The Gilmo Report

May 1, 2011

May 1, 2011

The market made it eight days up in a row since bottoming two Mondays ago when Standard & Poor’s changed its U.S. credit-watch to “negative,” as we can see in the daily candlestick chart of the NASDAQ Composite Index, below. Wednesday saw a 10-year high for the “NAZ,” and on Friday it exceeded its October 2007 high, which was where the index was before the brutal bear market that ended in March 2009 began. As I see it, the NASDAQ broke out of a cup-with-hande type of formation six days ago, although some wish to label this an “inverted head and shoulders.” What you call it is a matter of what you want to label it, and labels have no predictive value in and of themselves – it is the breakout through resistance in the 2815-2840 area that is significant and which carries more weight than what one chooses to label a chart pattern. Given the sharp move to the upside over the past two weeks, I would not be surprised to see the market pullback for a day or two, and Friday’s action made little progress on very heavy volume – some slight churning, but nothing to get excited about within the overall context of the market’s move so far.

NASDAQ Composite Index Gilmo Report Chart

What is disconcerting to me, and it should be to anyone who buys food, clothing, energy and iPad2’s with U.S. dollars is that the dollar’s descent is accelerating again. The past two weeks have seen the steepest decline in the dollar since January, as we see in the daily chart of the U.S. Dollar Index, below. The downside reacceleration evident in the chart makes me wonder whether we are seeing the early stages of a run on the dollar as it makes a move towards the 2008 low at around 70.70. If this is what Treasury Secretary Geithner and Fed Chairman Bernanke consider to be evidence of a “strong dollar policy,” then I would not want to see what evidence of a weak dollar policy looks like. In my view the dollar is reaching a critical point, and while further downside in the dollar may eventually create problems for stocks, it is likely that precious metals and other commodities will move sharply higher. As the government dithers in denial, the markets may eventually force the outcome, and it may not be pretty.

U.S. Dollar Index Gilmo Report Chart

As I wrote last weekend, silver looked poised for a climax top type of move this past week, and on Monday it looked like some sort of top had been put in. It is not uncommon for climax tops to result in one more push to the highs, and indeed silver, as represented by the iShares Silver Trust (SLV) daily chart below, did make a run for Monday’s high on Thursday. Silver futures did not exceed the high made on Monday, but both the SLV and 2-times leveraged silver ETF, the AGQ, did exceed their own Monday highs. The SLV formed a “Dragonfly doji” on Thursday as it churned around on very heavy volume, and Friday sold off slightly on volume that was heavy, but not as heavy as Thursday’s volume. In my view Monday’s climactic move was a short-term to intermediate sell signal, but we have to remember that the markets currently exist in the bizarre bubble of QE2, and it is always possible that continued weakness in the dollar, if not an outright run on the dollar, could continue to exert its lifting force on silver. Technically, however, the rally has become somewhat parabolic and does not provide any entry buy points, only continuation buy points such as Wednesday’s continuation pocket pivot move off the 10-day moving average. But if silver looks “frothy” and “parabolic,” there are other ways to hedge against the dollar’s decline.

iShares Silver Trust (SLV) Gilmo Report Chart

And, of course, as I wrote in my report of this past Wednesday, one can remain assured that “gold is a hold,” given that the yellow metal is only recently up and out of the big sideways consolidation it formed between early November 2010 and early April 2011. As I stated in my Fox Business News appearance on April 13th, which can be viewed at https://www.virtueofselfishinvesting.com/news/2011/04/gil-on-fox-business-channel-3/, gold was actually at a low-risk entry point when the SPDR Gold Trust (GLD) was trading at around 142 given its recent breakout through the 140.61 high in the base. Notice now how gold has taken over the driver’s seat in the precious metals rocket ride as silver churns. The daily chart of the GLD, below, shows that gold began to move sharply higher on Friday with volume coming in very heavy. Some “decoupling” between gold and silver was seen with the GLD up a big 1.7% while the SLV declined 0.8%. Thus I am happy to hold onto my gold ETF positions while letting silver rest a little bit, although I do still hold a 10% position in the SLV on the basis of Wednesday’s continuation pocket pivot. From my perspective, gold is in a less extended or parabolic position than silver currently, although if the dollar continues to drop it is likely that both metals will “re-couple” as silver gets dragged higher as well.

SPDR Gold Trust (GLD) Gilmo Report Chart

One thing to keep in mind about gold, however, is that it is now up 16 out of the last 19 days and 11 out of the last 12, so it is well extended from its breakout buy point at 140.61 and hence not buyable at current levels. When gold begins an upside tear, however, it tends to follow its 10-day moving average, so for now I would watch for pullbacks in the GLD to the 10-day moving average, currently running through the 147.48 area. The tricky thing here, as I see it, is the fact that with the dollar breaking to lower lows the potential for some exogenous event like central banks forcefully intervening in the currency markets for the purpose of supporting the dollar increases, and any sharp upside bounce in the dollar will likely have the reverse effect on precious metals. And as we reach what I see as a critical juncture for the dollar, the impetus for central banks to “do something about it,” also grows. With silver going parabolic, and gold beginning to show strong upside “froth” as it did on Friday, are these short-term signals that the trends could temporarily reverse? We shall see, but it doesn’t happen until it happens.

When it comes to stocks, there is still this aspect of “earnings season roulette” going on where some stocks tank on earnings while others gap-up. And this past week we saw retail leaders like Deckers Outdoor Corp. (DECK) “hit the deck” and drop sharply after announcing earnings, as did Under Armour, Inc. (UA) and Chipotle Mexican Grill (CMG), while cloud-related plays like Citrix Systems, Inc. (CTXS), Fortinet, Inc. (FTNT), and NetSuite, Inc. (N) gapped up to new highs. I’ve covered a number of stocks over the past few weeks, and members should review my reports of the past month, as for the most part my discussions on these long ideas remain in force. Where we have seen some of these, such as DECK or UA, break down through support or fail on breakout attempts, then one should be stopped out. But those that continue to act well, such as some of the “big stock” cloud plays like Salesforce.com (CRM) or Oracle Corp. (ORCL), continue to act reasonably well, with ORCL in particular moving to new highs on Friday. For a quick video run down of stocks I’ve covered over the past month in The Gilmo Report, members should go to the following URL: http://goview.com/?id=1df11a3b-27d0-4779-88dd-6e0b14781cfd. This service, GoView.com, is coincidentally from Citrix Systems (CTXS) and is still in beta-test, but I wanted to give it a try here with this report and so any feedback on your experiences with the GoVideo.com service is helpful. Make sure you have the most recent version of Flash to view it. In this report, I will focus on more current ideas that I consider to be among the better ones or those in a more emerging phase.

 

In my report of this past Wednesday I alerted members to Fortinet’s (FTNT) after-hours move that day after the company announced very strong earnings and handily beat analysts’ estimates. At the time, FTNT was trading between 44 and 45, as I noted in that report, and what I was looking for was a breakout through the top of this five-week base formation the stock has been in since it came off with the market in early April. FTNT has steadily been “growing up” and now trades 935,000 share a day on average, which is decent for an emerging technology company. The buy point on FTNT occurred right off the opening on Friday as the stock cleared the 44.90 peak on the left side of this little base formation, and volume was quite convincing at 303% above average. FTNT is showing strong trends in earnings and sales with a three-quarter sales acceleration and two-quarter earnings acceleration. If you didn’t buy the open on Friday, then you are looking for a pullback down towards the 46-47 price level to buy into.

Fortinet's (FTNT) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), © 2011 used by permission.

At one time I considered Citrix Systems (CTXS) to be a possible late-stage failed-base type of short-sale set-up, but the stock has proven that what one thought a day, week, or month ago can quickly become irrelevant. That is why we always remain flexible and open to new evidence. Five days ago, as we see on the daily chart of CTXS below, the stock flashed a pocket pivot buy point, and after announcing earnings on Wednesday after the close CTXS gapped up for what was in fact a buyable gap-up move on very heavy volume that was 202% above-average. CTXS makes a variety of products that add value as they leverage the “cloud” for presentations with their GotoMeeting®, GotoWebinar®, and GoView™ services. CTXS turned to positive earnings growth this past week with next quarter’s estimate showing a pick-up in earnings growth. This is potentially buyable here, using the 81.84 intra-day low of Thursday’s gap-up range as your guide for a downside stop.

Citrix Systems (CTXS)  Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), © 2011 used by permission.

NetSuite, Inc. (N) is a very thinly-traded CRM-software company; essentially a cloud play similar to, for example, Salesforce.com (CRM). N came out with earnings Thursday after the close and on Friday morning staged a buyable gap-up on huge volume that was 556% above its average daily trading volume of only 353,000 shares. The stock barely trades above my share minimum of 350,000 shares, and at $12 million in daily dollar volume is well below my general requirement of $30 million, preferably more. It is interesting however in that the stock is trading at 192 times forward estimates and thus attracts a large number of shorts who want to short the stock on the basis of valuation. Thus N has 12.1 days of short interest, or 4,271,300 shares sold short on a 20 million share float. Its return-on-equity, or ROE, is a weak 8%, which is not desirable, but the gap-up was in fact a buyable one, although it is extended now. A pullback towards 33 might offer a less-risky entry point given the 32.43 downside stop based on the intra-day low of Friday’s gap-up move, as the shorts might be in trouble on this one.

NetSuite, Inc. (N) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), © 2011 used by permission.

When Caterpillar, Inc. (CAT) pulled down just below its 50-day moving average and bounced off the 65-day exponential moving average two weeks ago, I was tempted to step in and buy the stock, but really wanted to see some volume support come into the stock at that point before doing so. That volume never appeared, as we see on the daily chart of CAT, below. Nevertheless, the stock rallied all the way back up to its early April peaks on below-average volume and did not show any big volume until Friday after it announced strong earnings growth of 258.5%. Since the gap-up went from Thursday’s close of 112.64 to a Friday open of 115.40 it is greater than 0.75 CAT’s 40-day Average True Range of 2.16, and with volume greater than 1.5 times or 50% above average daily trading volume at 1.71 times, Friday’s move could be considered a buyable gap-up CAT didn’t move much past its gap-up move, however, but theoretically is buyable using the 114.53 intra-day low of the gap-up day as your guide for a stop. At the very least, in my view this is a low-risk trade given the quick “out” point.

Caterpillar, Inc. (CAT) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), © 2011 used by permission.

While the advent of electronic trading combined with decimalization of stock prices was supposed to help out “the little guy,” I believe that it has done little more than create situations such as we see in the daily chart of Jazz Pharmaceuticals (JAZZ), shown below on a daily chart. This past Wednesday the stock suddenly broke from 33.70 down to 23.50, a 30.2% move that occurred in less than 2 minutes. There was no news to account for this, and it is the type of thing that argues for not watching your stocks trade in real-time since this could have easily shaken you out of what had been a decently-acting stock. JAZZ earnings come out next week, and the company is expected to post earnings growth of 206% to 217% at 55-57 cents a share, depending on the data source for these estimates. The chart below does not show the full range of Wednesday’s drop as some of those trades will likely be negated, but so far there has been no word from the SEC on this. Given that we were using the 10-day moving average as our selling guide, it may be prudent for investors to trim their positions given the violation of the 10-day line, looking for a later re-entry point.

Jazz Pharmaceuticals (JAZZ) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), © 2011 used by permission.

From time to time over the past several weeks I’ve received emails from investors announcing that they are shorting VistaPrint, Inc. (VPRT), shown below on a daily chart. There are two reasons why this has not been a good idea: 1) the stock is too thin at 394,000 shares traded per day on average, thus not meeting my 1 million share minimum, and 2) it keeps going higher! Nevertheless, the shorts in VPRT persist, and short interest is now 14.2 days, or 5,594,800 shares on a 39 million share float. Friday’s action following earnings growth of 37% on 63 cents constituted a valid pocket pivot buy point as the stock reversed back above the 10-day moving average after finding support near the 50-day line on volume that was 317% above-average. Next quarter’s estimates are looking for 37% growth on 52 cents a share, so there is nothing lacking there, and with so many shorts in the stock, this could move higher. I would use the 51.75 low of Friday’s intra-day range as my downside stop here at the very least, which is about 5% of downside. Keep in mind that VPRT is a thin stock at 394,000 shares traded a day, so it can be volatile.

VistaPrint, Inc. (VPRT) Gilmo Report Chart

Some leaders in this market have faltered, while some new situations have risen up in an attempt to take their place. Assuming this is healthy rotation, then the current market rally should be okay. However, we have been up eight days in a row now on the NASDAQ Composite Index, so a pullback would not be unexpected, and this could provide some better and more optimal entry points on some of the stocks I’ve discussed as long ideas recently. The one factor that makes me just a tinge cautionary is the situation with the dollar, which could escalate into a crisis, or even engender some aggressive central bank intervention that could create some downside volatility in stocks and/or commodities, particularly our favored precious metals. Most sentiment surveys, such as the Investors Intelligence Survey of investment advisors and the Wall Street Sentiment Survey, are currently showing strongly bullish sentiment which I would like to see “worked off” by some sort of pullback, but markets can go higher even as sentiment remains bullish, so this cannot be used as a sole predictor of market direction going forward. For that you have to look at the action of the indexes and leading stocks, and so far the uptrend remains in force, for now.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

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 DGP and SLV, though positions are subject to change at any time and without notice.

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