The Gilmo Report

October 25, 2017

October 25, 2017

The Dow Jones Industrials Index has now outpaced the S&P 500 by 10% over the past 12 months, with the near-term parabolic move continuing through yesterday. Where we had previously seen big-stock NASDAQ names provide narrow leadership in this market, the burden of lighting up the nation’s quote screens has fallen on the thirty stocks that make up the Dow.

International Business Machines (IBM), which drove about 100 points of a roughly 160-point Dow rally on Wednesday of last week, did, however, fall by the way-side yesterday. After a big show of strength after earnings, yesterday the stock broke below its 200-dma and the 156.95 intraday low of last Wednesday’s buyable gap-up (BGU) price range.

 

GR102517-IBM

 

And, of course, the only Dow stock that I’ve bought over the past 12 months, General Electric (GE) turned out to be nothing more than a one-day wonder and one heck of a dud.

Yesterday, Caterpillar (CAT) and 3M Company (MMM) helped keep the Dow driving higher yesterday as two of the higher-priced stocks in the price-weighted Dow. In particular, MMM, at more than $230 a share, is the third-highest priced Dow stock, so its effect on the Dow is amplified.

Back when I worked for Bill O’Neil, he used to tell me to watch out when you start seeing Dow stocks leading. As he pointed out, this represented a movement of institutional money into a very narrow group of big, established companies not likely to go out of business in a recession. In this way, it was a defensive move by institutions, and a warning sign for the general market.

In this market, however, we’ve seen many instances where the old rules don’t apply. More recently, as the Dow has gone parabolic, it has seemed as if this old observation of O’Neil’s was another rule to toss out with the kitty litter. Today’s break off the peak on higher volume may be the first indication that this rule is still in effect, but a less than ½% break off the peak isn’t much of a break – yet.

 

GR102517-$INDU

 

Meanwhile, the S&P 500 and NASDAQ Composite Indexes lag. The S&P 500 got knocked down to its 20-dema today, where it found intraday support to close about mid-range on the day. This is the second day of volume selling for the index, since Monday’s volume was relatively high in comparison to overall recent volume levels.

Monday’s volume shows up as lighter in comparison to Friday’s, but Friday’s volume was likely skewed higher by the fact that it was options expiration. So, in my view, we have two distribution days for the S&P 500 over the past three days.

 

GR102517-$SPX

 

The NASDAQ Composite Index was also hit with distribution today on its third down day over the past five in a row. It’s pretty clear that the indexes have all run into some turbulence. The question is whether this develops into something more severe. In terms of what is going on with individual stocks, some of the action has already been severe on the downside.

 

GR102517-$COMPQ

 

Most big-stock financials were hit with selling today, giving the Financial Select Sector SPDR Fund (XLF) a nice reversal off the peak on higher volume. Overall, however, the action didn’t look too bad, so we should keep an eye on this as its tests the 10-dma.

 

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Gold is still not in a position where I’m looking to buy it, as I discussed over the weekend. As a result, gold stocks are off my long radar for now, as the group was hit with some high-volume selling across the board.

 

Big-Stock NASDAQ Names:

 

Apple (AAPL) is expected to report next Tuesday, November 2nd, so I’m not inclined to do much with the stock. That said, the stock has been living below its 50-dma for the past five days and looks more like a short here using the 50-dma as a tight upside stop.

Netflix (NFLX) is one stock that I’m ready to play either way here as it tests the 20-dema and the top of its prior base. The stock hasn’t gone anywhere since breaking out of a cup-with-handle in early October, and is now resting at its 20-dema as volume dried up today. Technically, this would put the stock in a lower-risk entry position, using the 20-dema as a tight selling guide. As I blogged today, the flip-side view of this is that it would become a late-stage failed-base short-sale set-up to act on if it were to bust the 20-dema.

Today it was possible to short the stock at the 10-dma and scalp a buck or two on the downside, but right here this remains unresolved. Based on the actual set-up we see here and now, it is a long here using the 20-dema as a selling guide. A breach of the 20-dema would then bring the short side into play, if it resolves in that direction. Play it as it lies.

 

GR102517-NFLX

 

Intel (INTC) is expected to report earnings tomorrow after the close. We’ll also hear from Amazon.com (AMZN) and Alphabet (GOOGL), so I’m not going to advise doing anything with those stocks ahead of earnings. These will also have a reasonable impact on where the NASDAQ goes over the next few days.

Facebook (FB) is expected to report next Wednesday. The stock closed just below its 50-dma today on above-average selling volume, which doesn’t look too constructive heading into next week’s earnings report. Nothing to do here until earnings are out.

Tesla (TSLA) gapped up slightly on Monday on news that it was reaching an agreement to build a manufacturing plant in Shanghai, China, but all that did was set up a shortable gap-up (SGU) as it ran into resistance near the 20-dema. The stock had already been shortable near the highs of the range along the 160 price level per my prior comments in last Wednesday’s report.

I wrote over the weekend, “Let’s see if it doesn’t at least undercut the prior 331.28 October low ahead of earnings, providing a decent short scalp.” Well, here we are, with the stock undercutting the mid-August and early October lows on heavy selling volume. This could run into the 200-dma before staging any kind of bounce, so for now I’d use the early October low at 331.28 as a trailing stop.

TSLA is expected to report earnings next Wednesday, November 1st. So far this has given us exactly what we wanted ahead of the earnings report, and it is now approaching a short-term cover point. If you’re working this on the short side, stay alert and be ready to take profits.

 

GR102517-TSLA

 

Nvidia (NVDA) isn’t expected to report earnings until November 9th, which is two weeks from now. The stock pulled into the 20-dema today and held as volume came in well above average. I view the 20-dema as the lower-risk entry spot on pullbacks, but it would have been difficult to buy into today’s pullback since volume came in at 34% above average. Nevertheless, if the stock settles down along the 20-dema with volume declining, it would be in a lower-risk entry, using the line as a tight selling guide.

 

Semiconductors:

Micron (MU) pulled into its 20-dema today, which brought it into a lower-risk entry position using the line as a tight selling guide.

Universal Display (OLED) was knocked back below its 20-dema today on light selling volume. It isn’t expected to report earnings until November 2nd so I would lay back and leave this alone until earnings are out.

 

Telecom-Related Names:

Arista Networks (ANET) continues to go nowhere fast as it holds along its 20-dema. Earnings are expected next Thursday, November 2nd, so there’s nothing to do here ahead of earnings.

Lumentum Holdings (LITE) isn’t expected to report earnings until November 8th. I erroneously listed the expected earnings date as October 26th. So, the reality is there are still two weeks left before earnings. And, I might add, LITE has certainly had a very eventful week so far.

On Monday, a strong earnings report from a Swedish 3D-sensor company known as Arms AG sent the stock higher on a pocket pivot coming up through its 10-dma, 20-dema, and 50-dma. It then broke out of its two-month low-base price range yesterday on heavy volume. Today we saw a pullback to the top of the range on lighter volume, putting it in a lower-risk entry position using the 60 price level at the top of the range as a selling guide.

 

GR102517-LITE

 

Bio-Tech/Medical Names:

Bio-techs have been getting smacked hard lately, and this shows up on the iShares NASDAQ Biotechnology Index Fund (IBB) as a clean violation of its 50-dma. This takes the bio-techs off my radar as longs currently as big-stock names like Biogen Idec (BIIB) and Celgene (CELG) come unglued over the past few days.

However, I would point out one thing before writing bio-techs off completely. And that is that when things look as ugly as the IBB, BIIB, and CELG look right now, that has often been when they bottom and turn to the upside. So, if you’re a disciple of the Ugly Duckling, this may be worth keeping an eye on.

 

GR102517-IBB

 

Chinese Names:

 

Chinese stocks are coming unglued as well. Today Alibaba (BABA) went crashing through its 50-dma on increased but below-average selling volume. However, as I indicated over the weekend, with the stock expected to report on November 2nd, there wasn’t much to do with it ahead of the report. Meanwhile, as I see it, BABA is a sell based on the breach of the 50-dma, which I have discussed as a tight selling guide for the stock.

Sina (SINA) and Weibo (WB) were both showing signs of wobbling over the weekend, as I discussed at the time, but today they came apart in the worst way. Both stocks posted big outside reversals to the downside on huge selling volume.

WB looks the uglier between the two, although not by much. You can see that an alert short-seller monitoring the stock could have shorted it right at the 50-dma in the face of the general market weakness. That would have resulted in a nice profit as the stock plummeted to the downside on massive volume. Otherwise, if you’re not a short-seller, there’s no reason to mess with this kind of action on the long side! Ouch.

 

GR102517-WB

 

Cyber-Security:

Palo Alto Networks (PANW) is hanging along its 20-dema and the range lows of the past two weeks. This technically puts it in a lower-risk entry position, using the 20-dema as a tight selling guide. Earnings are not expected until late November.

 

GR102517-PANW

 

Fortinet (FTNT) is expected to report earnings tomorrow after the close. Waiting to see what happens after earnings before deciding whether this becomes actionable again, one way or the other.

 

Cloud Software Names:

Salesforce.com (CRM) moved to a new high today on above-average volume. As I discussed over the weekend, it had broken out of a six-week cup-with-handle formation. In my view this is extended, so out of actionable range.

ServiceNow (NOW) is getting smacked down to around 117 in after-hours trade as I write after reporting earnings after the close. This one looks busted for now, at least the way it’s trading after-hours, but we’ll see whether anything actionable transpires tomorrow morning, one way or the other.

Square (SQ) held along its 10-dma today on increased buying volume, giving it some low-key support on the day. However, earnings are expected next Thursday, November 2nd, so there is nothing to do here ahead of earnings.

Tableau Software (DATA) is expected to report next Thursday, November 2nd, so there’s nothing to do here ahead of earnings.

Workday (WDAY) isn’t expected to report earnings until November 30th, but the stock is starting to wobble a bit here. Today it closed just below the 50-dma on increased selling volume. There doesn’t appear to be anything actionable here on the long side, although one could view the stock as shortable here, using the 50-dma as a guide for a tight upside stop.

 

GR102517-WDAY

 

Internet Related:

Yelp (YELP) is expected to report earnings on November 2nd, so there’s nothing to do here ahead of the report.

 

Solar Names:

First Solar (FSLR) is expected to report earnings tomorrow. It too has been acting erratically as it flips back and forth, above and below its 50-dma. On Monday, the stock actually posted a pocket pivot at the confluence of the 10-dma, 20-dema, and 50-dma, but today it dropped right back below the moving average confluence. Nothing like consistency, and nothing to do here ahead of tomorrow’s earnings report.

SolarEdge Technologies (SEDG) is hanging along its 10-dma, but was hit with some above-average selling volume today despite closing above the 10-dma.

 

Software:

Veeva Systems (VEEV) got knocked back to its 20-dema today on light volume. This has been the place to buy the stock on pullbacks, and this pullback is no different. Technically, this is actionable here as a long, using the 20-dema, or the slightly lower 50-dma as your selling guide. VEEV is expected to report earnings on November 28th.

 

GR102517-VEEV

 

When it comes to individual stocks, I don’t see anything trending strongly over the past few days. One of the more robust names on my list has been Nutanix (NTNX), which was last buyable along the 10-dma last week per my comments in last Wednesday’s report.

NTNX again tested the 10-dma today, but selling volume was running at an elevated level at the time. However, by the close it held above the 10-dma and closed mid-range on above-average volume. So, this has the look of supporting action at the 10-dma.

Pullbacks to the 10-dma remain your lower-risk entry opportunities when they occur, but keep in mind that the stock is getting further extended from its early October buyable gap-up (BGU) and base breakout. NTNX isn’t expected to report earnings until November 29th.

 

GR102517-NTNX

 

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

The market has shifted into a cautionary phase as I see it. There is very little hitting my radar on the long side, currently, while many of the better moves lately have been short-sale plays in stocks that were previously on my long watch list, such as BABA, TSLA, WB, SINA, and others. So, the shift toward the short side in many names may be telling us something here, but we have some big earnings reports coming tomorrow, which may have an impact on where the market goes from here.

When there isn’t much to do on the long side, then you simply don’t do much on the long side. Also, keep a close eye on your absolute and trailing stops and selling guides, some of which have been taken out by many stocks on my long watch list lately, including AAPL, BABA, TSLA, WB, SINA, ATVI, NOW, WDAY, among others.

This is not a long report, and for good reason. The next few days, heading into next week when big stocks like FB report, will likely give us some strong indications as to where this market is headed next. But the bottom line is that the parabola-like move in the Dow reflects a rush into big-cap, established names, and this could represent a defensive move at the end of a long bull market.

And if this is the case, you will naturally be forced out of your positions as your stops and selling guides are hit. For now, that’s all you need to pay attention to as we go on high alert for further potential market weakness based on the clues that a widening swath of leading stocks may be telling us currently.

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.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.