The Gilmo Report

June 6, 2012

June 6, 2012


Given that the crowd had seen the breach of “critical” support at the NASDAQ Composite and S&P 500 Indexes’ respective 200-day moving averages on Friday, as I discussed over the weekend, the crowd was set up to be fooled by the market in the short-term. And so the crowd was fooled when the market initially confirmed the alleged “technical sell signal” by heading lower early in Monday’s trading session. But then the two subject indexes reached out and grabbed onto their 200-day lines as they first plummeted past them and then swung back to the upside, regaining this “critical” moving average, as the daily chart of the NASDAQ Composite Index, below, illustrates. Today’s (Wednesday’s) action saw a 2.4% rally in the NASDAQ that came on reasonably higher volume, which of course brings into question whether today was a third-day follow-through given the big upside percentage move. My first reaction to that is to simply focus on stocks, understanding that the market’s downside “threats” had become quite obvious by Friday such that the market was in a position for a rally attempt, but it is still possible to venture onto the long side of this market in measured and calculated fashion as the market is now in fact in position for a fourth-day follow-through. At the very least, I would be treading lightly, if at all, on the short side.

NASDAQ Gilmo Report Stock Chart

If you look at most of our previous short-sale targets such as FFIV, VRX, CF, and most recently (CRM), they are all down a fair bit off their recent highs since I first began discussing them as shorts, and all four of the ones cited here have hit our initial downside price objectives when they cleared their 200-day moving averages on the downside, CRM the most recent to do so. This indicated that near-term profits should have been taken by now. LinkedIn (LNKD), shown below on a daily chart, has not reached its own 200-day moving average and still appears to be floundering about, but has been able to find support just above the 200-day line that coincides with a prior base formation from late-February into early March, as I’ve highlighted on the chart. If I’m going to short LNKD again I’d prefer to do so if a) the market rolls over from here and b) it is, hopefully, trading up higher in its pattern, preferably close to the 50-day moving average up around 103 and change. For now, and this goes for all short-selling target stocks, I’d prefer to be out of the short side and waiting, perhaps, to short into any failed rallies should that occur. In the meantime, let this rally play out, as the long side can easily come back into play here.

LinkedIn (LNKD) Gilmo Report Stock Chart

Gold, as represented by the daily chart of its proxy, the SPDR Gold Shares (ETF), shown below, gapped above the 50-day moving average today right at the open but ran into clear resistance both at the 50-day line and the area of overhead congestion that extends, roughly, from mid-March to late April. GLD closed below the 50-day line on heavy volume, but I don’t necessariy consider this to be weak action given that stocks became ever more popular as the day wore on. Gold has popped quite dramatically and steeply off of its recent lows over the past four days, thus I would expect overhead resistance to remain a factor, at least for now. We are still playing this from my call over a week ago that the GLD could easily be bought around the 151 area given its proximity, at that point, to the lows in its current consolidation (see May 27th report). Now I would use the low of the gap-up day at 155 as a trailing stop on the GLD. Interestingly, silver had a bigger move today than gold as it tries to play catch-up, with the futures pushing up over 3% while gold ended up about 0.2%. Thus, overall the precious metals acted fairly well, despite giving up ground off of their intra-day peaks today. Gold remains a hold.

SPDR Gold Shares (ETF) Gilmo Report Stock Chart

Apple (AAPL) is doing its best to hang in there as it appears to be trying to build a base. Over the weekend it was looking like it could extend to the downside on a third “mini-leg” IF the general market also did likewise, but that did not occur. Instead, the stock pulled down on Monday morning and held support at around the critical 555 level, as we see on the daily chart below, so now my thinking begins to shift to the long side of AAPL, particularly if the general market can build upon this current three-day rally off the Monday lows. You might notice that volume picked up on Monday, and that AAPL is out-performing the NASDAQ as the index made a lower-low Monday morning but AAPL did not, remaining well above its low of over two weeks ago in mid-May. This is constructive action, and I like AAPL here as long as it can hold the 555 level. Ideally, I would like to see the stock put in a pocket pivot buy point by moving above the 50-day moving average, currently running through the 584.87 price level, with volume that is greater 18,598,827 shares. This is the volume level of four days ago on the chart and the highest downside volume in the pattern over what will be the prior ten trading days by tomorrow’s open.


Apple (AAPL) Gilmo Report Stock Chart

Mellanox Technologies (MLNX), one of the top stocks on my buy watch-list, flashed yet another pocket pivot buy point today, adding more constructive action to the base it has been continuing to form throughout the market’s correction over the past couple of months. As we see on the daily chart below, the stock logged a pocket pivot buy point a couple of weeks ago as it came back up above the 10-day moving average to form what has remained the low in the six-week flag pattern the stock has formed since its buyable gap-up move in mid-April. Today’s action, in addition to being a pocket pivot buy point is also a clean base breakout on nearly two times average daily trading volume. With the stock holding up incredibly tightly while the market sold off over the past couple of months and its nice earnings acceleration over the past four quarters (from-7% to 41% to 48% to 112% in the most recent quarter), I like MLNX’s prospects in a continued market rally, should that occur. This is potentially buyable here using a standard 6-7% downside stop for such a typical base breakout.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart Group (WWWW) is another stock, albeit a much smaller one, that has held up well since its own buyable gap-up move in early May, as we see in the daily chart below. Given that it held up well throughout the market’s “April to Mayhem” correction and flashed a pocket pivot within its base last Friday, a day where the NASDAQ Composite was busting through its 200-day moving average, this has to be considered on the long side after today’s clean base-breakout that occurred on over twice average daily trading volume. WWWW offers a relatively simple service, essentially helping small- to medium-sized business build and maintain a presence on the Internet, something that is critical for any business marketing plan these days. Earnings growth is in the healthy double-digits and has been for the past eight quarters with the most recent quarter coming in at 67% on a hard number of 35 cents per share, while sales growth is accelerating at +95% and +132% over the past two quarters. This should hold the 16 price level if it is going to work, but the standard 6-7% stop for a standard base-breakout works as an ultimate downside stop. Now on to my current views on the most controversial stock in the market right now, “Fakebook” (FB). Group (WWWW) Gilmo Report Stock Chart

If ever there was a stock for which market technicians should have created a “Love/Hate” Oscillator-Indicator it has to be Facebook (FB), shown below on a daily chart. The stock has gone from an extremely “over-loved” condition to an extremely “over-hated” condition in the span of thirteen trading days, an amazing metamorphosis when you stop to think about it. Only in the last couple of days has the stock been borrowable for shorting, and my guess is that this is calculated to create short-interest in the stock – short interest that can be run over all the way up if the stock can just get its nose turned to the upside from here. Today’s action was a reasonable attempt to do just that, but so far FB’s post-IPO behavior has engendered numerous reassessments of the stock’s prospects, with some giving the company an “intrinsic value” price of $13 and change and others making strong arguments citing the “mathematical impossibility” of FB ever reaching a $100 billion market-cap again. The crowd loved FB at one time, and now the crowd hates FB. FB was certainly hyped as a type of juggernaut-like phenomenon prior to its IPO, and its IPO has become something of a phenomenon in its own right. After all, such an incredible post-IPO trainwreck as FB is pretty much unprecedented, is it not?

Facebook (FB) Gilmo Report Stock Chart

Well, to answer that question directly, no. This is where a little market history comes in handy, and for that we must refer to the daily chart of eBay (EBAY) from back in September 1998 when the company had the great misfortune of coming public in the latter part of what was the very short but brutal bear market of August-October 1998. EBAY tanked about 50% after coming public during that period, but after an 11-day decline off the intra-day peak of its first day of trading, the stock finally found its feet and then proceeded to turn to the upside, regaining its prior highs a mere ten days later – a double off the lows. Thus we bear witness to the fact that what FB has done is nothing new, EBAY did it as well, but was able to recover rapidly once it turned with the general market. Can FB do that here? I can’t say for sure, but if the general market is able to turn and sustain an upside rally, I would look for FB to participate, particularly since the crowd hates it. And I could care less about all the “air-tight” fundamental arguments regarding the stock’s ridiculous valuation – that is no more than secondary or tertiary to the stock’s price/volume action. Remember that EBAY earned all of a single penny in annual earnings in 1998, 2 cents in 1999, and a whopping nickel in 2000. FB at least earned 15 cents in the most recent quarter.

eBay (EBAY) Gilmo Report Stock Chart

My view is that since the crowd is now almost vehemently convinced that FB represents all that is wrong with the investment world today as little more than the latest incarnation of Wall Street evil and greed, the crowd may be set up to be fooled. Obviously, the parallels to EBAY in 1998 are not all exactly the same, but certainly serve to point out that getting too caught up in “fundamentals” or “valuations” can catch one leaning to the wrong side at the wrong time. FB has only recently “sprouted” a 10-day moving average at the 29.08 level, but a pocket pivot type move above the 10-day line might be a confirming buy signal off the lows as it was for EBAY in 1998. This might be one way to play it, hence is something to watch for.

I might be jumping the gun here by leaning slightly to the long side, but I think this is possible if one focuses simply on the action of stocks showing the best price/volume action. In AAPL’s case, I tend to think it is more or less a proxy for the market, and if it can prove itself on a price/volume basis with more vigor, e.g., by pushing strongly above its 50-day moving average, this would likely bode well for the market. There is potential for the market to roll over again to new lows, of course, but with sentiment so morose and the news so negative, the market appears sold out in the short-term. So I tend to see the short side as played out for now, so we shall see how the situation shapes up by the time I write my report this weekend.

Gil Morales

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

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