The Gilmo Report

March 20, 2013

March 20, 2013

While events in Cyprus are seen as insignificant given that island nation’s economy is tiny relative to the larger European Union members (its economy is smaller than that of the city of Shreveport, Louisiana), it may provide us with a glimpse into our future. The idea of confiscating bank savings is quite Orwellian, but perhaps not too far-fetched given the state of affairs the global financial system finds itself in these days. Meanwhile, the Fed did its best today to signal a steady course in the form of continued monthly QE morphine injections that will allegedly help the economy “recover.” This initially sent the markets rallying, but it wasn’t enough to spark a massive rally as the indexes backed off from their highs by the close while trading very light volume. After-hours as I write, the futures have continued the downward slide following earnings from Oracle Corp. (ORCL) after-hours. The market seems to have a sluggish feel to it, both on the upside and the downside. For instance, Monday’s volume on the “Cypriot Cell-Off” was the lightest of the year for the NASDAQ Composite Index, shown below, and today’s volume came in close to that on an up day. The short story is that the market continues to show relatively light volume on the up days while at the same time showing little willingness to sell off hard on the down days.




While the market tries to figure out what it wants to do, the action in individual stocks is somewhat uneven. On the positive side, Semtech Corp. (SMTC), which I first discussed in my report of March 10th after its buyable gap-up, moved up and off of its 10-day moving average on a pocket pivot volume signature on Tuesday.




Santarus (SNTS), which we’ve been following since its buyable gap-up of March 5th, flashed what can be interpreted as a continuation pocket pivot buy point on Monday given that Friday’s volume was exaggerated by triple-witching options expiration and the stock closed at the peak of the range. This strikes me more as accumulation on the pullback rather than outright selling, hence it is constructive enough to view as an “up” day.




Mortgage-servicing stocks continue to come undone, as the “big-stock” leader in the group, Ocwen Financial (OCN), had a big blow-out to the downside yesterday, violating its 50-day moving average on huge selling volume.




Nationstar Mortgage Holdings (NSM), below, also violated its 50-day moving average on huge volume. The group had started to weaken several days ago, but Walter Investment Management’s (WAC) huge breakdown yesterday following its earnings announcement took the entire group down hard. At this point I’m looking at OCN and NSM as potential late-stage failed-base short-sale set-ups on any rallies up to their 50-day moving averages, currently at 37.75 for NSM and 39.12 for OCN.




While the mortgage-servicers got pummeled, homebuilders have been moving in the opposite direction as the two related groups decouple. Last Wednesday, in my March 13th report I pointed out the subtle pocket pivot in Pulte Group (PHM), below, and the stock has since moved higher as it makes a run for its 52-week highs.




Perhaps PHM will try and do something similar to its homebuilder sibling, Lennar Corp. (LEN), below, which moved back up towards its highs before breaking today on very big volume. D.R. Horton (DHI), which I also discussed a week ago on March 13th but do not show here on a chart, also moved higher, although on volume that was only 8% above-average.




Celgene (CELG) has paused long enough over the past few days to allow its 10-day moving average to catch up to its price, as we see below on the daily chart. This sets up the possibility of a continuation pocket pivot buy point along the 10-day line, so this is something to watch for.




Netflix (NFLX) was unable to make good on last Wednesday’s pocket pivot gap-up move, but it has pulled back constructively to the green 22-day exponential moving average on the daily chart, below, as volume has dried up sharply. This may be setting up a move up and off of the 22-day line, so watch for this. Notice how NFLX has held along the 22-day line on prior pullbacks in March, so if one were to buy the stock here, then the 22-day line would become a reference point for a quick stop.




I talked about Facebook (FB) as a short sale last week, and the stock has moved lower since then, as we can see on its daily chart, below. Believe it or not, FB’s lifespan only recently reached the 200-day mark, and so its 200-day moving average has finally appeared on the daily chart. This looks like a logical place for the stock to try and bounce, perhaps setting up another shortable rally.




Michael Kors (KORS) looks like a late-stage failed-base type of short-sale set-up here as it wedges up into its 50-day line on weak volume, stalling out into the close today. The stock broke down through the 50-day line last week, and bounced back above the line once before breaking down again. The 50-day line at 57.36 is the reference point for an upside stop…




As I discussed over the weekend in my March 17th report, Apple (AAPL) looked primed for a run at its 50-day moving average, which it did on Monday as the general market sold off on the Cyprus news. The stock looks to be consolidating this move so far, despite finding resistance at the 50-day line. This sets up the possibility of a bottom-fishing pocket pivot buy point if the stock can clear the 50-day line on volume that is higher than yesterday’s 18,813,300 shares, the highest down-volume in the pattern over the prior 10 trading days.




A member asked me to comment on (PCLN), and all I have to say is that the stock closed below its 50-day moving average yesterday, and if it moves below the low of yesterday it is a sell, end of story.




As the market continues to hold up near its highs, volume remains unconvincing, and so I remain wary of a pullback. But with very few stocks showing actionable buy points in the current environment it is simply a matter of not making a move on the long side unless you are presented with a bona fide, actionable buy point in a stock you have an interest in owning.


The market still has a bit of a sluggish, mushy feel to it, and there is always potential for danger. As we have seen with the mortgage-servicing stocks, last month’s darlings can quickly become this week’s nightmares if one lingers too long and does not heed the warning signs. In the case of stocks like NSM and OCN, this came in the form of prior weakness and failed breakout attempts before this week’s carnage and 50-day moving average violations ensued. Meanwhile, I’m not averse to having a couple of short-sale ideas in my back pocket in case the market does start to peel off to the downside. I pawned my crystal ball off a while ago, and so I cannot predict where we go from here, or whether we go nowhere as the market goes through a longer period of consolidation. Distribution days in the NASDAQ and the S&P 500 are building up again, so keep one eye on your stocks, and one eye on your stops. That is all.


Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Managing Director & Principal, MoKa Investors, LLC
Managing Director & 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 CELG, KORS, and SNTS, though positions are subject to change at any time and without notice.

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