The Gilmo Report

March 7, 2012

March 7, 2012


So far the market is 2% off of its highs in what is starting to look like at least a short-term correction that might extend to 3-5% off the peak, but of course it is impossible to know that for sure. When I look at the NASDAQ Composite Index daily chart, below, the action looks as if it is presaging further weakness, despite today’s snap-back bounce. So far off the peak over the last six trading days we’ve seen a high-volume reversal off the peak followed by yesterday’s big-volume gap-down, and this was followed today by a lower-volume gap-up that essentially served to fill yesterday’s gap-down, as I’ve highlighted in yellow on the chart. Given that there is allegedly a lot of money that is “underinvested” in this market it seems logical that a sharp pullback like yesterday’s would be followed by a bounce today as the weakness attracts buyers, but whether this is a dead cat bounce or something stronger remains to be seen. At the very least, with the market bouncing up to simply fill yesterday’s downside gap, it does not necessarily paint a picture of strength. The big, allegedly market-moving news tomorrow will be the final go or no-go on the Greek debt deal, but whether this is all that troubled the markets Tuesday remains to be seen. If you own a strong stock and it continues to act well, hang in there, but be ready to take profits if the stock begins to break down.

NASDAQ Composite Index Gilmo Report Chart

A very good example of staying with a stock while it is acting well, but acting swiftly to unload it if the signs are there is Viropharma(VPHM), shown below on a daily chart. VPHM had been issuing pocket pivot buy points all along its 10-day moving average, and at one point it crossed my mind that a stock flashing so many of these buy points which are allegedly signs of strength should be following it up with further, authoritative upside. Yet VPHM continued to edge along its 10-day moving average before finally giving way when the market got slammed on Tuesday, breaking down and violating its 10-day moving average for the first time since breaking out through the $20 price level in late October 2011. VPHM also closed below its 50-day moving average as yesterday’s attempt to hold at this key moving average failed miserably today. Having been long this stock, I did not wait for a second day as the slashing move through the 10-day line was enough to send me out of the stock above the $30 price level, thus eking out a small profit. Nevertheless, VPHM represents a leader that is stumbling badly, at least for now, and it remains to be seen whether the stock gets back on its feet over time.

Viropharma (VPHM) Gilmo Report Chart

Apple, Inc.(AAPL) finally moved below its 10-day moving average this week for the first time since breaking out in late January, as we see on its daily chart, below. Today’s iPad3 product announcement didn’t do much to spark a rally, but that is to be expected since the stock’s move since late January has been discounting the good news that comes in the form of another “new” product from AAPL. AAPL is clinging tenaciously to its 10-day moving average, and it appears that it is primed to at least consolidate here for a while as it digests what has become a parabolic move to new highs. If you still own it there is not necessarily any reason to sell it. I’ve owned the stock myself, but am now out of it waiting for a new buy point to show up. AAPL certainly has the potential to go higher, but I think it needs to spend some time building some sort of proper launch pad from these lofty levels and particularly after it has exhibited some parabolic price behavior. Thus I don’t have to engage in any arguments over whether the stock has topped or whether it is going to 700, as almost every analyst on the planet seems to think – I just watch and wait for the next buy point while I refrain from any pre-judgements as I let the stock “be all that it can be.” Or less…or more.

Apple, Inc.(AAPL) Gilmo Report Chart

I wrote in my report of this past weekend, March 4th, that it would be interesting to see how motion-sensor chip company Invensense, Inc. (INVN) acted once its $110 million secondary offering, working out to 6.5 million shares, was completed. This morning INVN priced those 6.5 million shares at 14.85, and apparently those were not enough shares to satisfy the market’s hunger for the stock. With the help of that 6.5 million share secondary being added to today’s volume total, INVN did what I thought it might do, and that was issue a pocket pivot buy point off of the 50-day moving average that also carried above the 10-day moving average, as we see in INVN’s daily chart below. This was the only thing I saw that was actionable today, and while a continued correction might cause a slight pullback towards the 50-day line, I would see that as also potentially buyable based on the strength of the stock in an uncertain tape both yesterday and today. As I’ve written several times before on the stock, its technology makes for a compelling story as motion-sensor technology takes hold in a variety of consumer technology products.

Invensense, Inc. (INVN) Gilmo Report Chart is trying to hold around the $14 price level, which is what I wanted to see it do as discussed in my report of this past weekend. One thing I note here on the daily chart is that the high-volume breakout of five trading days ago came after a low-volume rally up through the 10-day moving average, a “wedging” rally. Thus the breakout coming on the heels of a wedging rally was flawed, and the pullback below the 14 price level to the 10-day moving average serves to “correct” the wedge. Note also that today’s pullback came on light selling volume, so it is not as if sellers are all scurrying to blow out the stock.. I own the stock, but would love to see it come up off the 10-day moving average with some pocket pivot volume in order to confirm my “correct the wedge” theory here. The stock would need to trade up off the 10-day line on volume that exceeds 12,500,355 shares, the total downside volume traded three days ago on Monday which is the highest down-volume day in the pattern over the prior ten days. So, in my view, the action in ZNGA is not abnormal, and I suppose what I like about ZNGA is how everyone hates the stock and their business. After all, anyone can make games, just like anyone can stream video, which is what the bears said about NFLX all the way up throughout 2010 and 2011. (ZNGA) Gilmo Report Chart

When the market acts as it has this week, and it looks like a 3-5% correction might be in the offing, I tend to revert to seeing the market as a “market of stocks” instead of a stock market. The good stocks act well, and so I like those, but the bad stocks…well, they can become shortable. Deckers Outdoor Corp. (DECK) colored by world with some nice profits today as it busted the neckline of a head and shoulders topping pattern, as I’ve outlined on the daily chart below. Watching the stock rally up to the 10-day line last week, I was hoping to discuss the stock in today’s report, but it jumped the gun on me and began fallng apart yesterday as it gapped down. Because it could not recover from that gap-down yesterday, I shorted the stock, and it produced a nice 9% gain in one day, which I considered enough of a reason to take a quick profit, although I might expect the stock to continue lower into the 63 price area, more or less. Given how badly the stock was hammered today, any kind of reflex bounce up to 70 or higher would be a possible opportunity to come back and short the stock again.

Deckers Outdoor Corp. (DECK) Gilmo Report Chart

Short-sale set-ups are far and few between currently, so it is not as if a lot of individual stocks are indicating that the market is in trouble underneath the hood. Mostly what is going on is that leading stocks are correcting and building what may simply become new basing patterns. DECK was one short-sale set-up that worked today, and I’m still looking at as another candidate in this regard. AMZN has been locked in a short range over the past three weeks or so, and rallied 1.48% today on news that its February comp sales were up 60%, stalling just above its 50-day moving average, which is not uncommon for a shortable rally in a short-sale target stock. Frankly, if that were such good news the stock should have rallied at least 3-5%, so I consider the reaction somewhat tepid when it came on lighter than average volume and volume that was lighter than yesterday’s. This looks like a good place to take a stand on the short side of AMZN, as it is a bad stock that has the potential to act badly based on the weakness of its chart pattern currenlty. The only thing that would change my mind would be a strong pocket pivot move up and off of the 50-day line. In the meantime, I put a 3-5% stop on this. (AMZN) Gilmo Report Chart

In terms of being aggressive on the long side, the market’s action in the first half of this week leads me to at least take a pause, looking to sift out the more attractive situations as any correction runs its course. Meanwhile, I see no harm in coming after ripe short-sale targets as I did on DECK, if the set-up is right and the stock confirms my initial thesis by breaking down. The market rally could come apart at any time, of course, and this is the constant risk that stock investors and traders face all the time. For now the market seems to be showing a bit of a mixed bag underneath the weak action in the indexes themselves, and so it is a matter of whether weakness begins to set in among most leaders. For now we see some names like VPHM fall by the way side, but for the most part I am willing to let the weak names go and remain somewhat flexible here as we see whether the market is going to get into further trouble or whether it is simply resting before it catches its second wind. If it does, I might look for “new merchandise” situations like ZNGA, INVN, and even LNKD as my “go-to” stocks. Watching LNKD, for example, pull back here towards the 82.10 intra-day low on the gap-up of February 10th, becomes ever more tantalizing if it does so on light volume. Gilmo members should go back and review the past 4-5 reports to get a sense of stocks we’ve discussed in previous reports and which are acting reasonably well as they pull back into potentially buyable areas. However, as I indicated earlier, I didn’t see much outside of INVN that was compellingly actionable today, but that may change in the coming days, so stay tuned.

Gil Morales

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

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