The Gilmo Report

June 9, 2013

June 9, 2013

Once the S&P 500 and the Dow Jones Industrials Indexes reached their 50-day moving averages on Thursday, the market was in a logical position to bounce after two solid weeks of trending down off of its recent peak. This was one of two scenarios I discussed in my report of this past Wednesday, the other one being a break through the 50-day by the S&P 500 and the Dow that occurred as the NASDAQ Composite Index moved down to its 50-day moving average. The market acted according to what I consider to be the stronger of the two scenarios as the NASDAQ remains well above its 50-day line while the S&P 500, shown below on a daily chart, bounced off of its 50-day line and support at the top of its April consolidation just below the 1600 level. While the two-day bounce saw volume taper off on Friday, one cannot assume anything since we can see that the S&P 500’s mid-April sell-off began its rebound with the second day looking “running out of gas” as it occurred on lighter volume. In fact, many market rebounds during the Age of QE have started off on light volume, lulling bears into a dangerous sense of complacency. The key will be watching what the market does over the next several days and maintaining an open mind.

 

 GR060913-SPX

 

On the daily chart of the NASDAQ Composite Index, below, we can see how the index held well above its 50-day moving average, thus it becomes, de facto, the stronger of the major market indexes. Note that the NASDAQ remains within a two-week downtrend channel, so a breakout through the top of the channel might be considered somewhat bullish. Friday’s jobs number showed an increase of 175,000 jobs vs. expectations of 159,000 but with the unemployment rate rising from 7.5% to 7.6%. This was seen as a “Goldilocks” scenario where the news wasn’t so good as to spell the unequivocal end to QE by the Fed but it wasn’t so bad as to depict an economy spiraling further to the downside. This reminds me of July 1996 where the market was so sensitive to economic strength as a sign that the Fed would begin raising interest rates that a very strong jobs number in early July 1996 tanked the market. Given the two-day bounce, what I’m looking to do right now is observe where in the market any pockets of strength or constructive action might be occurring so that if the market does regain its “rally mojo” I will have a strong sense of where I want to go on the long side. Let’s start out with a few of these observations.

 

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Big-stock NASDAQ leader Google (GOOG) actually found support Friday at its 10-week moving average on its weekly chart (not shown), and this shows up as a pocket pivot coming up through the10-day moving average on the daily chart, below. This might confirm the pullback to the 10-week line on the weekly chart as an add point.

 

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Amazon.com (AMZN) was another big-stock NASDAQ name on the move Friday as it popped on a trendline breakout from a choppy four-month base. This would be potentially buyable with the idea that the stock should hold above the trendline breakout as I’ve drawn it on the daily chart below.

 

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One of the strongest of the bio-techs, Regeneron Pharmaceuticals (REGN) had a pocket pivot on Thursday that was similar to GOOG’s Friday pocket pivot coming after a short downtrend, but in this case REGN hit the pocket pivot as it bounced off the 50-day moving average. This is constructive, but I would not assume that the stock is going to jet back to all-time highs right away – some backing-and-filling might be needed.

 

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Big-stock financial name Goldman Sachs (GS) broke out to new highs on a pocket pivot buy point coming off of the 10-day moving average on Friday, and I noted that Morgan Stanley (MS), not shown, also had a continuation pocket pivot on the same day for a little group strength demo.

 

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Angie’s List (ANGI) came up off the lows of what is now a six-week base on a nice pocket pivot move Friday. ANGI is an allegedly “ridiculously overvalued” online directory service that everyone loves to hate given the fact that the stock has about 9.6 million shares of short interest vs. a float of 15 million. I would think that if this is buyable and viable it should hold above the 24 level on any pullback from here.

 

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Virgin Media (VMED) had a buyable gap-up way back in early February, and since then has drifted higher before meeting up with its 50-day moving average this past week and then flashing a pocket pivot buy point on Friday. Another stock potentially buyable with the idea it should hold above the trendline breakout.

 

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Vertex Pharmaceuticals (VRTX) presented at a bio-tech conference on Friday, and this had the effect of creating a pocket pivot buy point in the stock. We can see that the stock tried to break out of its current seven-week flag formation last week on a move that just barely missed being a pocket pivot. The stock did come back with a bona fide pocket pivot on Friday that is potentially buyable using the 79 area as a quick downside stop.

 

GR060913-VRTX

 

Myriad Genetics (MYGN) gapped up in early May and spent the latter half of the month pulling all the way in to its 20-day moving average, which it never violated. It then pulled off a pocket pivot buy point on Friday as it popped back up through its 10-day moving average. This coincided with a bit of a shakeout on Wednesday, setting up a “shakeout-plus-three” type of situation.

 

 

 

Acadia Pharmaceuticals (ACAD) has ignored much of the market craziness since I discussed it as being buyable at the 12 price level in my report of May 12th and it ignored a volatile market on Thursday when it staged a buyable gap-up move. The stock is extended from here, but given that I’ve discussed this stock before, and if one is familiar with the rules for handling a buyable gap-up as discussed in “Trade Like an O’Neil Disciple,” then one could have bought the stock closer to 15 on Thursday if one had the presence of mind to recognize it on that day despite the wild intra-day general market action.

 

GR060913-ACAD

 

Cree (CREE) flashed a pocket pivot buy point on Friday as it came up through its 10-day moving average. CREE has been trying to hold above its 20-day moving average where it has found support over the past couple of months. I still like this story very much, and the way it holds up during a market correction is very constructive.

 

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Fleetcor Technologies (FLT) just barely held above its 10-day moving average on Thursday for a pocket pivot buy point along the lows of a short two-week range. This is another established leader that acted well during the past two weeks’ market correction.

 

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Bonanza Creek Energy (BCEI) missed by one day a “bottom-fishing” pocket pivot buy point on Friday as it came up and off of its 50-day moving average on increased, albeit just-below-average, volume. Had Friday’s move occurred one day later, it would have qualified as a pocket pivot given that the volume on May 23rd, the highest down-volume day over the prior 10 days, would no longer be in the 10-day count, and so Friday’s volume would have been higher than any down-volume day in the pattern over the prior 10 days. Nevertheless, on its weekly chart the stock is holding up within a three-week handle to a 12-week cup-with-handle base. Keep this on your buy watch list in the event of a stronger breakout type move or pocket pivot.

 

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U.S. Silica Holdings (SLCA), which I have considered a cousin-stock to BCEI as part of the overall fracking theme. As we know very well by now SLCA provides the silica sand used in the fracking process, and while earnings growth has slowed to 0% in the most recent quarter it is expected to pick up over the next few quarters (see May 5th report). I’ve been following this for a while as it has continued to work on what is now a 13-week base because I believe that longer-term the fracking theme is still viable. What is notable in the weekly chart of SLCA, below, are the four supporting weeks I see along the lows of this current base. SLCA again found support after pricing another secondary offering on Thursday. 12 million shares were priced at $19.60 a share and the stock then moved higher to finish the week at 21.54, about 10% higher than the offering price. The real question is whether the company is done with secondary offerings and will now allow it a chance to break out of this current formation. Thus I keep looking for a pocket pivot move through the 50-day moving average or even a low-base breakout through the 24 price level.

 

GR060913-SLCA

 

The real leader in the fracking sand area is actually High-Crush Partners, L.P. (HCLP), a cousin-stock to both SLCA and BCEI. But while SLCA has been stuck along the lows of a 13-week base, HCLP gapped out of an eight-month cup-with-handle formation two weeks ago, as we see on its weekly chart below. HCLP came public at $17 last August, and it should probably be considered the leading fracking sand producer given its strong technical action and forward fundamentals. While earnings growth was negative this past quarter it is projected to show annual earnings of $2.29 in 2013, $2.75 in 2014, and $3.04 in 2015. HCLP produces premium mono-crystalline sand used in oil extraction which is mostly supplied to two main customers, Halliburton (HAL) and Weatherford International (WFT). The stock is very thin, and the main reason I am discussing it here is because I believe it shows that there is strength to be found within the overall fracking theme in the market, and perhaps this bodes well for BCEI and SLCA going forward.

 

GR060913-HCLP

 

If you’re feeling dangerously daring, then sizzling social-media platform YY, Inc. ADS (YY) might be just what you’re looking for. After a sharp move following its early-May breakout, YY has now flashed its first secondary buy point in the form of a continuation pocket pivot off the 10-day line on Friday. YY has posted some strong earnings and sales numbers over recent quarters with earnings growth of 80% and 156% and sales growth of 139% and 134%. It is also expected to grow earnings at 61% and 66% ($0.92 and $1.53-per-share, respectively) this year and in 2014, so fundamentally is not as much of an earnings “slouch” as other social-media stock, but it is a Chinese stock, which always carries its own special risks. As well, mutual fund ownership consists of a paltry 13 funds which is generally not what you want to see. However, if you feel up to a potential “heater trade” in a thinner stock, then maybe this is a playable idea for you.

 

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Infoblox (BLOX) is trying to move tight sideways here as it moves back and forth in about an 8.5% range after staging a buyable gap-up after announcing earnings about three weeks ago. You can see that BLOX tried to break out six weeks ago, but volume was lacking and the stock came right back in to its 40-week moving average. This set-up a “re-breakout” two weeks ago from a deep eight-week cup-with-handle base that is so far holding the roughly $24 breakout point. BLOX is the leader in Automated Network Control, and has benefited from partnerships with Cisco Systems, VMware, Microsoft, and Riverbed Technology, all of which recommend BLOX’s products to their customers. The last two quarters are showing nice acceleration in earnings and sales growth with earnings up 120% in the most recent quarter on a sales increase of 34%. Institutional sponsorship has also continued, as the number of mutual funds owning the stock has grown from 178 to 182 to 217 to 245 over the past four quarters. Pullbacks to the 24 price level, at least under 25, appear buyable to me.

 

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Way back in 1995 I made considerable money in a company called C-Cube Microsystems (CUBE), a maker of video-compression chips. A company that almost strikes me as a modern-day reincarnation of CUBE is Ambarella (AMBA), a maker of low-power high-quality HD Video chips and chipsets used for high-performance image processing in cameras and broadcasting. AMBA is at the cutting edge of its industry, but it remains a relatively thin “teenage” stock trading at $16.53 as of Friday’s close with average daily volume of 928,000 shares. I get a lot of questions about the stock, and while the story is very strong, the stock’s action is a bit uneven and volatile. It’s hard to tell whether the two big-volume weeks on the chart are supporting weeks or churning weeks. The stock has been able to find support at the 10-week line on pullbacks, but even a good earnings announcement this past week wasn’t enough to propel the stock higher. Thus my best guess is that this needs more time to develop and “grow up.”

 

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I’ve been looking at LinkedIn (LNKD) as a short-sale target in recent reports, and over the past three days the stock has wedged up into the 170-171 resistance area that I have seen develop on the daily chart (not shown). However, the weekly chart shows that the prior two weeks to the downside have occurred with weekly volume drying up. This led to an undercut of the lows of the stock’s prior flag from which it broke out in early April. Now we see upside weekly volume pick up this past week with the stock closing near the peak of its weekly range. Thus while LNKD did get hit with a huge weekly volume spike off the 200 peak six weeks ago after announcing earnings, the selling interest in the stock appears to be diminishing. Thus it may try and rally further up in its pattern, perhaps up to the 50-day moving average around 177.63 as of Friday’s close. There is still a possibility that LNKD may simply be working on a new base, so tread carefully here if you are trying to stalk this on the short side.

 

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Michael Kors (KORS) did not break down below its 20-day moving average this past week, so the jury is still out on whether this is a late-stage, failed-base, short-sale set-up or just a pullback following a volatile base breakout. I need to see it bust the 20-day line to short it as a potential late-stage failed-base because otherwise all it is doing is pulling back after a prior breakout that could in fact be bought with the idea that the stock should continue to hold the 20-day line.

 

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Apple (AAPL) must have read my report this past Wednesday as it pulled right down to its 50-day moving average on Thursday and by Friday morning was moving just below the 50-day line before it found some buyers and headed back to the upside for the day. There is still nothing conclusive about AAPL’s action until it breaks the 50-day line on volume or issues some kind of pocket pivot buy point off of the 50-day line. Again, no reason for a bullish or bearish bias, just watch the price/volume action.

 

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I still have a certain fascination with Tesla Motors (TSLA) which, as we can see on the weekly chart below, has closed up for 12 weeks in a row now, with this past week coming in as the stock’s highest weekly close. I thought I would discuss the stock given that Barron’s is doing their usual mindless valuation analysis hatchet-job this weekend with a negative article on the stock.

 

Notice the series of tight, ascending closes over the past four weeks, sort of an odd-looking “ascending chain“ as I like to call it. This past week and two weeks ago the stock closed at the peak of its range on above-average weekly volume. Some of last week’s selling off the peak might have been sell-the-news type of stuff combined with stubborn shorts still trying to hit the stock on the basis of it being “wildly and ridiculously” overvalued. I think some people just hate electric cars, and I have to admit that there has been a lot to hate about electric cars for many years.

 

But I think one has to have an open mind and not allow any pre-conceived biases to creep in here, including trying to assign some sort of rigid and “proper” valuation to the stock. Many, if not most, of the biggest leading stocks in market history began their big price moves with triple-digit P/E ratios, so TSLA is no “outlier” in this regard.

 

GR060913-TSLA Weekly

 

 

On TSLA’s daily chart, below, we can see that the stock held its 20-day moving average on a pullback earlier in the week and over the past four days has shown contrarian strength as it has moved up each day despite the market’s volatile action over the past week. According to the Barron’s article, TSLA stock is now easy to borrow and has a relatively cheap borrow rate, and this is considered a “negative” by the writer. This is a fairly silly conclusion in my view, since if this implies that there are no more shorts in the stock then why hasn’t it simply collapsed if it is nothing more than a short squeeze? On the contrary, the stock rallied two out of the past four days on above-average volume. It will be interesting to see how or even if the stock reacts to an article from a financial publication that I consider to be about as worthless as they come. The article makes no new points about the stock outside of the typical static and rather mindless valuation analysis that shorts originally utilized in their quest to get their heads ripped off as the stock rallied sharply during the merry month of May.

 

It has been my view that TSLA needs to take some time to digest some of its recent and very heady gains, and so I would look for any pullbacks in the stock to simply be part of this process. The auto manufacturing group has been strong lately, and it has not been led just by TSLA as Ford Motor (F) recently broke out to 52-week highs and even lowly General Motors (GM) has been on the rise as it continued its two-month uptrend with a continuation pocket pivot on Friday.

 

GR060913-TSLA Daily

 

After a two-week correction followed by a two-day bounce the market has helped to weed out the garbage and give us something of a glimpse as to where the stronger names exists in this market, and that has been the point of this report. While we’ve seen some success on the downside with short-sale targets like Facebook (FB), Salesforce.com (CRM), and to a lesser extent LNKD, the NASDAQ and S&P 500 Indexes are all of 1% and 2%, respectively, off of their recent highs.

 

If I am to believe that the market has the ability to recover from this current short-term correction, then I need to see some rotation and strength in newer areas and names, and we are seeing some of this currently. I’m not going to take a rigid bullish or bearish posture here as I would be ready to move more aggressively to the long side if the market can stabilize and turn here, albeit perhaps in some newer situations.

 

Meanwhile, I have a small handful of short ideas (emphasis on “small”), including a name like CF Industries (CF) which might be setting up in the right shoulder of an H&S formation and potentially shortable rallies in FB and CRM (see my June 5th report of this past Wednesday) which might serve us well if the market rolls over again. But as far as I’m concerned, given the position of the indexes currently, we’re still in the early stages of any truly ripe short-sale environment developing. 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 TSLA, though positions are subject to change at any time and without notice.

 

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