The Gilmo Report

September 26, 2012

September 26, 2012

The market begins to show a few cracks here as  it peels off to the downside every day so far this week and some of the better  leaders start to feel some heat. Whether the heat turns into a meltdown is not  entirely clear yet, but it strikes me as prudent to prune back positions and  put some profits in the bank as one figures out how and whether one wishes to remain long in the face of further market weakness. As it stands right now, the NASDAQ Composite Index, shown below on a daily chart, has pulled right back down to its handle breakout of nearly  three weeks ago. The S&P 500 Index is holding up a little better as it closed at 1433.32, still well above the 1420 level through which it broke out three weeks ago. While volume was heavy yesterday, creating a clear distribution day for all of the indexes, today’s volume was lighter on the NASDAQ and just a hair heavier on the NYSE. Thus it is possible the market is in a position to stage a reflex bounce after getting smacked around for three days in a row. I think it is wise to remain cautionary here, looking for sound pullbacks in leading stocks to buy into if the market holds up and finds decent support somewhere between here and the 50-day moving average, currently around 3045 for the NASDAQ and 1409 for the S&P 500. On the other hand, a weak bounce could be a bounce to short into, but that remains to be seen.




Apple (AAPL), the big-stock NASDAQ leader until just recently, has failed to hold the $700 price level, invoking the Livermore Century-Mark Rule in reverse. The famous trader Jesse Livermore often bought stocks as they moved up through these big round numbers, but if a stock failed at such a century-mark level he would then short the stock. One could have done that on Monday when AAPL gapped down below the 700 price level, as we see on the daily chart below. AAPL also violated its 10-day moving average, but I would not necessariy use that as a selling guide given that the stock already had a minor 10-day line violation nearly three weeks ago. It would be logical, however, for AAPL to undercut the late August/early September lows where it moved sideways for about three weeks where it would meet up with its 50-day moving average, currently around 647. Those who own the stock and want to give it some room should use the 50-day moving average as their selling guide, but the stock has come under some heavy sellng volume over the past three days, so vigilance is advised.




While AAPL falters, and Google (GOOG) takes over the reigns as the new big-stock NASDAQ leader, (AMZN) goes along with AAPL as it also violated its 10-day moving average on Monday, as we see in its daily chart, below. AMZN has held along the 10-day moving average nicely, even flashing some pocket pivots along the way, but I would sell any AMZN shares bought on the basis of pocket pivots in early September as the stock may have to come down further and test its 50-day moving average. It is still well above the base-breakout of late July which occurred as the stock moved up through the 230.50 price level, but the stock likely needs to do some work if it is to move higher. Therefore I am not averse to taking profits in AMZN and waiting for the next, if any, buy point to appear at a later time. While a 30-plus point move in AMZN from its late-July breakout might seem like a lot of points, it is akin to a $23 stock going to $26, which is not a bad move but certainly not one to get carried away with.




So as some of these big-stock NASDAQ bellwethers come under pressure, we can look to the QE barometers themselves, the precious metals, for further clues of market weakness. Given the sharp moves we’ve seen in both gold and silver, with silver being the sharper of the two, as we see on the daily chart of the iShares Silver Trust (SLV), a sharp pullback is certainly not unexpected. Both the SPDR Gold Shares (GLD), not shown, and the SLV bounced off of their 20-day moving averages, but the volume was merely just above-average, whereas I would have like to have seen some stronger volume at the 20-day line. At this point I am not averse to taking some profits in my precious metals ETFs with the idea of adding to a core position again or just outright re-entering from scratch again on some sort of pocket pivot buy point coming up through the 10-day moving average, which for the SLV is currently running through the 33.30 price level. On the GLD, not shown, the 10-day is running through the 171.20 price level, so I would keep an eye on GLD and SLV in relation to where they are trading with respect to their 10-day moving averages.




Michael Kors Holdings (KORS) action following the pricing and release of its 20-million-share secondary offering was somewhat disappointing as the stock got slammed both Monday and Tuesday following Friday’s very constructive buyable gap-up move. KORS, shown below on a daily chart, closed at an all-time high of 57.35 on Friday after raising guidance Thursday after the close. But this almost looks like a deliberate manipulation considering how badly the stock fared after the secondary came to market. It is simply possible, however, that the sizable secondary offering sated the institutions’ appetite for the stock in the short-term. This may end up putting a short-term lid on any further upside movement, and I began to unload any KORS shares I had as it began to slip on Monday. By yesterday, however, the breakdown through the 54.40 intra-day low of the buyable gap-up day, our standard selling guide for any such buyable gap-up move, was a sign to begin thinking about dumping the stock. The stock closed today below its $53 secondary offering price, not the sign of strength I would like to see in what was a strong retail leader and hence another cautionary sign for the general market.




As always I advocate watching one’s stocks first, and the market index action second, and when my stocks start flashing big warning signals I am generally quick to heed them. In the case of Zillow (Z), which got pounded on huge volume following a negative research report, the sudden and massive breakdown is a clear exit sign, in my view. I would at least be looking to sell any bounce off the 50-day moving average where Z closed today, as we see on the daily chart below, assuming one was not out of the stock yesterday. A number of housing-related stocks also got hit hard yesterday, so suddenly the sector is under some solid pressure. While I know that yesterday’s drop was caused by a research report panning Z as a ridiculously over-valued stock, I do not believe it is prudent to ignore the large amount of selling in the stock given that it constitutes the heaviest single-day’s worth of selling volume in Z’s entire history. Again, this is not what you want to see in a potential leading stock, and when stocks begin to break like this you do not want to be sitting around too long waiting for the next shoe to drop.




Below are some current notes on stocks I’ve discussed in recent reports:


Equinix (EQIX) – In my September 12th report I noted that EQIX should hold the 185 level on any pullback, and the next day the stock gapped above the 200 level after announcing it had approved a conversion to REIT status. Since then the stock is holing along the 200 price level and exhibiting no obvious weakness in the face of this week’s selling. That said I am not a buyer of the stock unless I were to see a pocket pivot move off the 10-day moving average, currently running through 197.82.

Facebook (FB) – after Barron’s panned the stock in a cover story, FB blew through its 50-day moving average, effectively quashing any bottom-fishing expeditions we might have thought were possible in the stock.

LinkedIn (LNKD) – is pulling below the $120 price level and must hold the $113 base-breakout level on any further downside action. If the market is able to hold this current pullback, one might opportunistically look to buy a further pullback towards the 113 level with the idea that it should hold that level.

Lumber Liquidators (LL) – the stock has violated its 10-day moving average, so I would sell it.

Nationstar Mortgage Holdings (NSM) – looking a little bit climactic with the stock up nine days in a row, hence I might look to sell into this move.

Onyx Pharmaceuticals (ONXX) – pulling back to its base-breakout at the 78.78 price level. Today’s close at 82.52 puts the stock right at its 10-day moving average. With selling volume drying up in the stock I would look to buy shares on this pullback if the general market can hold up, with the idea that ONXX must hold the 78.78 level on any further pullback.

Regeneron Pharmaceutical (REGN) – doing the same thing as ONXX as it pulls back towards its prior breakout point at 141.96. REGN closed at 142.97, so I would not want to see the stock pull back much more than another point, roughly, although it is possible it could test the 50-day moving average at 140.13 if one wanted to give it a little bit more room, essentially 2% further downside from today’s close.

Solarwinds (SWI) – this stock always acts great when it’s going up, and then terribly when it’s going down. Today it acted terribly, breaking nearly 6% on heavy volume and closing below its 50-day moving average. If the stock moves below today’s intra-day low of 53.78 it should be sold without fail, although today’s action would be enough for me to dump it.


Over the weekend I asked Gilmo members to send me some of their favorite stock symbols so I could give my take on some of the names you are all watching. Some have asked me what I think of security names like Fortinet (FTNT) and Sourcefire (FIRE). I show the charts of each below, and I can give my assessment in two words: “Arf! Arf!” Weak upside volume in FTNT and some big-volume selling spikes in FIRE’s base have kept me away from these stocks, and today’s action confirms that decision.






One of the better stocks that was sent in is Catamaran Corp. (CTRX), shown below on a daily chart. CTRX strikes me as a little bit erratic, and I don’t like the big selling-volume spike in the middle of the chart. While yesterday was a pocket pivot buy point coming off the 10-day moving average, as we can see on the chart, the stock seems to lack any significant upside buying interest in the pattern, which is why I’ve passed on it myself.




A couple of questions also came in about Zynga (ZNGA), but let’s get serious. ZNGA has a 1 Relative Strength rating (yes that’s 1 as in “one”) and is trading at $2.84 a share. Meanwhile, it made 1 whopping cent on $332.5 million in sales, which tells me that management hasn’t figure out how to make a profit with all those sales revenues coming in the door, and this is reflected by its 1.4% quarterly after-tax profit margins. I’d rather own an AM/PM Mini-mart – the profit margins are better.



Another popular stock that comes up often in member email questions is Invensense (INVN). At one time, a long, long time ago, I thought INVN was a worthwhile stock, and for a period of time it was, following its initial pocket pivot buy point around the $11 price level way back in January of this year. But, proving that Cinderella only comes once, INVN has failed to live up to its promise, and the action over the past two days, as we can see on the daily chart below, shows why you don’t want to buy junky little has-beens with -18% earnings growth on a meager 10% sales growth in the most recent quarter. I’m sure some might have been attracted to the bottom-fishing pocket pivot back in late July, but INVN simply lacked the fundamental basis for any further upside. Thus it simply busts back below its 50-day moving average on heavy volume once the market begins to slide a bit. I give INVN a “Five-Arf!” rating.




Alkermes (ALKS), shown below on a weekly chart, was one of the better stocks mentioned, and its fundamentals are relatively decent with 875% and 186% earnings growth over the past two quarters. However, ALKS tends to have an erratic earnings and sales record, and lacks a certain something in my mind that would make it institutional quality. The stock is trying to emerge from a nearly 15-month consolidation, as is evident on the chart, and this is constructive. But it still only trades about $20 million a day in dollar volume which makes it a bit less liquid than I’d prefer. As long as ALKS can hold the $20 level, I suppose, it is technically fine. Perhaps if the earnings and sales situation continues to improve and becomes more consistent as it has over the past two quarters, the stock will grow average daily volume as it attracts more institutional interest, at which point I would become more interested.




Given the position of the indexes, particularly the NASDAQ as it sits right on top of its handle breakout of nearly three weeks ago, I am not necessarily in the mood to start shorting stocks willy-nilly. On the other hand, the action in some of my holdings has pushed me into a heavy cash position. This has allowed me to bank profits in the market rally over the past month or so, and I prefer being in a position to see how things develop here, perhaps remaining opportunistic on the buy side if this market pullback proves short-lived. Such opportunism would essentially consist of watching how leaders act as they pull back with the market, and looking to buy into pullbacks in those leaders that are acting the strongest, preferably as they pull into a key moving average or a prior break point and do so constructively. I think, however, that we will have a better picture of what is going on currently as we approach the weekend, and it may be that some ideas on the short side develop by then as well. Stay tuned.


Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 a position in AGQ, though positions are subject to change at any time and without notice.

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