The Gilmo Report

September 1, 2013

August 31, 2013

The NASDAQ Composite and S&P 500 Indexes, both shown below on daily charts, are hovering near their recent lows as they form what appear to be short bear flags following Tuesday’s high-volume gap-down. Friday’s action saw the indexes close near the lows after Secretary of State John Kerry went on television with a barrage of high-minded rhetoric and tough talk but which ended on a less bellicose note as the administration continues to emphasize that this will be a “limited” strike of one or two days. As well, much of the particulars of such a strike have been telegraphed like no other in history. Pentagon officials released a sort of “pre-war” game plan statement that provides a laundry list of potential targets that seems to be giving the Syrian regime a lot of helpful advance warning.

The market, however, wasn’t taking any chances given the upcoming three-day Labor Weekend as investors headed for the exits in relatively orderly fashion. Volume was lighter, likely as a result of the long end-of-summer weekend as traders allegedly “headed for the Hamptons.” Speaking for myself as a trader, since I already live on the coast of Southern California, I just stayed where I was. Meanwhile, the NASDAQ Composite continues to hold above the late July lows and its 50-day moving average, as we can see in the chart below, and remains in a choppy correction. The volatility can create some opportunities for short-term traders, but for investors seeking to profit from sustainable trends, the situation is more problematic.




The S&P 500, shown below, remains well below its 50-day moving average and has in fact made a new leg down. Volume did pick up on the NYSE, but remained well below average in advance of the Labor Day holiday weekend. Since both NASDAQ and S&P 500 charts have held above the lows of this past Tuesday’s gap-down break, one could say that they are in the third day of a rally attempt off of those lows, with the potential for a follow-through day coming as early as Tuesday when the U.S. markets re-open. Perhaps the Syrian thing will turn out to be much ado about nothing, and once some clarity emerges next week the markets might find something to rally about. This, however, assumes that what ails the market in what is now a four-week correction is in fact potential events in that region.

Meanwhile, headlines over the weekend indicate that President Obama will seek Congressional approval of any impending strike on Syria. It is possible that an attack on Syria could get hung up in Congress. Maybe this will spark a rally given that polls show that a majority of Americans oppose such a strike. There is, however, still the issue of QE tapering, and no doubt the markets will be looking forward to the Fed’s upcoming meeting and policy announcement on September 18th. Meanwhile, most leading stocks are going nowhere as the stronger ones hold their ground while others come off a few percent, and some of our short-sale targets in the solar energy group continue to work.




Precious metals took a break this week, as we can see on the daily chart of the SPDR Gold Shares (GLD), below. The GLD has pulled into its 10-day moving average on light volume as it attempts to consolidate the upside move following the strong pocket pivot breakout of 12 days ago on the chart. Gold is also running into an area of logical upside resistance at around the 137-138 price area. On Friday gold and silver both came down along with stocks and bonds, even as Secretary of State Kerry appeared to turn the heat up on Syria a notch or two. If there was a fear bid in gold, silver and bonds earlier in the week, that seemed to disappear on Friday, and thus brings up the question as to where the market’s focus lies. Is it Syria or is it QE tapering?




The “Four Horsemen” continue to display strong action as they hold up well and appear to be impervious to the general market action. Last weekend I noted that Tesla Motors (TSLA) may have broken out of an ascending base, and so far the stock has been able to move up a bit more, as we can see on the daily chart below. This past week it held very tight sideways even as the general market gapped down on Tuesday and remained down for the week. Meanwhile, short interest is back above 20 million shares, and one has to wonder whether TSLA will not hit at least an intermediate top on some sort of climactic upside move. The flip side here is that if the general market continues to correct, usually it is the strongest stocks that they will get to last, so that once you see the strongest stocks (and these “Four Horsemen” can be considered the strongest institutional-quality names out there right now) get hit the correction may finally be over. If this happens, then investors should be alert to a potential opportunistic buy point should TSLA come down to its 10-day or 20-day moving averages. Right now, however, I have to say I am very impressed with its action given that the stock actually moved higher in the wake of Secretary of State Kerry’s tough talk rhetoric on Friday. Should the general market turn back to the upside, TSLA could move sharply higher based on its recent breakout from an ascending base.




Another one of these “Four Horsemen” is LinkedIn (LNKD), which is forming a tiny cup-with-handle, as we can see on its daily chart below. The stock is holding tight along the 10-day moving average and on Friday volume dried up sharply. It’s possible the stock could pull back to the 10-day line again, which I might consider a spot to pick up shares, around the 236.60 price level.




Facebook (FB) tried to make a new high on Friday after an analyst upgraded the stock with a $50 price target, but it ran into resistance and closed almost unchanged and at the lows of the day as volume picked up. I still think that the stock has some overhead at these levels left over from last year’s botched IPO. We already saw the stock pause around the 38 level, which was the offering price of the IPO in March 2012. But it has not made it through that level of resistance and may now be encountering some overhead from investors who were foolish enough to buy into the stock on the IPO date at prices approaching the $45 level. Thus at this point I would only be looking to buy shares on pullbacks to the 39-40 level, should that occur. Meanwhile, the stock, as the third name among the “Four Horsemen,” continues to act well as it ignores the market’s current correction.




The last of the horsemen, Netflix (NFLX) shows very little selling up here around peak prices as it pulled back slightly on Friday with volume drying up, as we see on the daily chart below. This is constructive and for now I would look to buy pullbacks to the 10-day moving average, currently at 276.54. If the general market gets into further trouble, one has to be cautious when it comes to taking long positions. Should the 10-day moving average not hold, then you are looking at using the 20-day exponential moving average as a secondary buy level. Of course, I intend to continue to follow these four stocks closely in my reports as the market correction continues to run its course.




I discussed Yelp (YELP) and its high, tight flag formation in my report of this past Wednesday. I guess the stock also reads The Gilmo Report, as it immediately launched higher on Thursday in what turned out to be a pocket pivot buy point. However, given its inherent and characteristic volatility, the stock came back into its 10-day moving average, as we can see on the daily chart below, with volume drying up. I don’t consider this abnormal action for the stock, and I still believe it remains viable as a name to watch should the general market turn back to the upside. As a volatile name, however, it will react more to general market weakness. In my view this pullback to the 10-day line could be buyable on the basis of Thursday’s pocket pivot buy point. At the very least, this is showing strength within the base and likely needs a new market uptrend to really get going to the upside.




Questcor Pharmaceuticals (QCOR) also demonstrates the hazards of buying stocks into a market correction, as the stock failed on last week’s pocket pivot breakout and has now pulled down to its 20-day moving average, as we can see on the daily chart below. As I wrote on Wednesday of this past week, the one thing about QCOR’s flag breakout six days ago on the chart was the fact that while it was a pocket pivot breakout, it did not occur on any appreciable volume, thus the stock may need to reset here. We’ll see whether it can gain any support off the 20-day line this coming week, but if it can’t hold the line then this is certainly problematic for the stock.




In contrast to QCOR, and as I pointed out in that same report of this past Wednesday, Fleetcor Technologies’ (FLT) flag breakout of seven days ago on the daily chart, below, was much stronger given that it occurred on  much heavier, above-average volume. Thus the stock holds up much better as it pulls back to its 10-day moving average on below-average volume. In my view, the stock should hold the $100 price level and its recent flag breakout to remain viable. An orderly pullback to the 10-day or the 20-day moving averages, both hovering near the recent breakout point, could present an opportunistic buy area if one is also willing to keep a tight stop.




Ocwen Financial (OCN) flashed a pocket pivot buy point on Monday and immediately failed. But with the general market getting into trouble, it pulled back into its recent base and is currently holding along its 10-day and 20-day moving averages, as we see on the daily chart below. Volume is drying up here so the stock might be buyable along these levels with the idea that it can continue to hold up in this current four-week base.




OCN’s cousin stock, Nationstar Mortgage (NSM), also continues to move tight sideways in what is now a four-week base, as we can see on its daily chart below. NSM just missed trading enough volume on Monday to qualify as a pocket pivot buy point, the same day that OCN’s pocket pivot buy point failed. NSM is holding up slightly better as it remains above its 10-day moving average. Both stocks are just continuing to build bases during a market correction, which is what stronger leading stocks will do during such a general market environment. Thus these stocks must remain on your buy watch list.




Restoration Hardware (RH) is also pulling back within its base following a pocket pivot buy point that occurred on Monday, five days ago on the daily chart we can see below. However, I first discussed RH in last weekend’s report after the stock had flashed a “bottom-fishing” pocket pivot off the 20-day moving average and up through the 50-day moving average. Given the general market action over the past four days, the stock has pulled in and is now holding along its 20-day moving average but just a hair below its 10-day moving average. Meanwhile volume is drying up so there doesn’t appear to be anything abnormal in the pattern so far – it’s just the general market keeping a lid on any further upside for now.




Splunk (SPLK) came out with earnings on Thursday after the close and gapped up on Friday for a buyable gap-up move. Volume was huge, so this looks like a viable move to new highs, the current market correction notwithstanding. The intra-day low of Friday’s BGU was 52.52, and the stock closed 5.12% above that, so it remains within buyable range. I would prefer to catch a small pullback from Friday’s close if I’m really interested in owning the stock. If we were in a strong market uptrend I would not hesitate to take a position in SPLK, and likely would have done so on Friday. However, it wouldn’t hurt to see the stock build a short flag here with a pullback of sorts bringing it closer to the 52.52 intra-day low of this past Friday’s BGU. Perhaps that is wishful thinking on my part, as this is SPLK’s first-ever buyable gap-up move. It comes as the stock is trying to break out of a six-month uptrend channel that has seen the stock zig and zag its way higher. More recently, SPLK had broken below its 50-day moving average going into earnings, but in fact never violated the line. The Friday BGU now puts the stock back into play, especially if the general market is able to come out of its correction.




Among other stocks trying to make comebacks, I note that Celgene (CELG) is engaging in some “roundabout” activity as it tries to round out the lows of a new base after successfully testing its 50-day moving average in the first half of August. CELG basically came off of its peak price at the same time that the general market did, but it is now counter-trending the market as it moves back above its 10-day and 20-day moving averages while flashing a pocket pivot buy point this past Wednesday. The stock pulled in a little bit on Friday as volume dried up. Overall the action seems to be showing that CELG is forming a new base in constructive fashion. Based on Wednesday’s pocket pivot, the stock could be considered buyable with the idea that it will continue to hold above the 50-day moving average.




There is also some group confirmation behind CELG’s action. Gilead Sciences (GILD), a stock that doesn’t necessarily thrill me with its fundamentals, also flashed a pocket pivot buy point on Wednesday, as is evident on its daily chart, below. It appears to be mimicking CELG in that it also bounced off of its 50-day moving average in mid-August after correcting with the market up to that point. While GILD’s current earnings growth numbers are rather tepid, with earnings growing 2% in the most recent quarter, it is most definitely a forward-looking story as annual earnings are expected to shoot up to $3.00 a share in 2014 compared to $1.97 this year. Analysts are also looking for the stock to maintain that trend with earnings of $4.56 in 2015, $6.09 in 2016, and $7.17 in 2017. Once GILD gets through the -4% and 0% earnings growth estimated for the next two quarters, respectively, its earnings growth rates over the following four quarters are expected to bring a sharp sequential upside acceleration of 29%, 38%, 60%, and 78%, respectively. Thus there is something more to GILD than meets the eye when it comes to current earnings growth.




A name I’ve discussed in prior reports when it first broke out of a short flag formation (see July 7th report), Gigamon (GIMO), moved to new highs five weeks ago after announcing strong earnings, as we can see on its weekly chart. Over the past four weeks the stock has been moving sideways and this past week pulled back into its 10-week moving average. The stock found support along the line this week, but I would also note that it is still above its 50-day moving average on the daily chart (not shown) which is right at the 32 price level. Average daily volume has dropped from 688,000 three weeks ago to 261,000 shares this past week, which seems to indicate that selling interest is drying up as the stock corrects here. The flip side is that despite the strong fundamental story behind GIMO, institutions have not flocked to the stock, although I note that a number of A and A+-rated mutual funds have taken initial positions in the stock as of the most recently reported quarter in June. On the positive side, GIMO’s group rank has progressed from #112 nine weeks ago to #37 in the most recent week, which is a good sign. In any case, this pullback is occurring on very low volume which may create an opportunistic buy situation for those interested in the stock.




Following up on Apple (AAPL), we can see on its daily chart, below, that the buzz surrounding activist investor Carl Icahn’s disclosure that he bought a large position in the stock has fizzled somewhat as the stock pulls back down toward its 200-day moving average and appears to be retesting its 20-day moving average, where it found support three days ago. I don’t really see AAPL as being buyable at current levels. If you recall I first made a case for a bottom in the stock when it flashed a bottom-fishing pocket pivot coming up through the 50-day moving average in late July, well before Icahn started pumping his position on Twitter (see July 28th report).




In my report of this past Wednesday, I made a bearish case for Three-D Systems (DDD) as fitting the historical precedents of First Solar (FSLR) in 2008 and Broadcom (BRCM) in 2000. The stock is not giving up the ghost just yet, however, and I would say that this may be due to the fact that the 3-D printing stocks, as a group, are not breaking down. As in the case of Stratasys (SSYS), it continues to hold its recent breakout to all-time highs, while Exone Company (XONE) continues to work on a base as it anticipates the pricing of a 2.565 million share secondary offering in the coming days. Even Proto Labs (PRLB) is holding up within 2% of its all-time high after a recent base “re-breakout.” Thus the group is holding up, which likely has a positive effect on DDD, not to mention the fact that DDD has record short interest in excess of 28 million shares as of the most recent August 15th report date.




A group that has not been holding up, however, is the solar energy group. On the short side of the market First Solar (FSLR) continues to flounder along its 200-day moving average as it appears to be setting up for more downside. I maintain my downside price target at $30 with the 10-day moving average at 37.80 or the $40 price level, around where the 20-day line is at, as guides for upside trailing stops. Remember that if the general market is able to turn and resume its uptrend, short-sale targets might rally within their patterns, so be prepared to react as appropriate.




Solar City (SCTY), another solar group flameout, continues to plumb new lows, although as I mentioned in my report of this past Wednesday it is undercutting the prior late June low at 32.66. SCTY actually undercut that low on Wednesday and then staged a very weak “undercut & rally” move on Thursday before rolling over to a lower low Friday on above-average volume. This might have been due the early release of a weekend article on the stock in Barron’s magazine that pans the stock pretty nicely. In any case, look for more downside in the stock this week. For now I would use the 10-day moving average at 33.73 as an upside trailing stop. Ultimately I can see the stock going all the way back to the low 20’s, but it’s still early in the stock’s downtrend, and the last proper short-sale point was at the 50-day moving average in early August (see August 11th report). For discussion on other short-sale target stocks, please refer to my report of this past Wednesday, August 28th.




So far we’re in a correction that has seen the NASDAQ Composite Index drop 2.81% off of its recent peak while the S&P 500 has come off about 4.45% from its recent peak. This is short-term correction land, and the question is whether we’re going to see some sort of stabilization here or whether the wheels are going to come off, something that would likely have to be accompanied by a lot more leaders coming undone. So far I still see a lot of leaders trying to build new bases, something that leading stocks do during market corrections, so these remain on my buy radar as “go to” names in the event of a market turn.

The situation remains fluid, so investors should simply keep an open mind and be ready to move with the market trend in real-time. If Congress blocks any action against Syria this week, this might set off a market rally. But this is a binary event as Congress could also approve such an action, and it is unclear what the market would do in the event of such a headline, at least in the short-term. Meanwhile, the issue of QE tapering provides a nice cross-current. My view is that in the absence of QE tapering, the Syria “crisis” likely creates a buying opportunity, and clarity regarding QE tapering might be forthcoming in September following the Fed policy announcement on the 18th.


Gil Morales


CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, 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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