The Gilmo Report

March 30, 2011

March 30, 2011

I found it interesting that over the weekend very few seemed to want to believe the NASDAQ Composite Index’s follow-through-day (FTD) on Thursday when it was up over 1.4% on volume that was higher than the previous day. As I mentioned in my weekend report, based on the most current follow-through studies that we have done, the current threshold percentage level that is statistically valid to use is 1.4% on the NASDAQ and 1.3% on the S&P 500. It was interesting to see that in today’s edition of Investor’s Business Daily that they were also prompted to consider the 1.41% move in the NASDAQ last Thursday as a follow-through as well, albeit belatedly, with additional weight given to the rapidly improving action of leading stocks. So if you don’t believe it now, you probably never will. The NASDAQ, shown below on a daily chart, is now seen as somewhat “overbought,” but like the crowd that did not want to believe last week’s FTD, the crowd may now get obsessed with the market’s “overbought condition.” As I wrote over the weekend, investors can take their time and pick their spots carefully, as the FTD alone does not necessitate piling in all at once, and a profitable bull rally phase does not begin and end in one day, much less one week.

NASDAQ Composite Index Gilmo Report Chart

For myself, I am somewhat curious to see where the new “entrepreneurial” leadership will come from in this market. I always like to see any new FTD after a reasonable correction (the most recent generated an 8.3% correction in the NASDAQ, enough for an intermediate correction in my view) come with some newly emerging names that haven’t been played out yet. A lot of the old leadership, such as NFLX and BIDU, which I like and have discussed as buyable in the last 2-3 reports, has been going for a long time, which always brings up the topic of “well, aren’t these late-stage bases?” Maybe they are and maybe they aren’t, but I can tell you that big leaders can often go on climax runs from “late-stage” bases, so assume nothing until you actually see the stock break down and fail. I do find it notable that the Russell 2000 Index is leading here, and we can see that the iShares Russell 2000 Index ETF (IWM) has broken out to new highs ahead of the Russell 2000 Index itself. This would seem to argue that small to mid-cap names are moving to the forefront, and so it is here where I shift some of my attention as I scan the market for new names.

iShares Russell 2000 Index ETF (IWM) Gilmo Report Chart

I find Salesforce.com (CRM) to be a fascinating real-time example of why one must be flexible and always interpreting action in real-time. Sometimes, current action can also change how recent action in a stock’s pattern is interpreted. Over the weekend I noted that broken cloud stocks like F5 Networks (FFIV) and VMware, Inc . (VMW) had both had two “waves” down and might be looking at a third IF the general market rolled over. Of the three big cloud stocks, CRM held up the best as it remained above its 200-day moving average, as we see in its daily chart below. Note however that CRM, unlike FFIV and VMW did in fact have three waves down, and using the Rule of Three, we know that this can often “wash out” the selling in a leading stock. I believe that may have happened over the past couple of days as CRM has blitzed back above its 50-day moving average on strong volume. Over the weekend I was short a small (for me, at least) position in CRM (refer to this weekend’s report for discussion), but have since shifted and gone long the stock here, with the idea that it should roughly hold the 50-day line. If this holds, and the market continues higher, CRM could easily see its old highs once again, in my view.

Salesforce.com (CRM) Gilmo Report Chart

CRM’s move today was brought on by news that it was buying social-media software maker Radian6. As you might notice Facebook is filled with pages set up by companies of all stripes, so the idea of businesses having strong integration with social media is one that has quickly become a new driver in this space, and I think it could provide a nice “hot” theme for any market rally’s leadership matrix. Facebook has put off its IPO until May 2012, so investors “jones-ing” for such an IPO are forced to go into withdrawal. I think this may, however, find its expression elsewhere in the market and so CRM’s buyout of Radian6 is compelling. Another, small- to mid-cap player in social networking software, Tibco Software (TIBX) has recently been showing some strength as it broke out with the FTD last Thursday. TIBX launched a new social business software product, “Tibbr,” in January, which is another cog in the wheel of this new movement among businesses towards social-media integration. TIBX broke out five days ago, pulled back today briefly after announcing earnings yesterday, but found heavy volume support at the prior breakout point, as we see on its daily chart below, before closing up for the day. This is buyable here, as I see it.

Tibco Software (TIBX) Gilmo Report Chart

New products and new services are the lifeblood of any entrepreneurial company, and it is certainly how otherwise large, established companies like Apple, Inc. (AAPL) have continued to re-invent themselves in ways that lead their stocks to have magnificent new upside price runs. I have pointed out in prevous reports that Amazon.com (AMZN) is a “stealth cloud-player” with some interesting potential (see January 5th report). Yesterday AMZN announced its cloud-based music service, “Amazon Cloud Drive,” which functions as a “locker” where one can keep their music and pull it up on any number of devices. Thus you can listen to your music collection from any device, without having to load the music onto the device itself. If you have a number of devices and hate having to move music files around physically, this solves your problem. In my view, if there is a “cloud” anywhere, AMZN is it. Just ask NFLX, which uses Amazon Web Services to store and deliver movies. This latest move looks like a “shakeout-plus-10″ buy point, and today featured a pocket pivot volume signature as the stock gapped back above its 50-day moving average. I would watch this for a pullback to the 50-day moving average just below 176 as being potentially buyable..

Amazon.com (AMZN) Gilmo Report Chart

I like today’s breakout in Endo Pharmaceuticals Holdings (ENDP), shown below on a daily chart. Like Jazz Pharmaceuticals (JAZZ), which I first discussed as a buyable gap-up way back in early November 2010, ENDP has a broad product line and does a lot of things right. ENDP is very good at producing cheaper and effective generic versions of established, widely-used drugs. In early March, the company’s birth-control pill, “Emoquette,” was approved by the FDA. This is a generic version of “Ortho-Cept,” and is made by ENDP’s Qualitest Pharmaceuticals division, which has over 600 drugs in its line of products. The stock emerged from a six-month base today on huge volume, and while I don’t show the weekly chart here, the base has a lot of tight areas within it and thus appears very constructive. You could potentially see a pullback to the breakout point just above 36, but the stock is just about 5% past this level, so technically remains potentially buyable here with the idea that it should hold the 36 price level, roughly. I tend to think that a big breakout after putting in time in a nice long, reasonably tight base is a good thing to see in TIBX.

Endo Pharmaceuticals Holdings (ENDP) Gilmo Report Chart

Molycorp, Inc. (MCP) has acted well since I flagged it a week ago following its big pocket pivot buy point as it jammed back above its 50-day moving average. As we see on the daily chart below MCP has come all the way up the right side of a square-looking cup formation and looks like it needs to build a handle here. Since most handles tend to be 5-10% deep, or about 1/3rd of the prior move up off the lows, I could see the stock pulling back into the yellow highlighted area on the chart. MCP’s base has also been very loose, with very little tight closes on the weekly chart, which I don’t show here. It would be constructive to see MCP build a tight handle here that looks more constructive than the rest of the base. MCP picked up a big buy recommendation from J.P. Morgan yesterday, which raised its price target on the stock from $66 to $74. MCP seems to be gaining favor with institutional investors, as Pegasus Partners also reported that it raised its stake in the company from 14.4% to 21.2%. Currently I would see any constructive pullback into the 55-56 area as buyable.

Molycorp, Inc. (MCP) Gilmo Report Chart

Silver continues its winning ways, as the iShares Silver Trust (SLV) and other silver ETFs like the AGQ made all-time closing highs today. With the dollar’s downtrend likely to continue, as I discussed in my report of this past weekend, I think commodities of all stripes are playable. However, as with silver and gold, I prefer to operate according to my commodities-buying mantra of “buy it when it’s quiet.” The Barclays iPath Soft Commodities ETN (JJS), which corresponds to a basket of three big consumer-oriented commodities, cotton, coffee, and sugar, is one such vehicle that is pulling back in what I see as a constructive “buy it when it’s quiet” situation. As we see on the daily chart, the JJS has pulled back to its 65-day exponential moving average, interestingly enough, and is picking up some volume support here. Note the huge-volume buying exactly two weeks ago which was pocket pivot type supporting action. As well, the JJS has had two more pocket pivot volume signatures as it has retested its low of March 15th. For me, this is an easy trade. Consider buying it here and using a violation of the 65-day e.m.a. as your selling guide.

Barclays iPath Soft Commodities ETN (JJS), Gilmo Report Chart

While it is always nice to see stocks like NFLX, BIDU, LULU, CMG, ORCL, RAX, and PCLN acting well in conjunction with last week’s market follow-through day, we may see some interesting action in “comeback kids” like AMZN or CRM. Meanwhile, the emergence of some newer, interesting, and relevant names like TIBX or ENDP provides a “refreshing” new element to this nascent market rally. Members should also review my last four reports for discussions of other names I’ve mentioned like NFLX or BIDU which remain in force. When I’m thinking about buying stocks, I am always interested in themes, so the social-networking angle is one that I think might gain some traction. In this regard, names like TIBX and CRM are quite interesting. In the same manner that cloud-computing became the big theme in September with stocks like RVBD and RAX and CAVM and APKT all coming out of the gate, social-networking may serve a similar purpose in a potential new market rally phase, and so I would be looking for more players to emerge on the scene as I screen the market for buyable names. For now we have ourselves a new market rally until further evidence proves otherwise, and so we take it one stock at a time.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

Editor’s note: Gil Morales will appear on Fox Business News on Friday, April 1 at 9:45 a.m. ET/6:45 a.m. PT.

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, CRM, NFLX, JJS, and TIBX, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.