The Gilmo Report

May 15, 2013

May 15, 2013

The market continues on its now accelerating, but still grinding uptrend, as we can see on the daily chart of the NASDAQ Composite Index, below. With the market looking quite extended on the upside, any time the indexes trade higher on lighter volume, such as they did on Monday, it seems that investors start looking for a top. However, Monday’s lighter volume up day was followed by a much stronger volume up day on Tuesday as the indexes again reversed from an early morning pullback to close sharply in the black. Today’s action saw the indexes go even higher on another increase in volume, making Monday’s action moot. Of course, as the market continues higher the greater the probability of a pullback, and we may be getting to the point where this becomes a possibility as the indexes go parabolic here. Economic data continues to come in quite soft, and despite a Wall Street Journal article talking about the Fed beginning to map out its strategy for ending QE, it’s still not clear to me how the economy takes over and carries the QE baton once the Fed ends its bond purchases. It also appears that this is not clear to the market either, and so it just keeps rallying.

 

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Providing impetus to the NASDAQ’s strength is Google (GOOG), which gapped up today on heavier volume and cleared the $900 “century mark.” One theoretically could have bought the stock at $900 on the basis of Jesse Livermore’s “Century Mark” rule to pick up just under 16 points of additional upside.

 

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Meanwhile Apple (AAPL) is going in the opposite direction, breaking down through its 50-day moving average on heavier, above-average selling volume. While GOOG and Priceline.com (PCLN) keep the NASDAQ chugging along, AAPL now serves as a drag as it appears poised to test its mid-April lows under the $400 price level. A rally back up into the 50-day moving average could be a short-sale opportunity, particularly if the general market, for whatever reason, decides to take a pause and pull back for a few days.

 

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Netflix (NFLX) has moved higher following last Thursday’s pocket pivot comeback buy point, which I discussed in my report of this past weekend. The stock is now extended, but illustrates how one must be willing to come back to a stock when a new buy signal presents itself, even if one got stopped out at a lower price when the stock failed on the initial buyable gap-up that occurred after earnings on April 23rd.

 

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Goldman Sachs (GS) was also discussed in my weekend report as being buyable following last Monday’s “bottom-fishing” pocket pivot buy point coming up through the 50-day moving average and the ensuing constructive, low-volume pullback to the 50-day line. GS is now 2% off of its 52-week high and looking to set up in a possible cup-with-handle formation.

 

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The 3-D stocks have been red-hot over the past few days, led in part by Three-D Systems (DDD) as it logged a new all-time closing high on Tuesday after flashing two pocket pivots last week, as I discussed in my weekend report. At this point the stock may need a little time to consolidate these sharp gains coming straight up off the 50-day moving average over the past three weeks.

 

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Stratasys (SSYS) came out with earnings on Monday before the open, and after a little shuffling back and forth finally closed up on the day for a strong pocket pivot buy point. SSYS had previously issued a “bottom-fishing” pocket pivot on April 10th, and since then has slowly worked its way up the right side of a new base. Yesterday’s action constituted a clean base-breakout, so is potentially buyable on this basis, using the usual 7-8% downside stop.

 

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Mastec (MTZ), which I discussed in my weekend report as looking ready to move higher as it was holding tight following a buyable gap-up last week, did in fact move higher over the past two days. Today’s move constitutes a valid base-breakout that closed within range of the 31.31 breakout point.

 

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Most, if not all, of the actionable stocks I discussed in my report of this past weekend have continued higher so far this week, including Santarus (SNTS), which put in a pocket pivot type of recovery move off the 10-day moving average following the pricing of a 4.25 million share secondary offering at 18.25. The stock moved to new highs today, which is probably what it wanted to do in the first place, before the secondary got in the way of last Tuesday’s buyable gap-up move.

 

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Over the weekend I also pointed out that Acadia Pharmaceuticals (ACAD) looked ready to bounce off of the 12 price area again, which it did on Monday, setting off a move that took the stock back up to the top of its five-week range. This provided some logical resistance to today’s move as the stock moved higher on strong upside volume but stalled out as it approached the top of the range. If one bought near the $12 level, the next thing to watch for is a breakout from this five-week flag type of formation.

 

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Over the weekend I discussed the pocket pivot buy point in Valeant Pharmaceuticals (VRX) as it found support at its 50-day moving average on Friday, and the stock promptly moved to a new all-time high yesterday, although on roughly average volume. Otherwise the stock looks fine here on today’s very-low volume pullback.

 

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Fleetcor Technologies (FLT) also looked buyable over the weekend as it had pulled back to its 10-day moving average four days ago on the daily chart, below, before moving higher on the first two trading days of this week. Today the stock gapped down and held at the 10-day moving average, but remained above Friday’s price range. As long as the stock holds above the buyable gap-up day’s intra-day low of 78.88 it is still viable.

 

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U.S. Silica Holdings (SLCA) continues to round out the lows of a potential base, but so far it remains below its 50-day moving average. While today’s pocket pivot action off of the 10-day line might presage a move back above the 50-day line, I would like to see this confirmed with a pocket pivot volume signature if it does indeed occur, so watch for this.

 

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Tesla Motors (TSLA) remains one of the hot stories of the week as the stock rocketed up towards the $100 level before halting at 97 and then backing off a bit yesterday on a high-volume reversal. Rumors that the company would be filing for a secondary offering sent the stock back to the downside yesterday, but it was able to stabilize and hold relatively tight on above-average volume, as we see on the daily chart below. After-hours today the rumors proved to be true as the company announced a 2.7 million share stock offering of which CEO Elon Musk has indicated a preliminary interest in purchasing 1,201,345 shares for himself. The mixed shelf offering is expected to bring in about $830 million to help pay off its Advanced Technology Vehicle Manufacturing (ATVM) loan from the Department of Energy. While some have criticized TSLA’s taking of this loan subsidy, it might be enlightening to consider that the ATVM loan program was signed into law by President George W. Bush in 2008. Ford Motor Co. (F) as well as Toyota Motor (TM) have also taken loans from the program to the tune of $5.9 billion and $1.6 billion, respectively, making TSLA’s $465 million loan look like pocket change. I would not be surprised to see the stock move higher from here given the positive implications of CEO Elon Musk’s share purchase.

 

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Of course, if one is going to play TSLA, then one should do so understanding the volatility of the situation and position-size in accordance with one’s own risk tolerance. My view is that the stock will eventually form some sort of identifiable consolidation from which it will issue another tangible buy point/buy signal, but this could also occur at higher prices. If short-sellers, who have been decimated in the stock’s recently instant-doubling since early April, found a reason to start shorting the stock again after yesterday’s high-volume reversal, they might once again be scrambling to cover on news of a highly favorable secondary offering.

 

For stocks that I’ve discussed in previous reports but which were not mentioned in today’s report my thoughts remain the same. Most of these names, such as Nationstar Mortgage Holdings (NSM) or Qihu 360 Technology (QIHU), are now somewhat extended, so it is a matter of waiting for new, actionable buy points to emerge. Meanwhile, the general market shows no signs of letting up, although a pullback could coincide with some of these recent strong performers backing-and-filling as they digest recent gains. Thus if you have something that is working well, such as an NSM, DDD, QIHU, NFLX, etc. it is best to be patient and wait for the next buy point to show up without chasing more shares as the stocks become near-term extended. Otherwise, the market isn’t ready to top until it is ready to top, and in the face of broad and constructive action in leading stocks, including some of these re-emerging leaders as they come up the right sides of bases and break out again, such as SSYS, NSM, GS, DDD, etc. one can only go with the trend until it ends, and no sooner.

 

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 DDD, FLT, SSYS, and TSLA, though positions are subject to change at any time and without notice.

 

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