The Gilmo Report

March 13, 2011

March 13, 2011

    
 

By any measure the market’s action over the past two days has been fairly ugly as the NASDAQ Composite Index, shown below on a daily chart, blew through its 50-day moving average by gapping down on Thursday with volume up very sharply. This is now the ninth distribution day for that index in the past eight weeks. So far, 2011 has not necessarily been a friendly year for stock investors, despite getting off to a reasonably good start in January and making new highs in February as leading stocks continued to show their muscle. While there are leading stocks holding up fairly well despite the level of distribution in the general indexes, that number is clearly diminishing, and today’s strong-looking stock can quickly morph into tomorrow’s casualty. Case in point: JDS Uniphase (JDSU) which was blasting out of a flag formation a week ago only to close the week 26% off of its recent price peaks. While some may become dismayed by such developments, for me it is simply the message of the market telling you what you need to know, and that is that risk is increasing in this market. Play accordingly!

NASDAQ Composite Index Gilmo Report Chart

Despite the ugly sell-off over the past couple of weeks the NASDAQ remains a scant 4% off of its recent peak. Since the September 1, 2010 follow-through day (FTD) the NASDAQ has corrected no more than 5.1%, but this week saw the first breach of the 50-day moving average, and it came on a massive gap-down. Believe it or not, the NASDAQ is currently finding support at its 65-day exponential moving average, which coincides with the late February lows and late January lows, so it is a logical area for the index to try and find support. While Friday’s upside action came on very light volume, in fact the lowest daily trade in the NASDAQ since the Christmas holidays, it could still carry up into the 50-day moving average at around 2746, at least. Notice also on the S&P 500 daily chart below that this index is showing less distribution than the NASDAQ and on Thursday and Friday undercut its late-February lows and managed to finish the week above its 50-day moving average. The S&P 500 is currently 2% off of its recent February price peak, so for all the ugly action on your quote screens so far the market hasn’t done much more than show declines typical of a short-term correction. That doesn’t mean it can’t get worse, but it also implies that if you want to get full-on bearish about this market you could still be premature. QE2 still lurks, and despite what Fed heads might say, you cannot assume they won’t resort to a QE3 at some point.

S&P 500 Gilmo Report Chart

And so the madness continues as the Obama Administration displays its state of denial by offering up $1.6 trillion budget deficits without batting an eye or even showing the slightest glint of understanding just how unsustainable such borrowing-and-spending is. Thus the dollar remains in a downtrend and began rolling over again on Friday. In my view, precious metals, particularly silver, will continue to go higher, and for now this is my best and cleanest-acting position. The daily chart of the ProShares Ultra Silver (AGQ) two-times leveraged ETF, shows how powerful this upside thrust is. After finding support at the 10-day moving average the AGQ moved lower on Friday morning only to reverse back above the 10-day line and close up on the day. This is obviously a very bullish upside reversal, but you may also notice that this is also a continuation pocket pivot buy point as the AGQ moved back above the 10-day line on upside volume that was higher than any down-volume day in the pattern over the prior 10 trading days. If you bought silver on the breakout last month this is potentially an add-point for perhaps ¼ to ½ more of your original position.

ProShares Ultra Silver (AGQ) Gilmo Report Chart

In recent reports I have reviewed a small handful of stocks that I see setting up as some initial short-sale set-up target stocks, but as I’ve repeatedly said, keep in mind that the short-side of any correction can take some time to develop. While I noted in my report of this past Wednesday that NFLX could be setting up as a late-stage failed-base type of situation, I pointed out quite clearly that I expected this first breach of the 50-day line to find support at 3 possible points, and it turned out that NFLX pulled down to “fill the gap” of January 27th before bouncing on Thursday – a logical area for it to bounce from. Friday saw weak volume as the stock ran up into its 50-day moving average, so it may have to test Thursday’s lows again, but this is still early. Also note that Thursday’s volume qualified as a pocket pivot volume signature, although it was not a true pocket pivot buy point. So the jury is still out here as this develops. Note that NFLX has not broken down through the prior base as well, so it found support where it should for now, and so while it is possible to test a tactical short position here, you may not get much more downside than a retest of Thursday’s lows.

NFLX Gilmo Report Chart

While I have my small handful of potential short-sale set-ups to monitor as they develop here, I am also mindful of maintaining an even psychology here by not leaning too far one way or the other. Hence, if the market is able to recover once again and jet off to higher highs, I want to have my buy watchlist in place, and this means keeping an eye on those stocks that have weathered recent selling in the general market very well. On Thursday, as the NASDAQ gapped down 1.84%, Baidu, Inc. (BIDU) held its ground and, believe it or not, flashed a pocket pivot buy point, as we see on the daily chart below. It then followed up with another pocket pivot buy point on Friday as it cleared this short price range it has been in over the past three weeks. You could actually buy this using Friday’s low at 119.25 as a downside guide for a stop, since if the NASDAQ does keep bouncing up into its 50-day moving average, BIDU could conceivably move to new highs. The stock has remained above its buyable gap-up move of February 1st and its 50-day moving average, so it is one of the stronger “big stock” leaders currently.

Baidu, Inc. (BIDU) Gilmo Report Chart

The strength in BIDU was also seen in the other three bigger Chinese internets, including Sina Corp. (SINA), Sohu.com (SOHU) (which also flashed a pocket pivot buy point on Friday), and Netease.com (NTES), shown below on a daily chart. Since breaking out in mid-February, NTES has held up very well, and over the past two weeks of sharp selling in the NASDAQ has managed to remain above its 10-day moving average. In fact, it has done well enough to actually flash a pocket pivot buy point on Thursday of this past week, as I’ve annotated on the chart below. It is fascinating to me to see this kind of strength in the face of weak general market action, particularly when it is occurring in a group of closely-related stocks, in this case Chinese internets. These stocks all trade on their home exchanges in Chinese currency, so with a declining dollar vs. a strong Chinese Yuan or Renminbi, are they telling us something in this regard? While I don’t claim to be an expert in currency exchange, if the Renminbi rises and the dollar falls, then it would seem that these stocks would have no choice but to rise in dollar terms.

Netease.com (NTES) Gilmo Report Chart

Right now my long screens are focused on looking for stocks that have continued to hold up in the face of recent market weakness, and among the biggest of the “big stocks” on the NASDAQ, Priceline.com (PCLN) is another one holding up very well. PCLN gapped out of a base-on-base formation in late February after announcing earnings, and this gap-up occurred on extremely heavy volume, as you can easily see on the daily chart below. PCLN’s earnings were up 71% in the most recent quarter, an acceleration from last quarter’s 54% earnings growth. If you saw the stock push up off of its 20-day moving average and up through the 10-day on volume that exceeds 1,795,300 shares, higher than the biggest down-volume day over the prior 10 days which occurred on March 1st, you would have a pocket pivot buy point coming on top of the buyable gap-up at the end of February. This despite the fact that, technically, PCLN is buyable on the basis that it is still within 5% of its recent breakout through the 443-444 price level, as well as very near to the low of its recent buyable gap-up at the 453 level.

Priceline.com (PCLN) Gilmo Report Chart

In my view Green Mountain Coffee Roasters (GMCR) has won the “coffee wars” by virtue of the “strategic manufacturing, marketing, distribution, and sales relationship” it has entered into with “Big Coffee,” as I like to refer to Starbucks, Inc. (SBUX). This news led to a massive buyable gap-up, in my view, on Thursday, a day when the NASDAQ was down 1.84%. GMCR had 7.2 days of short interest, about 32.6 million shares sold short, going into the announcement, so Thursday’s move was probably accompanied by 32.6 million “silent screams” from shorts scrambling to cover. Pundits now seem to “know” that the move in GMCR is over and everything is “richly priced in,” but unless all 32.6 million shares of GMCR were covered on Thursday’s whopping 42,277,000 shares traded, the shorts may still be in trouble here. Objectively, I believe GMCR could go higher on this gap-up move, with the idea that the 55 intra-day low of Thursday’s gap-up trading range functions as a solid downside guide for a stop. Do not underestimate the power of this move, especially if you are one of the unlucky shorts in GMCR.

Green Mountain Coffee Roasters (GMCR) Gilmo Report Chart

 

Gap-ups are some of the most powerful price moves to buy, and often some of the easiest given that the intra-day low of the gap-up day provides a ready reference stop-loss point. Sometimes, however, a bit of “porosity,” as Dr. K likes to say, can occur where the stock dips below the gap-up day’s intra-day low, as we see in Whole Foods Market’s (WFMI) daily chart. BIDU, which I discussed further above, also dipped below its gap-up day’s low on an intra-day basis, but closed above that level, whereas we can see WFMI has actually been affected by the recent market weakness which has served to send the stock below the 58.49 intra-day low of its gap-up day on February 10th. WFMI closed above that low on Friday at 58.89, so it is for now managing to hold the gap-up low despite displaying some porosity. WFMI has held up during recent market weakness, so I would keep an eye out for a potential pocket pivot buy point here, should that occur, if it were to move up through the 59 price level on volume that exceeds the 2,110,000 shares traded on March 1st, the highest-volume down-day in the pattern over the prior 10 days.

Whole Foods Market's (WFMI) Gilmo Report Chart

Interestingly, pockets of strength that I see in the the face of recent market weakness seem to be well-represented by retailers like PCLN, GMCR, WFMI and Under Armour, Inc. (UA), shown below on a daily chart. You may not know this but UA uses silver in its garments because silver has anti-bacterial properties and it is bacteria that produces odor. Hence the silver, which is combined with chitosan and is trade-marked as “ArmourBlock™,” in the garments they sell cuts down on the proverbial “B.O.” Maybe that’s why UA’s stock has held up very well recently and on Friday flashed a clear pocket pivot buy point. Instead of hording silver, one could horde Under Armour underwear! The earnings and sales growth is still strong in UA, and it is notable that the stock on Wednesday and Thursday of this past week did not come under any heavy-volume selling pressure at all as it merely drifted down to its 20-day moving average on below-average trade before finding support on Friday at the 20-day line. If you like to buy pocket pivots, this is one, with the idea that it should hold the 20-day moving average.

Under Armour, Inc. (UA) Gilmo Report Chart

When the NASDAQ Composite Index and the Russell 2000 indexes sell off hard like they did on Thursday, smaller tech stocks usually get smacked even harder. I watched Cavium Networks (CAVM) get blistered this past week, and it was one stock I mentioned on Fox Business News during my appearance on Monday of this past week. The other small tech stock I discussed was Fortinet, Inc. (FTNT), a stock I’ve mentioned frequently in recent reports. On Thursday I kept checking FTNT’s price to see if it was breaking down but the stock did not give up much ground. Instead it has held up above its 10-day moving average over the past week as the general market got hit. Nobody is really interested in selling FTNT, apparently, and so the stock continues to hold up in a fairly well-defined uptrend channel. FTNT had a massive increase in the number of mutual funds owning the stock at 365 in the most recent quarter compared to the prior reported quarter’s number of 277, which is significant. FTNT also had a pocket pivot buy point seven days ago on the daily chart, below, and is holding right above that. If this can hold Friday’s intra-day low at 41.69, it will remain a strong buy candidate if the market can find its feet in here.

Fortinet, Inc. (FTNT) Gilmo Report Chart

In hindsight, I would have to say the best approach to this market has been to just be long silver, either via the “plain vanilla” ETF, the iShares Silver Trust ETF (SLV) or the more exciting two-times leveraged AGQ, which has been the only long position I’ve held since buying it on the breakout through the 160 level, which coincided with the $31.50-an-ounce level in physical silver futures, currently at $35.89 as I write this weekend. In my view, silver will go a lot higher, particularly as investors again begin to see it as “money.” Silver in recent decades has been seen primarily as an industrial metal, with gold taking the front seat as an “alternative currency.” Historically, when gold and silver were both considered “money” at one time, the ratio between the two more or less stood at 16 to 1. Today the ratio is 40.75, and if the perception of silver as money equivalent to gold continues, then the price of silver could very well double from here.

Meanwhile, the market remains in a short-term correction as well as in the second day of a rally attempt. From my perspective, despite the deterioration in a number of leading stocks, there is still enough out there to fuel another move to higher highs, although we could see leadership narrow in the process. As well, we could be looking at the formation of a more significant top presaging a deeper (many think 10% at least, but that may be the “crowd” at work again) correction, but for now that is still in the early stages. My view is that investors should be open to either outcome, and to take positions only with the idea of keeping their cards “close to the vest,” as it were. While some point to the possibility of the earthquake and a possible nuclear reactor meltdown in Japan as a negative for the markets, I do not believe that is clear at all, and would simply focus on the price/volume action of the indexes and individual stocks.

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 and NFLX, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.