The Gilmo Report

March 21, 2012

March 21, 2012


The indexes remain in an extended position and are susceptible to some drag-down maneuvers here as some normal shifting about occurs and the market starts to become briefly rotational. This sort of action underneath the surface was somewhat evident in the fact that oils and other “stuff stocks” like big machinery stock Caterpillar, Inc. (CAT) and big diversified operations stock United Technologies (UTX) hit the Dow and the S&P 500 Indexes while the NASDAQ Composite Index holds up relatively better. This is visually depicted on the daily chart of the NASDAQ Composite Index, below, where we see the light gray line marking the index’s relative strength vs. the S&P 500 poking up to new highs. With big stuff stocks coming off, gold firmly entrenched under its 200-day moving average, and bonds trying to bounce after getting whacked last week, we see a move perhaps out of bigger stuff stocks and into growth, including tech, which is what the NASDAQ Composite Index is home to. Tech stocks are certainly leveraged to take advantage of any inflection point the market sees with the potential for “change” in the November election and the clearing away of oppressive economic policies favored by the current Administration and Congress, and the strength in a broad swath of technology names lends crediblity to this theory.

NASDAQ Composite Index Gilmo Report Chart

The internet, now known as the “cloud,” and all of its enabling components in the realm of social-networking, mobile-computing, virtual networking, etc., etc., is still alive and well, and as the secular move to “virtuality” continues to add meaningful value and efficiency for private and public enterprises everywhere, there will be companies that remain both strong drivers and beneficiaries of this shift. This is evident in the action of any number of cloud software and networking plays, such as F5 Networks(FFIV), which remains viable despite testing its 10-day moving average yesterday, and Rackspace Hosting, Inc. (RAX), which moved to an all-time high today. Underneath it all, the strength in “cloud tech” is the company that really originated the “cloud” when two of my Stanford alma mater’s computer operations staffers first cobbled together the campus networking systems that led to the founding of Cisco Systems(CSCO). Not surprisingly, in this age of the cloud and this current market environment we see CSCO having the temerity to flash a pocket pivot buy point off of its 10-day moving average yesterday, as we see in its daily chart below. Not that I would buy CSCO, but I think its action bodes well for the cloud.

Cisco Systems (CSCO) Gilmo Report Chart

The cloud story is also a broad one in and of itself, and the networking technology that a company like CSCO first enabled has provided the platform for a number of second- and third-wave internet applications, not the least of which is social networking. We’ve been following LinkedIn, Inc. (LNKD) closely over the past few weeks since it flashed its big buyable gap-up on February 10th, and the stock finally came through with a buyable gap-up breakout through 95-96 resistance today on huge buying volume, as we see on the daily chart below. LNKD has been percolating for some time as evidenced by the pocket pivot moves in the stock over the past couple of weeks. This is obviously buyable right here on the basis of the gap-up move today, using the intra-day low of 97.10 as your selling guide. Given that LNKD is an inherently squirrely stock, I would give 2-3% porosity below that level. Some overhead resistance is now found at the $100 price level, but I would expect LNKD to be able to get through that soon enough. Everyone wants to short LNKD as an “overvalued” bubble-stock, but Goldman Sachs begged to differ today, putting the stock out as a buy with a $135 price target. Hopefully, based on the numerous prior discussions of LNKD in prior reports, many of you were on board before today’s gap. A good place to add, a good place to enter, in any case.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

LNKD’s social-networking cousin, Zynga, Inc. (ZNGA) put in a buy point today as it moved above its 10-day moving average on a clear pocket pivot volume signature. I show a weekly chart here instead of a daily chart, as I think that the weekly chart helps to distill out a lot of the “noise” in the daily chart and thus provides a clearer picture. One thing to understand here is that ZNGA had a massive pop after breaking out from its original “IPO base” at roughly the $10 price level back at the beginning of February, running up some 40-plus% from that point very quickly. Therefore all of this sloppy action in the base is what the stock likely needs to do as it consolidates a very violent jerk to the upside. In this context, it could be considered “normal.” On the weekly chart we can see that the sideways movement over the past eight weeks, roughly, has enabled the 10-week moving average to catch up to the stock, and this week it found some support off of that key line. I think ZNGA is potentially buyable here on the basis of today’s pocket pivot with the idea that it should hold the 10-week line. ZNGA today announced the buyout of OMGPOP, but its secondary offering still remains to be priced. Today’s action is enough for me to be positive on the stock as long as it holds the 10-week line.

Zynga, Inc. (ZNGA) Gilmo Report Chart

Another “cloudie,” Solarwinds, Inc. (SWI) is percolating higher once again to new highs, as we see on the daily chart below. I’ve only discussed SWI at key points along the way, including a brief note in my report of February 22nd that indicated members should keep an eye out for some sort of pocket pivot buy point to show up as the stock moved sideways around the 38 price area. Aside from that, after a more detailed discussion in my report on February 5th right after the stock had broken out through the 34 price level, roughly, the stock has acted fairly normally as it moved up from the breakout point and then tracked along its 10-day moving average, more or less. SWI does not show a tendency to obey the 10-day line, so one would have to use the 50-day moving average as a selling guide. In any case, today’s pocket pivot buy point off of the 10-day moving average is another buy point in the stock with the idea that it won’t violate the 10-day line on any pullback.

Solarwinds, Inc. (SWI) Gilmo Report Chart

Motion-sensor/detector chip-maker, Invensense, Inc. (INVN), a stock I’ve discussed repeatedly since its pocket pivot buy point back down below $11 in early January got the New Year off to a good start, is resting peacefully after pushing up to new highs last week. The stock saw selling volume dry up yesterday, and today buying interest picked up slightly as the stock found some support off of its 10-day moving average. This creates the potential for another buy point to show up here if the stock puts in some sort of pocket pivot buy point off of the 10-day moving average which has now had enough time to catch up to the stock. In prior reports I have discussed the similarity I see between INVN today and Omnivision Technologies(OVTI) in the early 2000’s. In the manner that OVTI capitalized on the trend towards installing camera chips on smartphones and PCs as cameras became standard equipment, INVN has the potential to capitalize on today’s move towards motion-sensing/detecting capabilities becoming standard equipment in today’s smartphones, tablets, and other devices. Given that INVN has not shown a tendency to obey its 10-day line, it will be interesting to see how it acts here as it meets up with the 10-day.

Invensense, Inc. (INVN) Gilmo Report Chart

More recently I have favored among the bio-techs, mostly by trial and error, Alexion Pharmaceuticals(ALXN), Biogen-Idec(BIIB) and Salix Pharmaceuticals(SLXP), all of which are acting very well lately. When I see a smaller bio-tech, such as Abiomed, Inc. (ABMD), flash a pocket pivot buy point as it did today I am not ready to dump my other bio-techs in order to jump on this one. As the daily chart below shows, it tends to be somewhat sloppy, perhaps even quite sloppy, as it swings back and forth. But so far it has held support at all the right places, briefly dipping below its 50-day moving average two weeks ago without actually violating it before turning back to the upside. For those who are interested in the stock, today’s action provides a clear pocket pivot buy point off of the 10-day moving average.

Abiomed, Inc. (ABMD) Gilmo Report Chart

Oil stocks have fallen out of favor recently along with big stuff stocks, but those who are familiar with oil stocks know that they tend to be a little erratic in their movements. If I want to be in oils here I tend to think that those with exposure to growth in fracking, like Continental Resources, Inc. (CLR). CLR’s daily chart, below, shows the stock’s tendency to rush to the upside and then spend some time frittering sideways as it wears investors out, only to burst to the upside again. After a prolonged move above the 95 level CLR has spent almost the past month drifting back down to its 50-day moving average. Today it found pocket pivot volume support at the 50-day line, which qualifies as a buy point with the idea that the stock should not violate the 50-day. Simple enough, and quite actionable given that often buying into a pullback is the best way to try and enter leading oil stocks. Thus CLR’s pocket pivot off the 50-day line is a good place to enter the stock if you are interested in owning what I consider to be one of the better oil leaders in the market.

Continental Resources, Inc. (CLR) Gilmo Report Chart

As I have in recent reports, I’m sticking to discussions on stocks that I consider actionable in real-time. Members should continue to refer to prior reports for discussions regarding any stocks not mentioned in this report but which remain quite viable, from AAPL to ISRG to GNC and everything in between that I’ve discussed in recent reports as leadership in this current market environment. Otherwise, despite the uneven behavior in the indexes, the market’s action “under the hood” remains quite healthy judging from the action in a number of leaders today, including the buyable gap-up in LNKD, a stock we’ve followed diligently over the past month or so. The market’s uptrend remains intact, so, until further evidence proves otherwise, when you see the shot, take it.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 ALXN, BIIB, GNC, INVN, LNKD, SLXP, SWI, and ZNGA, though positions are subject to change at any time and without notice.

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