The Gilmo Report

May 1, 2013

May 1, 2013

 

The NASDAQ Composite Index joined the new-high party by launching to a 12-year high and its highest high in the bull phase that is now three years old. If QE isn’t doing much to help the economy, as this morning’s ADP jobs report showed coming in with 119,000 jobs vs. a consensus estimate of 155,000, it is at least continuing to prop the markets ever higher. The Fed released its latest policy announcement today which amounted to more of the same: endless QE until the employment situation improves or inflation begins to move above its target range. This sparked a sell-off in the major market index which had already been weak throughout the day. The daily chart of the NASDAQ Composite Index shows a broadening or so-called “megaphone” top, which is generally considered bearish. The problem with such a formation, from my experience, is that it is so rare that the statistical sample size of such patterns is insufficient to come to any hard statistical conclusion regarding its top-forecasting abilities. While I can find a trade here and there on the upside, fresh buy ideas are few and far between. Thus I still tend to think this is a market where one could easily take the position of being out wishing they were in, rather than in wishing they were out.

 

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As I discussed in my report of this past weekend, April 28th, Apple (AAPL), has three clear waves of selling in its pattern, which I illustrated over the weekend with a weekly chart, and do so below using a daily chart. This “three waves down” formation set up this week’s sharp bounce off of its 52-week low and back above the 50-day moving average. As I theorized over the weekend, AAPL’s move provided the NASDAQ with the assistance it needed in its successful bid for a new high. AAPL is going to have to hold above the 50-day moving average, unlike late March when a rally back above the 50-day line was nothing less than a short-selling opportunity. AAPL does illustrate my view that a lot of the movement in the indexes is occurring in “junk-off-the-bottom” or “JOB” stocks rather than strongly-acting leaders riding in consistent uptrends. This phenomenon has also been illustrated by a number of the homebuilders over the past week or so, as I discussed over the weekend in the example of D.R. Horton (DHI) which has come straight up from the lows of its recent ugly chart pattern (see April 28th report).

 

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In my April 10th report I theorized that the 3-D printing stocks might be trying to round out the lows of potential new bases, and so far this has been the case. Three-D Systems (DDD) logged a “bottom-fishing” pocket pivot buy point yesterday after announcing earnings. Not that the report was a blow-out, but with some 23.4 million shares of the stock short on a float of 81 million, it didn’t appear that there weren’t any natural sellers left in the stock. This set off a sharp recovery after the stock initially sold down to its 50-day moving average, which now serves as a downside selling guide.

 

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Netflix (NFLX) has completed a sixth day of going nowhere following last week’s earnings-related buyable gap-up. When a stock flashes a buyable gap-up signal and then takes more than six days to follow through with more upside, it is often likely to fail. NFLX is still above the 209.51 intra-day low of its gap-up day, a key level. But the longer it takes to get going, the greater the likelihood of failure, so it must get going from here.

 

Krispy Kreme Doughnuts (KKD) violated its 50-day moving average yesterday after closing below the line on Monday. This constitutes a clear 50-day moving average violation and sell signal for KKD positions. I suppose with the ADP employment number coming in so weak, at this rate consumers may soon be unable to afford even a gooey doughnut!

 

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I did not care for the action in Cree (CREE) today as it appears unable to hold the top of its prior range breakout. In this market I don’t give things much room to the downside and in this environment if a range breakout cannot hold I do not waste time unloading my shares if I have a position in a stock acting in such a manner. End of story.

 

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Acadia Pharmaceuticals (ACAD), which I considered a sell after its nice, roughly 13% run-up after I first mentioned it two weekends ago in my April 21st report, has pulled right back to its starting point. This illustrates how positive action in potential leaders is generally short-lived in this odd market environment. It also serves to illustrate my view that strong upside moves of 10-20% should be sold into.

 

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Valeant Pharmaceuticals (VRX), which had flashed an initial pocket pivot buy point per my discussion last Wednesday in my April 24th report, gave up the ghost today and broke back to the downside. Most bio-techs came under pressure today on rumors that a large bio-tech hedge fund was shutting down and liquidating its positions.

 

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After hours, Facebook (FB) can’t decide if it wants to rally or sell off as I’ve seen it trade as high as 28.68 and as low as 26.56 this afternoon as I write following its after-hours earnings announcement. FB missed earnings estimates by a penny while beating revenue estimates by $20 million. As I write, I see it trading below where it closed today, which is probably not a good sign for the stock. No gap-up, but so far no gap-down. Either way, I’m not interested in the stock here without a clear bottom-fishing pocket pivot or some other valid buy point showing up in the pattern, which sees FB currently holding above its 50-day moving average.

 

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Overall I’d have to say I see very little in the way of actionable buy points outside of the DDD I discussed earlier in this report. The question of whether I would buy DDD is a different matter altogether, however. While it seemed like a good trade off the lows yesterday for a 10%-plus pop going into the close, it is not clear to me that this market environment is going to provide much in the way of sustainable trends. Thus my general view is to play lightly, play quickly, or some combination of the two. I do not care for the broadening, volatile action we are seeing in the major market indexes, as that strikes me as potentially negative more so than new highs are constructive. Meanwhile I’m not necessarily in the mood to start shorting stocks aggressively, although this is a developing situation, and I did discuss the situations in Amazon.com (AMZN) and Qualcomm (QCOM), not shown here but which you can review in my weekend report of April 28th, as potential late-stage, failed-base, short-sale set-ups on rallies up into their 200-day moving averages.

 

The action in the precious metals remains fascinating to me, not necessarily from the perspective of generating any actionable buy points, but rather from the perspective of this tremendous paradox that I see developing in the metals with respect to physical demand vs. paper selling (see my first discussion of this in my April 7th report). Even as paper selling of the metals reached a crescendo two weeks ago, physical demand has been, and remains, off the charts. An article sent to me today by my colleague Kevin Marder discusses the situation at Australia’s Perth Mint, which has seen demand jump to its highest level in five years following the plunge in precious metals prices. Meanwhile, gold coin sales at the U.S. Mint in April have been the highest in any month since December 2009, while in India premiums to secure supplies of physical gold rose to five times the level before the metals took a dive. Thus while investors rush to sell paper metal, physical demand increases sharply. But since there are many times more ounces of paper gold than there are of physical gold, the selling in paper drives the price lower even as buyers can’t get enough of the real stuff.

 

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Physical demand appears to have provided some support to gold prices, at least, as we see on the daily chart of the SPDR Gold Shares (GLD), above, which has filled its second gap and today found support off the intra-day lows as stocks sold off and closed near their lows.

 

I have always imagined that when the U.S. dollar and other global fiat currencies have reached the end of the line, so to speak, owners of paper gold will come to the realization that in a true currency crisis paper metal does you no good – you must have the real thing in hand – thus leading to a sharp sell-off in paper metals that is entirely contradicted by feverish demand for physical metals. And this is exactly what we are seeing currently. Is this telling us anything? It’s impossible to know for sure, but it is, in my view, a good reason to remain cautious in this current market environment. 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 no positions, though positions are subject to change at any time and without notice.

 

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