shorting here with 5% stop.

JWN – was shortable on last rally up into resistance at around the 33 area.

ONXX – covered on move back above 50-day moving average.

PRU – consider shorting here with 5% stop.

SPWR – consider shorting here with 5% stop.

TRA – consider shorting here with stop at 48.

TIF – looks okay if it can be shorted in a rally in here, such as today.

I’ve given examples of and discussed repeatedly in past reports the types of short-sale set-ups you should be looking for. So hopefully, armed with this knowledge, some of you are able to find other set-ups to play on your own. Remember, stay nimble and remain a moving target.

Maybe someone calls 9-1-1 for some assistance here and the market finally stages a meaningful bounce. But the action is decidedly negative, and we are still left looking for a bottom. At least through today, the short side of the market is still the right side.

Gil Morales

Chairman

Gil Morales & Company, LLC

At the time of this writing, Gil Morales & Company, LLC held a position in FSLR and ISRG. Positions mentioned are subject to change at any time.

Gil Morales & Company, LLC (“GMC”), 1925 Century Park East, Suite 1050, Los Angeles, California. 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. ©2008 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.