The Gilmo Report

September 19, 2010

September 19, 2010

If you were paying attention to the S&P 500 and the Dow Jones Industrials Indexes only, Friday looked like a big-volume churning day that sticks out like a sore thumb as the index appears to have run into logical resistance in the 1130 area as we see in the daily chart of the S&P 500 Index below:

S&P 500 Gilmo Report Chart

Despite the look of the S&P 500, the NASDAQ 100 stocks offer a picture of abject strength as they have powered higher for 8 straight days:

NASDAQ 100 Gilmo Report Chart

No doubt this is what helps the NASDAQ Composite to outperform its larger index cousins as it broke out through resistance on Friday and made a higher high, as we see in its chart, below. I might be concerned that the strength seen in the narrower NASDAQ 100 Index, which features such leading stocks as Apple, Inc., (AAPL), Amazon.com (AMZN), Baidu, Inc. (BIDU), etc., as a sign of a lack of breadth in this market, but the truth is that I see a pantheon of stocks currently either breaking out, making continuous new highs, or flashing pocket pivot buy points and/or volume signatures, all of which paints a more broadly positive picture than the S&P 500 Index. A quick perusal of the charts of the S&P 400 Mid-Cap Index and the Russell 2000 Index (not shown), which you can do on your own, reveals that these lesser-cap areas of the market are acting fine as they consolidate their own moves off the late August lows. If we simply take the NASDAQ Composite’s price/volume action at face value, it looks rather positive with a strong-volume push through resistance through the 2300 level, as I’ve highlighted, roughly, on the chart below. The fact is, despite my feeling that the market “needs” to pull back and consolidate here, the major market indexes refuse to give it up, which in itself is a sign of strength that we must heed.

NASDAQ Gilmo Report Chart

There is also nothing “fluky” about the NASDAQ’s outperformance, as it is being led by a number of resurging big-cap names such as the grand-daddy of cloud-computing, Oracle Corp. (ORCL), shown below on a daily chart. ORCL blasted out of a base on Friday, gapping up in a buyable gap-up move after the company announced stellar earnings on Thursday after the close. We are now looking at a two-quarter acceleration in ORCL’s earnings growth, and I consider its action to be a major positive for the general market and further confirmation of the validity of the cloud-computing theme in this current market. Remember that it was Oracle Chairman Larry Ellison in the mid-1990’s who first postulated the idea of a “network PC” where all the applications were accessed from and stored in a remote network via the internet while the “PC” functioned as essentially a “dumb terminal” used to access remote servers and applications. The next wave of the PC/Internet/Communications boom is upon us, and ORCL’s action is strong confirmation of this development, in my view. For those who like slower, more reliable big-cap stocks (although ORCL’s action this past week was anything but “slow”), ORCL is quite buyable here on the basis of this gap-up
breakout.

Oracle Corp. (ORCL) Gilmo Report Chart

If ORCL’s action is good for the market, then it is also a good sign for the broader cloud-computing group that I have favored for some time now, as members are well aware by now. Salesforce.com (CRM) is consolidating its recent move to new highs a couple of weeks ago, and the stock has endured an analyst downgrade or two based on “valuation” as it settles in here along its 10-day and 20-day moving averages. Note that CRM, while currently trading below its 10-day line, has not technically violated the 10-day line since it has not moved below the intra-day low of the first close under the 10-day moving average, as I’ve indicated on the daily chart of CRM, below. CRM’s leadership role is no secret, and the reasons for it are clear: outstanding fundamentals. The HighGrowthStock Investor software chart below which is provided by our good friends over at HGSI (www.highgrowthstock.com), shows accelerating sales and earnings growth for CRM over the past two and three quarters, respectively. I like the stock here along the 20-day line, and would watch for a pocket pivot move to develop here as a signal to become more aggressive in the stock.

Salesforce.com (CRM) Gilmo Report Chart


VMware, Inc. (VMW), which is currently in talks to buy the old Novell (NOVL), a big leading network stock in the middle 1990’s as I recall way back when, is also showing the same type of fundamental strength as we see in its daily chart below, also courtesy of HighGrowthStock Investor. In fact, the rest of this report will feature HGSI charts and data as I go through the fundamentals of these cloud-computing stocks which I believe provide a strong reason why these stocks remain in a leadership position in the current market environment. VMW is showing strong acceleration in earnings and sales, and Friday’s move down into the 10-day moving average sets up the possibility of a pocket pivot type of move off the 10-day line, although I have no problem building into a position here along the short moving average (pink line on the chart). VMW remains a major leader in the group, along with its partner CRM, and hence I believe that one or the other of these stocks should be in any growth investor’s portfolio, particularly if they start to go parabolic here, which I believe is always a possibility as long as they remain in robust uptrends.

VMware, Inc. (VMW) Gilmo Report Chart


F5 Networks, Inc. (FFIV) has been leading currently among my “Power Trio” of cloud-computing leaders that also includes CRM and VMW. All three have continued to hit new price highs with each jockeying for pole position from week to week. FFIV leads the pack this week as it made a new all-time high on Friday and has now pierced the $100 price level. If we consider Jesse Livermore’s rule about stocks when they first go through a “Century Mark” like the $100, $200, or $300 price level (see discussion of PCLN in my August 18th report), then FFIV could have a sharper, even parabolic move through the $100 price level, so this should be watched for. FFIV certainly has the fundamental “beef” to back up its price/volume action, and we can see that the stock has an outstanding multi-quarter record of very robust earnings growth. The stock continues to remain above its 10-day moving average, and I would use any pullback to the line as a potential buy point, but I would much prefer to see some sort of pocket pivot type of volume signature off the 10-day moving average as a strong buy signal. While FFIV has moved to new highs over the past three days, volume has remained somewhat tepid, so a stronger-volume type of pocket pivot move would be nice to see here.

F5 Networks, Inc. (FFIV) Gilmo Report Chart

I noted in my Wednesday report that I was disappointed with Acme Packet’s (APKT) tepid action, and of course this served no purpose other than to send APKT back to the upside on Friday as it flashed a pocket pivot buy point, popping up off of its 10-day moving average on volume that was higher than any down-volume day over the prior ten days – our typical pocket pivot price/volume signature. As I’ve discussed in previous reports, APKT has the potential to go on a strong price move here based on the fact that it has only recently emerged from an ascending base formation as I last discussed in my report of September 5th. This is the kind of action I was looking for in my discussion of this past Wednesday, and it seems that the right amount of whining about the stock has caused it to flex its muscles here with a potentially buyable pocket pivot move, right here, right now. As we see in the daily chart and data, below, APKT has the strong earnings and sales growth required of a leading stock that is also related to the cloud-computing theme.

Acme Packet's (APKT) Gilmo Report Chart

As I noted in my September 1st report, the cloud-computing space is broad and getting broader. Back then I discussed Citrix Systems (CTSX) as it was resting on its 10-day moving average (not shown), and the stock has gone on a tear since then, rising from 58 to 68, roughly, over the past three weeks. Likewise, Aruba Networks (ARUN), which I first discussed in my August 29th report, has continued to move higher over the past three weeks as it follows its 10-week moving average into new high price ground, as we see in its daily chart, below. ARUN has strung together seven quarters of triple-digit earnings growth as a strong, emerging player in the Branch Networking area. For now ARUN is a hold, but I would look at pullbacks to the 10-day moving average as spots to add to any position one might have in the stock currently. Again, however, we see that ARUN has the strong fundamentals that characterize all of the stocks in the cloud-computing group – at least the ones that we are looking at and monitoring in this current market environment.

Aruba Networks (ARUN) Gilmo Report Chart

On the hardware side of the cloud-computing equation, Altera Corp. (ALTR) has followed through on this second re-taking of its 50-day moving average, as we see on its daily chart, below. As I discussed in both of my reports from last weekend and this past Wednesday, September 12th and 15th, ALTR found support at its 10-day moving average after failing on an initial pocket pivot attempt that briefly took the stock back above its 50-day moving average. This led to the latest move back up through the 50-day line which is now picking up a lot of buying volume as the stock has made a bee-line for potential new price highs on five straight up days. ALTR is a big-cap semiconductor company in the field-programmable gate array (FPGA)space, a key hardware enabler for cloud-computing applications, as I’ve discussed in previous reports, and has shown two quarters of extremely strong and powerful triple-digit earnings growth on top of robust and accelerating sales growth. ALTR could pause here to build a little handle, but I would not be surprised if it simply moved to new highs first.

Altera Corp. (ALTR) Gilmo Report Chart

The last time I talked about Adtran (ADTN) was in my August 29th report when it flashed a pocket pivot buy point off of its 50-day moving average 15 trading days ago, as we see on the daily chart below. ADTN benefits from government largesse intended to help the build-out and expand broadband infrastructure, another side line to the whole cloud-computing thing, and since flashing that pocket pivot buy point on August 27th the stock has worked its way to a multi-year high as it makes its way to the very top of what is a 14-year long macro-base if you look at it on a monthly chart (not shown). A breakout from such a long-term pattern, through the 38-40 price area, would make the current price/volume action even more compelling, in my view. The stock flashed a pocket pivot buy point, a continuation buy point, off the 10-day moving average on Friday as volume picked up sharply. This is where you add to any ADTN position you might already have. I should also mention that a position could be initiated here on the basis of this pocket pivot buy signal since the stock is just about $1 above its $33 standard new-high breakout buy point of a couple of weeks ago.

Adtran (ADTN) Gilmo Report Chart

We’ve been watching Priceline.com (PCLN) do very well since I first discussed its pocket pivot buy points at the 50-day and 200-day moving averages back in my July 7th and 11th reports, as well as its gap-up on its earnings-related gap-up move (August 4th report) and its action up here around and above the $300 price level (August 15th and 18th). Even online travel companies Expedia (EXPE) and Travelzoo (TZOO) have been jetting to higher highs, so it is not surprising to see Wynn Resorts (WYNN) also establishing itself as a comeback leader in this area as a cousin stock to PCLN, EXPE, and TZOO. WYNN is something of a turnaround situation in the space, and on Friday it flashed a buyable pocket pivot point off of its 10-day moving average. WYNN has put in three quarters of strong sales growth that has translated into two big turnaround quarters of triple-digit earnings growth, as we see on the daily chart of the stock, below. WYNN has seen some heavy-volume down days in its base, but to some extent this has to be viewed within the context of a weak general market environment, including the “Flash Crash” of May 6th. In any case, the pocket pivot gives one enough of a buyable reference point with minimal risk with the idea of getting a jump on any potential breakout to new highs.

Wynn Resorts (WYNN) Gilmo Report Chart

My pocket pivot screen produced 106 names on Friday, which is an inordinately high number of stocks, but this was probably due to some exaggeration in volume levels in certain stocks due to S&P index rebalancing. So when I see a pocket pivot in a big index stock like Union Pacific (UNP), I may be a little skeptical, but the bottom line here is that this is very bullish action for UNP, a railroad stock, and probably a sign for the general market as well, which must be taken at face value. UNP has logged two quarters of strong turnaround fundamentals, and recently broke out to higher highs, as we can see on its daily chart, below. Since then, the stock has trended sideways until finally meeting up with its 10-day moving average this week, off of which it flashed a pocket pivot buy point on Friday. To quote Gomer Pyle of historic TV sit-com fame: “Surprazz, surprazz!” If the rails are leading, that has to be good for the general market, as I see it. If you like big-cap railroads, then UNP is buyable right here, using the standard 7-9% downside stop, in my view.

Union Pacific (UNP) Gilmo Report Chart

Likewise, a new-high breakout and a pocket pivot buy point in big Dow Jones Industrials index stock Caterpillar, Inc. (CAT), lends credence to the current market strength. In fact, with big-caps industrials like UNP, CAT, and even Dupont De Nemours (DD), which I mentioned in my reports of August 29th and September 1st, acting well, it seems that the market is making a statement about where it sees the economy heading in the coming months. This, of course, is at odds with the mass of economists who see nothing but gloom and doom ahead, but with a potential re-balancing of Congress coming down the pike in November, some sort of inflection point and reversal of the anti-business, economically-regressive stance of government back to some sense of pro-growth sanity could be enough for a strong market rally that carries through to the end of the year. Who knows for sure, but I have to like the action in these big-caps as evidence attesting to an improving market tone. CAT’s move on Friday was a clear pocket pivot buy point off the 10-day moving average that coincides with a bona fide, standard new-high breakout buy point on the same day, lending additional confirmation to the move. It is buyable here with the idea of using the standard 7-8% stop-loss used for standard base breakouts.

Caterpillar, Inc. (CAT) Gilmo Report Chart

It has been a long time since I last discussed Dendreon Corp. (DNDN), the big prostate cancer play based on its new therapy, Provenge, which was approved back in late April. That news was obviously sold into, given that the stock immediately blew off to the upside and then rolled over 55.3% from its late April high of 57.67. Since hitting a low of 25.78 in July, DNDN has slowly been working its way up the right side of a potential base formation, as we see on its daily chart, below. Note the two pocket pivot buy points in the pattern, the first off the 50-day moving average in early August, and the second one coming on September 1st off of the 10-day moving average. DNDN has now met up with its 10-day moving average, setting up the possibility of another pocket pivot move off the 10-day line, which I would watch for closely here. One thing to note from a fundamental perspective is that the revenues from Provenge sales are starting to roll in, as I’ve indicated on the chart below, and this could provide some basis for continued upside in the stock. Aggressive players could even try taking a position right here off of the 10-day moving average in anticipation of a pocket pivot move or similar in the coming days.

Dendreon Corp. (DNDN) Gilmo Report Chart

There is not a lot to say about the general market other than that the current uptrend remains in force, and until some evidence to the contrary shows up, investors should be focused on positioning themselves in leading stocks, using the current consolidative period in the general market to take advantage of any logical buy points on pullbacks in leading stocks. At the same time, one should be ready to hop on pocket pivot buy points as they emerge, as we see in stocks like APKT and ADTN, for example.

Gil Morales

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

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