The Gilmo Report

March 26, 2014

March 26, 2014

Once again leading stocks have told you what you need to be doing long before the indexes did. As I wrote in my March1 6th report, the NASDAQ Composite Index “appears ready to test its 50-day moving average at 4203.55,” and that prognostication has proven to be spot on this week as the index blew through its 50-day moving average on a move to lower lows as selling volume came in much heavier for the day. The clue that the market was in trouble came in the form of two gap-up opens on Monday and Tuesday that were sold into as the index churned around the 50-day moving average. The S&P 500 Index, not shown, is still holding above its 50-day moving average, as is the Dow Jones Industrials Index, also not shown. But as I’ve discussed in recent reports, the relative strength in these indexes is due to a shift out of high P/E highflyers and into safer, more stable, big-cap names as institutions move to a defensive posture within their portfolios. Meanwhile, today we saw another gap-up open that reversed much more sharply than the stalling type of reversals we saw in the indexes on Monday and Tuesday.




What is fascinating to me is just how badly leading stocks like Tesla Motors (TSLA), Facebook (FB), Netflix (NFLX), Workday (WDAY), Tableau Software (DATA), FireEye (FEYE), Palo Alto Networks (PANW), Yelp (YELP), and numerous other high-flying, high P/E stocks have been decimated with nary a flicker of a bounce in their brutal downtrends. Most of these stocks have in fact just recently violated their 50-day moving averages over the past few trading days. I keep thinking that as we approach the end of the quarter we could see some quarter-end window dressing and some sort of violent bounce given how brutally “oversold” leading stocks have become, but that hasn’t happened just yet. The bottom line is that this is a market to be shorting, not looking to go long. With the S&P 500 still a little over 1% above its 50-day moving average after today’s close at 1852.56, it still has some room on the downside, and we’ll see if tomorrow brings us some sort of gap-down open. For now, and as I wrote over the weekend, there is absolutely no reason to be long this market.

I advised selling the SPDR Gold Shares (GLD) last Wednesday based on 1) the GLD’s gap-down off the peak and through the 10-day moving average, and 2) the idea that a continued sell-off in stocks would drag everything else with it, including commodities like gold. I’ve also discussed the fact that the uptrend could still be considered intact if the GLD were able to at least hold its 200-day moving average, but as we can see on the daily chart of the GLD, below, it closed just below the 200-day line today with selling volume a little bit above-average. Bottom line: GLD was a sell last Wednesday per my report of that day, and failure to hold the 200-day moving average on this pullback is a final signal to simply steer clear of gold for now.




There is no need to discuss the long side of this market since there is nothing that I would advise anyone to buy at the present time. Sure, we might get some sharp upside bounces in some of these leading stocks that have been decimated over the past 2-3 weeks, but those would be short-term “I’m feeling lucky today” types of trades. As many of these leading stocks have shown, even trying to buy pullbacks to the 50-day moving average would only result in some quick losses as the stocks violate this key moving average. With the long side out of the picture, we have focused our attention to the short side, and the past three days have seen our short-sale targets come down with the market. I have to admit, however, that things, at least on a stock-by-stock basis, have gotten so ugly that one could practically just throw darts and come up with short-sales that would have worked well over the past few days. 

Cree (CREE) was discussed over the weekend as a short-sale target, and on Monday it briefly skittered up towards its 50-day moving average without quite getting there, as we can see on the daily chart below. At that point the stock was shortable and it has now come off over the past three days, breaking to a lower low today as it undercuts the 58.06 low from the second week of March. My thinking here is that the stock is headed for the early February low at 55.76. So I’m using that as my short-term downside price objective, although I believe the stock can get down to 52 in the event of some very weak general market action over the next few days.




LinkedIn (LNKD) broke through the 185.03 low of mid-February on Monday before staging a very small “undercut & rally” move back to the upside that appears to find resistance at the 189-190 price area, as I’ve highlighted on the daily chart below. I’m currently using that level more or less as a trailing stop on any LNKD short position, but my ultimate downside price objective is 156 based on a point & figure chart price target. That would also dovetail somewhat with the 160.02 low from last June. While that may seem like a “long way down there,” the reality is that this is only about 12-13% lower from today’s close at 185.93. LNKD’s relative strength line continues to lead the stock to lower lows as its RS rating drops to a very dismal 10. My view is that one should already be short the stock from last week’s rallies into the 50-day moving average, as I last discussed in my report of last Wednesday. But I would also consider rallies up into the 189-190 price area as potentially shortable using a tight stop at the 10-day moving average, currently at 194.57. Right now LNKD appears to be forming a short bear flag en route to lower lows. If the general market starts to break wide open, that could easily occur, and we’ll just have to see how things pan out over the next few days.




Pandora Media (P) is making a beeline for its prior buyable gap-up move in early January as we can see on the daily chart below. This level also roughly coincides with the rising 200-day moving average and the descending neckline of a head and shoulders formation that it appears to be tracing out as it rolls over here on heavy selling volume. I first discussed this in my report of last Wednesday based on the inverted bear flag the stock formed after gapping down off the peak in early March. Currently my downside target is the price zone between 27.69, the bottom of the early January gap-up “rising window,” and 26.54, where the 200-day moving average currently is. I had thought earlier in the week that P might undercut that 30.93 low from early February and bounce in an attempt to form another right shoulder. But since right shoulders in the chart patterns of individual stocks that are topping are generally influenced by the movement of the general market, further general market weakness today took the stock to a lower low, bringing these lower downside price targets into play. For now I’m using the 30.93 early February low as a trailing stop.




Stratasys (SSYS) was discussed over the weekend as a new short-sale target based on the overall weakness evident in the 3-D printing group of stocks. As we can see on the daily chart, below, SSYS provided short-sellers with a perfect short-sale opportunity as it rallied up into its neckline on Monday morning before reversing and closing below its 200-day moving average. Another day edging up into the 200-day moving average was followed by today’s move to lower lows. I would use the 200-day moving average as a trailing stop with a downside price objective at 90.




Probably the most fascinating aspect of this current market environment is that despite the fact that leading stocks have been slashed to pieces most market pundits and commentators remain somewhat complacent given that the S&P 500 is less than 2% off of its recent peak and the fact that they somehow view the movement into low-P/E, big-cap names as “constructive” rotation. As I’ve written in previous reports over the past couple of weeks, this rotation strikes me as defensive in nature, and was another clue that the market was starting to get into trouble. Also, there is a pattern of “alibied” sell-offs, wherein a news event is used as an “alibi” to sell stocks initially. Once that news event is mitigated in some manner, it is then used as an alibi to rally stocks. This rally is then sold into by smart money. As I discussed in detail over the weekend, the pattern starts to become quite obvious. In the last 2-3 weeks the Ukrainian Crisis as well as Fed Chair Janet Yellen’s alleged “gaffe” have provided news events around which alibied sell-offs and rallies can be manufactured. Thus I continue to focus on the short side of this market until further notice. 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 positions in CREE, LNKD and P, though positions are subject to change at any time and without notice.

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