The Gilmo Report

September 2, 2012

September 2, 2012

Investors spent Thursday discounting the possibility of Fed Chief Ben Bernanke putting the kibosh on QE3 during his speech on Friday, and the market sold off on light volume, as we see on the daily chart of the NASDAQ Composite Index, shown below. Friday morning Bernanke laid out the case for continued vigilance with respect to the potential implementation of more QE policies and defended the Fed’s use of QE thus far since the financial crisis began in 2008. This was seen as laying the groundwork for action by the Fed when they meet again in mid-September, and after some post-speech gyrations that resulted in a “double-reversal” for the NASDAQ as it first opened up sharply, then sold off into the red, and then finally closed up on the day with volume picking up sharply from the prior day. Thus the market remains in what now has the look of a two-week “handle” to a cup-with-handle type of formation as it continues to move sideways and digest the gains made in the first half of August. Meanwhile, NYSE short interest remains at extremely high levels at 21.0% and has continued to move steadily higher. Historically, high NYSE short interest levels are a contrarian positive for the market. And while it is a secondary indicator at best it does reflect the fact that rampant “complacency” is not ruling current market sentiment.

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While the major stock market indexes have tracked sideways over the past two weeks the place to be has been the precious metals. Gold and silver were the big story on Friday as they both flashed huge-volume pocket pivot buy points at and off of their 10-day and 200-day moving averages. I first discussed in my report of August 19th the bottom-fishing pocket pivot in the SPDR Gold Shares (GLD) that started the move in the precious metals, and the iShares Silver Trust (SLV) flashed its own bottom-fishing pocket pivot on the following Monday. Since then the precious metals have been off to the races. As I discussed in my report of August 29th, the confluence of the 10-day and 200-day moving averages would be the first line of support for both the GLD and the SLV on any pullback. As we can see on the daily chart of the SLV, below, the 10-day line provided ready support as well as a proper launch pad for a pocket pivot buy point which I see as a clear second buy point in the pattern. Even if one got nervous before Friday and sold their GLD or SLV before Bernanke’s speech, the ensuing pocket pivot buy points on Friday create very clear and simple entry points to act upon, using the 10-day lines as a downside selling guide.

iShares Silver Trust (SLV) Gilmo Report Stock Chart

While happy days have certainly been here again for the precious metals, I still find that it is most productive to continue focusing on the handful of names I’ve been trafficking in, as they all continue to act well, if not with a huge amount of upside thrust. My tactic has been to work into positions in stocks as they quietly pullback or feign temporary weakness, as has been the case with LinkedIn (LNKD), shown below on a daily chart. LNKD is one of those stocks that is best bought on pullbacks, and I first began buying the stock underneath and around its 50-day moving average. On Wednesday of this past week the stock flashed a pocket pivot buy point as it broke out of a short sideways range, but true to form it has pulled back to its 10-day moving average. Volume was light on Thursday but picked up on Friday as the stock found support at the 10-day line. In my view, LNKD is setting up to move higher, and I consider the stock potentially buyable on this pullback on the basis of Wednesday’s pocket pivot. The utter weakness in other social-networking names like Facebook (FB), Zynga (ZNGA), and Groupon (GRPN) might weigh LNKD down in the short-term, but it does strike me as one stock potentially setting up to move higher at some point.

LinkedIn (LNKD) Gilmo Report Stock Chart

Regeneron Pharmaceuticals (REGN) remains my favorite stock among bio-tech names, and with the big bio-techs like Biogen-Idec (BIIB) all acting very well this #2-rated industry group deserves some representation in every investor’s portfolio, as I see it. We have been following REGN for over a month now, and the stock finally broke out of a cup-with-handle formation last week, as we see on its daily chart below. Thursday and Friday saw the stock pull back towards its 10-day moving average from which it flashed pocket pivot buy points on both days. This is very constructive action coming on the heels of last week’s standard-issue base-breakout, and the stock in fact remains within 5% of its 141.96 breakout point in the handle and is potentially buyable at current price levels solely on this basis. Thursday’s and Friday’s pocket pivot buy points add weight to the case for owning REGN, and the stock can simply be bought right here right now with the idea that it should hold the 141.96 breakout point from here. What makes REGN most attractive to me as a bio-tech is that it combines a strong fundamental foundation with continued, resilient, and strong technical action.

Regeneron Pharmaceuticals (REGN) Gilmo Report Stock Chart

On Friday I noted some subtle pocket pivots among a variety of stocks, even including big bio-tech Amgen (AMGN), not shown, which flashed a very subtle pocket pivot along its 10-day moving average. Another bio-tech, albeit of a smaller nature, that we have been following for a while, Onyx Pharmaceuticals (ONXX), also flashed a subtle pocket pivot buy point on Friday. We can see on ONXX’s daily chart below that the stock has had two big buyable gap-up moves in its pattern, but the second one that occurred in the latter half of July likely was a bit too obvious coming so soon after the one in late June. Thus ONXX has spent some time building a new base as it has pulled back to its 50-day moving average twice. On Friday the stock held on a pullback to the 50-day line as well as the 10-day line, the magenta moving average on the chart, and it found enough support at these key moving averages to move up off of them and post a pocket pivot buy point within the base. Keep in mind that ONXX is still losing money, but its drug pipeline is broad enough that analysts believe the company can earn $7.88 a share in 2016. This is potentially buyable with the idea of using a violation of the 50-day moving average as your selling guide.

Onyx Pharmaceuticals (ONXX) Gilmo Report Stock Chart

Nationstar Mortgage Holdings (NSM) has continued to be one of the hottest-performing IPOs in this market, as we can easily surmise from its daily chart, below, and the stock continues to display strong technical buy signals. After first testing its 50-day moving average in late July, NSM was able to turn and launch straight up to new highs and move above the $28 price level. This sort of straight-down-and-straight-up action is a bit suspect, however, and the stock corrected this by pulling down towards the 50-day moving average on the daily chart while actually touching the 10-week line on its weekly chart (not shown). This resulted in a bounce and a pocket pivot buy point on Tuesday of this past week from a somewhat v-shaped position. I didn’t discuss this in my Wednesday report of this past week because of this slight flaw, but over the past two days the stock has been able to correct this by pulling back to its 10-day line on light volume. This is a potentially buyable position here, with the idea that the stock should hold the 10-day moving average – if it can’t, then likely it needs more time to build a more extensive base, but aggressive players can take a shot here.

Nationstar Mortgage Holdings (NSM) Gilmo Report Stock Chart

Lumber Liquidators (LL) is not unlike NSM in the sense that it also flashed a pocket pivot buy point off the 10-day moving average this past Wednesday from a somewhat v-shaped formation. We first discussed the stock when it was still in the flag pattern from which it broke out in the early part of August, and it has jostled its way higher since then. Wednesday’s pocket pivot is constructive, but probably needed the two days of pulling back that we saw on Thursday and Friday. Housing-related stocks have remained constructive, even if they aren’t all streaking to the upside, and I would place in this group situations like Home Depot (HD), Fortune Brands Home & Security (FBHS), Pulte Home (PHM) and the other home-builders, and even Eagle Materials (EXP), all of which are trending higher in tight fashion. LL’s pullback to the 10-day line on light volume appears potentially buyable, but the stock may go sideways a bit more along the 10-day before moving higher. I would like to see a pocket pivot occur off of the 10-day moving average after some sideways movement, so as it pulls back to the 10-day line it looks buyable.

Lumber Liquidators (LL) Gilmo Report Stock Chart

Rackspace Holdings (RAX) has acted well and on Friday it “kissed” the 60 price level. In my view, that was the place to sell the stock and take short-term profits given the sheer steepness of the stock’s rise up the right side of this big, deep cup, as we see on its weekly chart, below. From here I would look for the stock to pull back 5-10% as it builds a proper handle, but there is still an outside chance that the stock could simply continue higher. Note that over the past three weeks the stock has closed at the peak of its weekly price range, and it did so again this past week with volume picking up. I have considered RAX to be part of the “stack stock” theme, namely those stocks related to the storage and capacity requirements of the growing internet “cloud,” along with Amazon.com (AMZN). While AMZN continues its march to new all-time highs as it posted its highest-ever closing price of 248.27 on Friday, I have also noticed that Akamai Technologies (AKAM), another “stack stock,” has also been quietly building a cup-with-handle formation as it moves tight sideways, and I show a weekly chart of AKAM on the next page.

Rackspace Holdings (RAX) Gilmo Report Stock Chart

Like RAX, AKAM had a sharp move up off of the lows of its base in mid-July, as we see in the weekly chart below, and has moved right up to the peak on the left side of the cup. It has now spent the last couple of weeks moving tight sideways as it forms a short flag type of handle to its cup-with-handle base with volume drying up. In my view, this is the type of constructive action you want to see after a sharp move straight up off the lows of the pattern, and it is why I tend to think RAX needs to engage in this type of short-term consolidating action if it is to sustain further upside momentum from current levels. I tend to think AKAM looks quite buyable within this handle given that it had a pocket pivot buy point on July 15th and has moved straight sideways since that buy point, with the idea that the stock should hold the 36 price level, the point from which the July 15th pocket pivot launched.

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Generally, my thoughts from the most recent discussion of any particular long idea that I have discussed in previous reports during August still stand over this Labor Day weekend. Members should refer to those previous reports for discussions of any long ideas not discussed in this report.

The market itself remains in a constructive period of “digestion” as it works off the bullish momentum as a result of its big upside jaunt in the first half of August, and so far there is no evidence to suggest otherwise, despite the bearish arguments of those who want to see a “triple top” in the charts. Speaking for myself, I see the market indexes as simply building handle-type consolidations to big cup formations that they’ve formed since the top in late March. One thing to keep in mind is that when the market breaks out to new highs it generally has to do it by forming at least a “double top” as it meets up with and then exceeds a prior high, which is what the NASDAQ Composite Index appears to be doing currently. The S&P 500 has more of a “triple top” thing going on, but to me this is all just reflective of a need to label and judge the market based on factors that do not take into account the underlying technical and fundamental context of the market. In terms of underlying conditions, we have a Fed apparently willing to move on the next wave of QE, perhaps at their next meeting in mid-September, while the November election looms ahead with its prospects of bringing real change to the U.S. and its fiscal and economic policy quagmire. Meanwhile, leading stocks act fine and provide an objective foothold from which to participate in any continued market rally. Take it from there.

Gil Morales
CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

 

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