The Gilmo Report

May 4, 2011

May 4, 2011

“And hast thou slain the Jabberwock?
 Come to my arms, my beamish boy!
O frabjous day! Callooh! Callay!”
  He chortled in his joy.” –
Lewis Carroll

The news of the week was clearly the demise of of Osama bin Laden at the hands of U.S. Navy SEALs on Sunday, and stock futures reacted with a big 24-point rally on the NASDAQ 100 e-mini contract Sunday night. This in turn triggered the “Osama bin Killed’ rally that we saw on Monday morning which turned out to be predictably ephemeral. While the NASDAQ just barely escaped a second distribution day today, the other major market indexes were not so lucky, which makes the action so far this week look like smart money selling to dumb money on the big headline futures gap-up. Frenzied buying at the open on Monday was met by a steady wall of sellers as the indexes reversed. The selling carried into Tuesday and today with two distribution days in a row on the S&P 500. The NASDAQ did find support at the top of its recent breakout through the 2800 price level as we see on the daily chart below, but the way a big swath of leading stocks have been smacked around recently does not look constructive. As I wrote over the weekend the market was primed for a pullback, but it has not been constructive from my perspective.

NASDAQ Gilmo Report Chart

If the market breaks down through the lows of today and support at around the 2800 level on the NASDAQ, then we are looking at a more serious situation developing. Perhaps a further pullback will finally cause sentiment to back away from its strongly bullish leanings these days, as the chart of the Investors Intelligence Adviser Sentiment survey (© 2011, DecisionPoint.com, used by permission) below shows. The level of bears has declined to 16.50%, the lowest level of bearishness seen in at least the past six years, based on the chart below, and certainly the lowest seen in this entire bull market that began in March of 2009. Most other sentiment indicators reflect a similar complacency. This is something to keep in mind, as further deterioration in the price/volume action of the indexes and leading stocks would certainly cause all the pieces to come together when sentiment is thrown into the mix. The main problem I have with the market is the way many leaders have been hit over the past two days, as it is the action of the stocks, first, that serves as the final arbiter of general market conditions.

Investors Intelligence Adviser Sentiment Gilmo Report Chart

Silver iced itself on Tuesday when it violated its 10-day moving average from whence it had posted a continuation pocket pivot buy point last Wednesday. Since that was where the pocket pivot occurred, off the 10-day line, then a violation of that moving average is your first and most logical selling guide. As I wrote over the weekend, I was not in the mood to take more than a 10% position in the SLV based on the buy point as I had felt that last Monday’s action was a clear climax top offering an optimal move to sell into. Now we see that the SLV has corrected 20% off of its peak and found support today at the 50-day moving average. Given the fever that overtook silver on the climax run that just missed $50-an-ounce on the spot silver, the 50-day line could support a bounce in the SLV from here as those who missed the ride look for a second chance. In my view, however, that is mostly just a trade as my tendency is to consider that the white metal needs more time to digest such a huge move that started out last year in September at below $20 an ounce. If somehow silver was able to simply bounce off the 50-day moving average and then spike to new highs to form a “super-parabola,” then that would likely mean something is going very wrong somewhere in the financial system, and I doubt that this would be good for stocks.

SLV Gilmo Report Chart

I might be interested in trying to buy silver off the 50-day moving average IF I saw gold exhibit some strength here somewhere. So far the GLD, as the daily chart below shows, has pulled back to where I figured it would somewhere around the 147 level as I discussed in my report of this past weekend. But downside volume is picking up here so while the GLD could find support at its 20-day moving average right around 146 it is not its nature to do so. Thus I might expect the GLD to pull down closer to its 50-day moving average. With silver at its 50-day moving average, those of you inclined to try and trade the SLV off the 50-day line should also monitor the GLD. The U.S. dollar, not shown, is trying to hold the 73 level, and as I wrote over the weekend this is a critical level. In my view this increases the odds that a central bank or government somewhere will be moved to “do something,” and I have to wonder whether the climax top in silver last week was the first shot across the bow that something is coming down the pipe. Real interest rates are negative, and any increase in interest rates as QE2 winds down could keep the metals and commodites down. This would also likely have a deleterious effect on stocks.

GLD Gilmo Report Chart

Those who played “earnings roulette” yesterday in Green Mountain Coffee (GMCR), shown below on a daily chart, won big today as the stock gapped up over 18% on the day. Is this buyable? Technically, yes, since the stock met all the requirements for a buyable gap-up move, and with the stock closing at 75.98, the downside stop is very close at the intra-day low of today’s trading range at an even 75. Keep in mind that a number of buyable gap-ups have failed recently by violating the intra-day lows of their gap-up days, such as CAT, VMW, CMI, FTNT, and CTXS, to name a few, and this is not constructive. GMCR has had two buyable gap-ups within the past two months, and when I see this I can almost hear the bones crunching as the shorts in GMCR get trampled into calcified dust. As of the last count, GMCR had 4.8 days of short interest that multiplies out to 16,891,200 shares sold short, or 15.3% of the float. The bottom line is that this second gap-up in GMCR may be too obvious, and this current market environment has resulted in many gap-up failures. Other than that, one could conceivably take a shot here given the very close 75 stop.

Green Mountain Coffee (GMCR) Gilmo Report Chart

There were few stocks acting well today, but Amazon.com (AMZN) put in some notable action today as it made another run at the $200 price level. So far that level has served as near-term resistance, as we see on AMZN’s daily chart below, but the stock has also held its 191.40 breakout level very well over the past six trading days. AMZN was helped out by news that it is going to upgrade its Kindle tablet reading device to perform more like an iPad-like tablet device. No other details were forthcoming, however, and this likely led to some of the strength as the stock held up today on respectable, above-average volume. The news also didn’t seem to bother Apple, Inc. (AAPL) much as it held above its 50-day line and closed up $1.37 on the day although I don’t show a chart of the stock here. So if this market pullback ends up finding support here at the top of the major market indexes, recent breakouts may turn back to the upside. Where do you go on the long side? Probably those stocks that are holding up well or which have pulled back into logical areas of support.

Amazon.com (AMZN) Gilmo Report Chart

An example of a stock pulling back into prior support is Acme Packet (APKT), shown below on a daily chart. APKT broke out nicely on earnings but since then has flipped right back into the top of its prior base as it has pulled down deeply and held its 50-day moving average. This is the type of situation where you look at this and wonder if it can be bought on this pullback to the breakout level since a large number of leading stocks often break out and then have one pullback to the original breakout point. Maybe so, but it is a matter of getting cooperation from the general market at this point. The best thing I can say about trying to buy a pullback like this is that the “get me out” point is very nicely defined as one could use a violation of the 50-day moving average as a downside stop or selling guide. Other stocks showing similar pullbacks to the tops of bases and/or their 50-day moving averages are AAPL, AME, BIDU, BHI, CY, FTNT, KSU, NXPI, OVTI, OTEX, RAX, SOHU, and UNP, for example. From my perspective as I go through my watch lists, these are the few stocks that have pulled down to a point where they could become buyable, and that will definitely depend on the action of the general market over the next few days.

Acme Packet (APKT) Gilmo Report Chart

The market environment over the past three days has presented some serious challenges for investors as most leaders have pulled back sharply, serving to evaporate nascent profits in many positions. In my view the odds of success here on the long side are beginning to skew away from us currently, so I remain cautious. Obviously, if the market can hold near-term support then some pullbacks in leading stocks as I listed them on the previous page could be buyable, but keep in mind that these appear to be getting fewer and farther between. The best way to make money in this environment seems to be to play “earnings roulette” and hope your stock gaps up on earnings like GMCR, although one could just as easily end up with a Deckers Outdoor (DECK) instead, so that amounts to little more than gambling which I cannot endorse!

Finally, if you get a clear sell signal such as we’ve seen in Jazz Pharmaceuticals (JAZZ) as it has violated its 10-day moving average, a line it has held very well for at least the past seven weeks as I discussed in my report this past weekend, take your profits! We remain in this screwy QE2 environment, so as we’ve seen previously the market has shown a tendency to rally on light volume after throwing investors by first starting to look very ugly, as it did in mid-March. Thus I believe that investors should take a very cautious approach here without getting too bearish or bullish and paying attention to sell signals, such as violations of prior breakout points or moving averages, and protecting any profits.

(I will be appearing on Stuart Varney’s Fox Business show tomorrow Thursday, May 5 at 10 a.m. Eastern.)

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 no positions, though positions are subject to change at any time and without notice.

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