The Gilmo Report

March 18, 2012

March 18, 2012


The big NYSE indexes finished their best week so far this year and the NASDAQ its best in a month by trading in a very narrow range and holding very tight on what was quite heavy triple-witching options expiration trading volume this past Friday, as the daily chart of the NASDAQ Composite Index shows below. Leading stocks spent the day spinning their wheels as options expiration ran its course, and the situation has not changed all that much since my last report on Wednesday, March 16th. With the NASDAQ up over 5% from the intra-day lows of two Tuesday’s ago (the gap-down day of nine trading days ago), one would not be surprised to see the market pull back a little here, at least as far as the indexes are concerned.

NASDAQ Composite Index Gilmo Report Chart

With the market cruising to higher highs this week, it is somewhat surprising to see how cautious the crowd is as one might expect rampant ebullience to be the order of the day. The chart of the Investors Intelligence Advisor Sentiment survey, for example, (©2012 shown below, indicates that bullish investment advisors have dropped to 43.6%, the lowest level since before the 2012 market rally began. If the crowd’s enthusiasm is waning here as they perhaps expect a market that has gone “too far, too fast” to pull back, the market may not necessarily oblige.

Investors Intelligence Advisor Sentiment survey Gilmo Report Chart

The market’s strong action is also confirmed by the action in the Dow Jones Transportation Index, which also serves as a barometer for underlying economic conditions. Railroads such as Union Pacific(UNP) were some of the strongest movers on Thursday, and UNP contributed to that action in the “trannies” by posting a huge-volume pocket pivot move up through its 50-day moving average, as we see on the daily chart below.

Union Pacific (UNP) Gilmo Report Chart

The biggest of the big stocks in this market, Apple, Inc. (AAPL), also doesn’t show any signs of slowing down, despite action that has many thinking that the stock is getting to a climactic top. As I’ve written in previous reports quite repeatedly, all one needs to do with AAPL now is to use the Seven-Week Rule in conjunction with the 10-day moving average. When AAPL violates the 10-day line, then that is when profits can probably be taken. In the meantime, while AAPL’s move might look and perhaps feel like a big climax top, things may need to get a bit more climactic before that happens. In the meantime, with AAPL selling at 14 times forwards estimates, it’s going to be hard for any portfolio manager of any mutual fund or pension to justify unloading the stock. The iPad3 is selling well, and the potential for another product catalyst is always out there with the “iTV,” if and when that ever appears, so it is not necessarily a given that AAPL has run out of bullets in terms of the potential to continue capitalizing on its strong brand. And while the action on the AAPL daily chart, below, certainly looks parabolic, I tend to think that it is not climactic, and in this vein it is probably useful to look at a historical example of a “big stock” staging a massive climax top, namely Qualcomm, Inc. (QCOM) in 2000.

Qualcomm, Inc. (QCOM) Gilmo Report Chart

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The daily chart of QCOM from late 1999 and early 2000, below, reveals what a real climax top looks like. In the past couple of months we’ve seen AAPL run from around 420 to 600, a move of 180 points, or somewhere around 40%. From late October 1999 into the very beginning of January 2000, QCOM ran from a split-adjusted 25 to 100 in about two months, a 300% move. The final climactic move occurred at the very end of December 1999 as QCOM bounced off of its 10-day moving average at around 60 and ran to 100 in five days. That was a true climax top, and when you compare AAPL’s action in 2012 to QCOM’s in year-end 1999, it is not, pardon the pun, like comparing “apples to apples.” AAPL’s strong run since gapping up after earnings in January could just be the first leg of an extended run that takes the stock even higher, and I might look for the stock to form some sort of high, tight flag in here as a precursor to further upside. Thus I think it is helpful to study actual historical examples of climax tops to gain a proper perspective on AAPL’s current action in order to avoid pre-judging it and perhaps drawing the wrong conclusion. Again, for now, only a violation of the 10-day moving average is a sell-signal for AAPL.


F5 Networks(FFIV) continues to make higher highs, and it stands on the verge of challenging its old high up around $146 as it cleared the 130 price level on a decent pocket pivot move up and off of the 10-day moving average this past Tuesday. As the daily chart below shows, FFIV had a nice shake-out along with the market two Tuesdays ago, finding support just above its 50-day moving average before regaining the 10-day line on this past Tuesday’s pocket pivot move that was also a breakout from a short flag formation. All of this comes on the heels of January’s buyable gap-up move which FFIV never violated. The big driver of growth for FFIV going forward will be its move into wireless networks and its ability to execute in that space as its core market in corporate data centers matures. The price/volume action in FFIV appears to argue in favor of this forward-looking growth thesis, and the stock is holding in very tightly with volume drying up after this past Tuesday’s pocket pivot/breakout move. The big clouds are all on the move, including CRM and VMW, and FFIV threw its hat into the ring again this week. This is buyable, in my view, with a 6-7% maximum stop.

F5 Networks (FFIV) Gilmo Report Chart

On the hunt for actionable ideas among leading stocks, I note that GNC Holdings, Inc. (GNC), a dietary supplements retailer that offers everything from vitamins to sports nutrition products, is holding up very tightly after a) a buyable gap-up move four days ago and b) a 17-million-share offering that was priced at $33.50-a-share and dumped into the market three days ago, accounting for the big red volume spike in the pattern. This is the second time GNC has broken out of a range on a buyable gap-up in the past month, and I consider this breakout to be quite buyable on the gap-up basis as well as the fact that it is also a standard new-high base breakout. We’ve seen Herbalife, Inc. (HLF) sustain a long-term price move to the upside on earnings growth in the low double-digits, but GNC is showing a three-quarter earnings growth acceleration that has gone from 36% four quarters ago to 56%, 65%, and 106% in sequence over the past three quarters. Sales growth has also accelerated in recent quarters while mutual fund sponsorship has increased from 203 to 272 in the most recently reported period. This is potentially buyable on the basis of the buyable gap-up, with a 32 downside stop.

GNC Holdings, Inc. (GNC) Gilmo Report Chart

Invensense, Inc.‘s(INVN) buyable move off the 50-day moving average has taken the stock into new-high price ground which it held by the close of the week. This gives the weekly chart, below, the look of a new-high base-breakout from a short, four-week double-bottom sort of formation. I’ve seen these types of patterns work when they occur in the midst of an overall upside move, such as Dryships (DRYS) short six-week double-bottom in May/June of 2007, so as long as INVN holds the 18-19 top of this short formation it looks fine to me. Note that the weekly upside volume in the stock over the past two weeks is the highest volume in the pattern and indicates strong institutional accumulation off the 10-week (50-day) moving average. This remains potentially buyable on the basis that it should hold the breakout on any pullback. Given the sharp move off the 10-week line I would not be surprised to see the stock rest here for at least a few days, although I also wouldn’t be surprised to see the stock try and go higher following the big-volume move into new-high price ground.

Invensense, Inc.'s (INVN) Gilmo Report Chart

Looking at a weekly chart of LinkedIn, Inc. (LNKD) gives a better perspective on exactly where the stock is currently. What is quite obvious at first glance is the strong, seven straight weeks up in a row that the stock put in off the lows of this big base before running into logical resistance at around the 95 price area. So far the stock has spent the past four weeks consolidating this strong move, and for all practical purposes is still working on a handle to this big cup formation it has formed since the end of October 2011 into last month. While the stock runs into resistance at the 95 price level it also finds solid support off of the 84 price level on pullbacks within this handle. Volume was up this past week, but the stock still closed up for the week after last week’s pocket pivot buy point which I discussed in my report of two Wednesday’s ago on March 7th. I note that LNKD’s handle on the weekly chart is also forming up as a tiny cup-with-handle itself. Meanwhile, as I predicted last week, LNKD’s Relative Strength rating has pushed above 80, logging in at 83 this past week with a B accumulation rating. The stock is still building its base, however, and as it does, some patience will be required for those who bought shares on the buyable gap-up of five weeks ago and last week’s pocket pivot buy point.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

In my mid-week report of this past Wednesday, March 11th, I discussed Tangoe, Inc. (TNGO) as a new IPO that continues setting up quite constructively despite announcing an 8-million-share secondary offering that has 2.2 million shares being offered by the company while another 5.8 million are being offered by selling shareholders. TNGO is a thin stock, and I am interested in seeing how the stock absorbs this additional supply of stock. The best IPOs, such as INVN, usually find strong support for such secondary offerings as they serve to increase liquidity in the stock, making it more attractive to institutional investors. On the weekly chart, below, TNGO is holding very tight along the 18 price level as it finished up the third week in what so far looks like a constructive little base since its big-volume breakout five weeks ago. For a thinner IPO, TNGO has acted reasonably well as its price action has tightened up considerably as it has marched higher since coming public at $10 in July of last year. In particular, note how tight the stock got just before it broke out through the 16 price level, and its current action displays the same constructive coherency. Again, watch for a buy signal to emerge when the secondary is completed.

Tangoe, Inc. (TNGO) Gilmo Report Chart

Last but not least, I wanted to touch on Intuitive Surgical(ISRG), which I show below on a weekly chart. ISRG is clearly one of the “big stock” leaders of this market, along with other big stocks like CMG, PCLN, MA, and V, for example. I note that ISRG has been inching higher over the past several weeks in a short “ascending chain,” a name I’ve given to weekly patterns where you see a “chain” of blue upside weeks strung together as a stock slowly moves higher. CMG is famous for its ascending chains, such as the one it formed from September to October 2010, and the one it is currently forming as it posted its 13th straight up week in a row in a slowly ascending chain of blue upside weeks, as we see in CMG’s weekly chart which I’ve posted beneath the ISRG chart. Earlier in the year someone was going around emailing that ISRG was identical to Oracle Corp. (ORCL) in 1999, but this is quite obviously not the case since ORCL broke out in October 1999 and just about quadrupled in price in four months. ISRG has gone up about 20% in the past four months, a far cry from ORCL’s move in 1999, but it still is a strong leader in this market with strong potential.

Intuitive Surgical (ISRG) Gilmo Report Chart


If I were going to apply any historical “precedent” to ISRG’s action it might be the fact that it is starting to build a short ascending chain, and this reminds me more of Chipotle Mexican Grill’s(CMG) ascending chains, not ORCL’s base-on-base formation in October 1999 from which it launched and rocketed about 268% higher over the next four months before topping with the market in March of 2000. We can see in the weekly chart of CMG, below, the ascending chain it built in 2010 before moving sharply higher, as well as the ascending chain it is building now. CMG flashed a couple of pocket pivot moves this past week as well, as did ISRG, so both stocks look like they want to go higher to me. CMG has followed its 10-day moving average for 12 weeks now, so CMG is an easy stock to buy here since one would use the 10-day line, around $400, as your downside selling guide. Meanwhile, ISRG has now followed its 10-day moving average for the past seven weeks, so one could also invoke the Seven-Week Rule here and use the 10-day line as a selling guide for ISRG. Both are big stocks with simple and straight-forward risk-management parameters and which have also issued pocket pivots in the past week.

Chipotle Mexican Grill's (CMG) Gilmo Report Chart

Looking over my portfolio, I see nothing wrong with the stocks I own, and looking over my list of leading stocks in this current market uptrend, I don’t see much in the way of deleterious action there either. Sure, some leaders will fall by the wayside as the market continues in any bull market trend, but what we’ve seen in this market is the continuous emergence of new leaders, many of them representing “fresh merchandise” in this market, that step up to take the place of any faltering or fallen leaders. In turn, these provide fresh opportunities to investors well-equipped to identify proper buy points, such as pocket pivots, that provide an early-mover advantage. In the meantime, I don’t think investors should waste their time and capital trying to short stocks, although some situations such as DECK, which I discussed last week, remain weak. As long as the market remains in an uptrend and existing as well as fresher leadership continues to maintain a strong presence in this market environment, your capital is most efficiently deployed on the long side until the market evidence begins to shift and prove otherwise. Members should refer to recent reports for discussion of leading stocks not included in this report, as my thoughts on these remain the same.

Gil Morales

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

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.