The Gilmo Report

September 8, 2013

September 8, 2013

The market strikes me as being in a strange place currently, and the idea of trying to slap a label on the action such as “market in correction” is not entirely accurate and blinds one to potential opportunities. I’ve often advocated the idea of treating the market not as a stock market but as a market of stocks, seeking to capitalize on opportunities both long and short as they arise. The current environment seems to fit this sort of “template” that is really a non-template. The market currently seems to be a sort of “tale of two exchanges,” as the NASDAQ-based stocks appear to be acting far better than their NYSE-based counterparts.

The evidence supporting this can be seen in the daily chart of the NASDAQ Composite Index, shown below, which remains within 1% of its early August peak and which showed what looks to me like strong supporting action on Friday. The Bureau of Labor Statistics’ release of the jobs number showed 169,000 new non-farm payrolls, well below expectations. But the unemployment rate dropped to 7.3% thanks to the lowest labor participation rate in 35 years. This occurred as more unemployed are simply dropped from the count. Initially, the market set off on a morning rally. This turned decidedly negative as the Dow swooned nearly 200 points following news that Russia would provide aid to Syria in the event of a U.S. strike on that country. The market then shook off that news sell-off to turn back into positive territory but by the close ended relatively flat.

On its face, the NASDAQ Composite chart looks fairly positive given that all four days this week were up days on volume that was either average or above average and Friday’s action has the index closing in the upper part of its daily range on heavy volume.

 

GR090813-NAZ

 

Meanwhile, the S&P 500, shown below on a daily chart, looks less happy as it remains below its 50-day moving average. Friday’s volume came in well below average and lower than Thursday’s as the index closed flat and just barely in the upper half of its daily trading range. To support the idea that the market might be trying to turn here based on the underlying action of leading stocks, which I find to be rather constructive right now, I would like to see the S&P 500 get back above its 50-day moving average. Intuitively, this would absolutely have to happen if the market is going to return to full-fledged rally mode.

 

GR090813-SPX

 

The strength in the NASDAQ is mostly being led by the larger stocks as we can see that the Russell 2000 Small-cap Index, shown below on a daily chart sans volume, also remains below its 50-day moving average. Again, I would look for a move above the 50-day line by the Russell 2000 as well as the S&P 500 as strong confirmation of a new upside move in the broader market. Meanwhile, I see no point in trying to maintain a rigidly bullish or bearish stance as a number of stocks are showing positive action, and it is there that I remain focused for now.

 

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As we approach the upcoming Fed policy meeting to be held September 17-18, the action in precious metals as well as bonds seems to indicate some tentativeness regarding exactly where the Fed is headed with QE tapering. Gold, as represented by the SPDR Gold Shares (GLD), shown below on a daily chart, has pulled back a little bit over the past week or so, but has managed to hold above its 20-day moving average as its uptrend off the June lows remains intact, so far. Some Fed heads have talked of the Fed cutting its monthly bond purchases to $70 billion from $85 billion, something of a “gradual” tapering. In the “old days,” before the Age of QE, traders used to refer to the old rule of “three steps and a stumble” whereby the market would finally correct after the Fed had raised rates three times. If we were to consider a tapering of monthly QE injections to $70 billion from $85 billion as one step, perhaps the market may not react as much as many investors might think. Rather than trying to outthink the Fed, I think investors should just focus on the action in individual stocks.

 

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Checking in with our so-called “Four Horsemen,” we can start with Facebook (FB), which continues to charge higher following its buyable gap-up move of late July. The last buy point was the breakout from the short flag formation 10 days ago on the daily chart, shown below, and which I discussed in my report of August 25th. FB on Friday moved to within a buck-and-a-nickel of its all-time intra-day high, a high achieved on the day it went public in May of 2012. Is the market in a correction If it is, somebody forgot to tell FB about it.

 

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Netflix (NFLX) also appears to be oblivious to the market’s correction, as it has trended higher over the past five weeks of “market correction,” hitting a new 52-week high on Thursday before backing down on lighter volume Friday. Watch for the next buy point in the stock, which could come on a continuation pocket pivot off the 10-day moving average down at 286 and change. For now the stock is extended and remains in a quite healthy uptrend.

 

GR090813-NFLX

 

I wrote in my report of this past Wednesday that I would take an opportunistic view of any pullback in LinkedIn (LNKD) as a result of its secondary offering. Later that evening I was quite surprised to see the company announce that 5.38 million shares of LNKD shares had been priced at $223, quite a sweetheart deal for what I’m guessing was mostly or entirely institutional investors who were given the opportunity to buy in on the offering. LNKD traded down to about 232 after-hours when the secondary pricing was announced, but the next morning was trading relatively flat pre-open. This resulted in a strong pocket pivot buy point emerging along the 10-day moving average, as we see on the daily chart, below. The stock is now off and running to all-time highs as it closed above the $250 price level for the first time in its history. The stock is within range of the pocket pivot buy point of this past Thursday, but I would look for any small pullback as a better chance to buy shares.

 

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Tesla Motors (TSLA) was hit on Friday with a little bit of selling as it pulled back to a point just below its 10-day moving average. Apparently some NYU professor had posted on a Wall Street Journal blog his analysis of “fair value” for the stock, which he, in all his academic wisdom, places at $67 a share. Even CNBC gave air time to the good professor and his analysis which, in my view, mostly goes to show why he is a professor and not a professional investor. This had the effect of sending TSLA down a little less than 2% on the day to close 13 cents below its 10-day moving average. Volume picked up on the day, as we see on the daily chart below, but remained 20% below average.

As I’ve discussed in previous reports, I believe the stock broke out of an ascending base at around the 158.88 price level, thus any pullbacks to that level make the stock potentially buyable. Currently the stock is within 5.1% of that breakout point, so technically is right on the border of being buyable. Any further pullback, perhaps even down to the 20-day moving average currently down at 157.99, would then be quite buyable with the idea that the stock will hold the ascending base breakout. Remember that ascending bases occur during market corrections, and the latter part of TSLA’s ascending base did form during the market’s current “correction.” Can TSLA go higher? I would suggest that members go read the Forbes blog article I wrote with my colleague Dr. Chris Kacher back on June 3, 2013 where we compared TSLA of 2013 to General Motors (GM) in 1915. The article can be found at: http://is.gd/eoZb4X.

 

GR090813-TSLA

 

While the previous four stocks might be considered the “Four Horsemen” of the current environment, we might think of Yelp (YELP) as being the latest “Rocket Man” of the current market environment. After flashing a couple of pocket pivot buy points along its 10-day moving average, something I discussed several times in reports over the last week or so, the stock launched higher, gapping up to new closing highs on Thursday and Friday on huge volume. As I wrote in my report of this past Wednesday, I viewed the action on that day, three days ago on the daily chart below, as the actual trendline base-breakout from a high and tight flag formation. Those who abide by more simplistic measures of what constitutes a base breakout might not see the stock as buyable until it exceeded the 59.35 high (and probably adding a very arbitrary dime to make it a 59.45 “buy point”) on the left side of the pattern.

My view is that this is a late buy point and I would actually be looking for the stock to pull in to the 60 level, maybe just a little bit lower from here. Given that I bought the stock along the 10-day line, my tendency is to sell or cut back the position into the three-day launch and look to buy back on a pullback to 60 or better. Those who bought along the 10-day line in the 53-54 area now have a 15-20% profit in the stock, and in this environment it has been my policy to take at least partial profits on such a move. I may be wrong, and the stock could just continue higher, but I think the odds of at least a quick pullback now that the breakout is quite obvious to the crowd are decent.

 

GR090813-YELP

 

In my Wednesday report I also discussed the tight action with volume drying up in Splunk (SPLK) as it built a short flag formation after its buyable gap-up move of five days ago on the daily chart, shown below. On Friday the stock gapped up and out of this short three-day flag on above-average volume, although it did stall and close in the lower part of its daily range. If one bought shares on Thursday, one is up on the position, and I would view any pullback back towards the short three-day flag’s position in the 55.30 area as potentially buyable.

 

GR090813-SPLK

 

I first started talking about InfoBlox (BLOX) way back in June when it was first emerging from a more than year-long base that it formed after coming public in April of 2012 (see June 9th report). As we see on the daily chart, below, BLOX has quietly continued to trend higher, more or less ignoring the general market volatility during that period. On Friday BLOX gapped up after announcing strong earnings on Thursday after the close. Now we have what is a clear buyable gap-up move using the 37.69 intra-day low of Friday’s gap-up day as a selling guide. BLOX closed at 40.69 on Friday, not quite 8% above the intra-day low, so it is just a bit extended at this point. I would watch, however, for the stock to possibly move tight sideways over the coming days, perhaps in a manner similar to what SPLK did before moving higher itself on Friday (see chart above). Generally, if a stock has a buyable gap-up and closes near the peak of its range on that day that is a sign of strength. If it then moves tight sideways near that peak over the ensuing days then that is a sign of confirming strength and the stock can usually be bought right there. Keep an eye on BLOX to see how things develop
from here.

 

GR090813-BLOX

 

Restoration Hardware (RH) followed through on its initial constructive rumblings and pocket pivots along the 10-day moving average over the past couple of weeks with a nice trendline/base breakout on Friday, as we can see on its daily chart, below. Lumber Liquidators (LL), not shown, continues to track tight sideways just underneath the $100 price level. I should note that RH announces earnings Tuesday after the close, so holders of shares in RH will have to decide whether they want to play “earnings roulette” going into the announcement.

 

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Ocwen Financial (OCN), shown below on a daily chart, has followed through on this past Tuesday’s pocket pivot move by trundling higher, and is currently in an extended position.

 

GR090813-OCN

 

OCN’s mortgage-servicing “cousin,” Nationstar Mortgage Holdings (NSM), also made a move to new highs this week on a pocket pivot breakout this past Wednesday, as we see on the daily chart below. While volume was high enough on that day for a pocket pivot type of breakout, it was still below average, unlike OCN’s move on Tuesday which occurred on well above-average trade. On Friday, as OCN moved to new highs, NSM backed down a bit as volume increased but remained below average. NSM remains within buyable range of Wednesday’s pocket pivot breakout, however, and could try and play catch up to OCN’s strong upside action.

 

GR090813-NSM

 

In my report of last weekend I pointed out that Gigamon (GIMO) had found support at its 10-week moving average, and then in my Wednesday report of this past week noted that the stock was bouncing nicely off the 10-week line. However, GIMO didn’t bother to pause at its 10-day moving average as I figured it might and instead bee-lined straight up to its prior highs, as we see on the daily chart below. In fact, GIMO made an all-time closing high, although volume was below-average. Currently average volume for GIMO is at 253,000 shares, so it remains a very thin name. I would use pullbacks toward the 10-day line as opportunities to buy shares as in its current position there is no concrete buy signal to be found. The last spot to buy the stock was on the pullback to the 10-week line seven days ago on the chart. I still consider GIMO to be a “big stock” story that trades like a thin little stock and would like to see average daily volume increase as more institutions start to traffic in its shares.

 

GR090813-GIMO

 

One of the issues I have with the Three-D printing stocks is that they have all had pretty decent price runs. In this environment, I’m more interested in “newer merchandise” in the form of stocks that are coming out of first- or second-stage bases. Three-D Systems (DDD) and Stratasys (SSYS), which I do not show here, have had long moves and can be considered somewhat “late-stage.” Exone Company (XONE), as a more recent IPO, has also had a big move, and on Wednesday I thought the stock might try to make a move off of its 10-day moving average as volume was drying up in the extreme. XONE is out pitching their secondary offering currently, and based on the fact that the stock could not hold the 10-day moving average on Thursday, as I expected it should, it looks to be pricing lower. Whenever I take a position in a stock that appears to be pulling into a moving average with volume drying up in the extreme, I expect it to hold. If it does not, I do not give it much room on the downside, pitching whatever shares I own as soon as the moving average in question is penetrated to the downside. XONE closed below its 50-day moving average on Friday, albeit just barely, but now this could morph into a late-stage failed-base situation. Thus, unless the stock shows some strength and a bona fide buy point at some point, I do not play!

 

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Proto Labs (PRLB) is another 3-D printing-related stock that has been acting well and which has been in a protracted uptrend for some time. More recently, on Tuesday of this past week, PRLB flashed a little pocket pivot buy point as it has finally followed through on a breakout attempt from a short base five weeks ago. We can see on the daily chart, below, that the stock tried to break out in early August but failed, then tried to break out again a week later and failed. Finally, three weeks ago, the stock was able to hold the move back up to the highs and since then has trended slightly higher. Tuesday’s pocket pivot buy point was constructive, but the stock has pulled right back to that level at the 10-day moving average. My view in relation to PRLB and all the 3-D stocks is that investors might want to focus their investment capital elsewhere as all of these stocks have had decent price moves already. “New merchandise” situations might provide more fertile ground.

 

GR090813-PRLB

 

Bio-techs have continued to exhibit strength, and we’ve seen Celgene (CELG) Regeneron Pharmaceuticals (REGN) and Biogen Idec (BIIB), none of which I show here on charts, all act constructively following pocket pivot buy points earlier in the week. Gilead Sciences (GILD), which I do show on a daily chart, below, also flashed a “bottom-fishing” pocket pivot last week, and then on Friday flashed a decent pocket pivot buy point along both the 10-day and 50-day moving averages after shaking out earlier in the day. As I discussed in my report of last weekend, GILD is a strong forward-looking story and my guess is that the stock will move higher from here.

 

GR090813-GLD

 

Constructive action is also being seen in other bio-tech stocks we’ve followed in previous reports over recent months. Acadia Pharmaceuticals (ACAD), which appears to be working on a base-on-base type of formation, is working on what is so far a five-week base, as we can see on the daily chart, below. On Thursday the stock flashed a pocket pivot buy point coming up and off of the 10-day moving average, and after an intra-day shakeout on Friday closed at a higher high and just below its 21.85 all-time high from early August. ACAD has been moving in an ascending pattern for the past three months, and it may be coiling up for a strong upside move from here, particularly if the market is able to resume its uptrend in strong fashion.

 

GR090813-ACAD

 

Questcor Pharmaceuticals (QCOR) has continued to flounder following its failed pocket pivot breakout attempt of two weeks ago, as we see on the daily chart below. Given that the pattern already has two buyable gap-up moves in it already, it was perhaps somewhat premature for the stock to break out and start on a sharp upside move. We saw similar action in NFLX back in early May when it tried to come out of a three-weeks-tight flag following its second buyable gap-up move of the year and then pulled in and had to set up in a new base. Perhaps QCOR needs to do something similar as it backs down and falls back into its prior flag formation. What I do note in QCOR is that the stock has pulled back down to its 20-day moving average and volume is drying up while at the same time it is holding above the 64-65 lows of its prior flag formation. If one wants to try and buy this pullback, this might be the spot to do it, but I would keep my stop fairly tight here.

 

GR090813-QCOR

 

Green Mountain Coffee (GMCR) couldn’t hold its continuation pocket pivot of three days ago, something I discussed in my report of this past Wednesday, and has now pulled back to the top of its prior base. As far as I’m concerned the stock needs to hold the top of the base and show some support here as it dips just below the prior 82.51 breakout point in the base, as I see it. If one tries to step in here and buy shares on this pullback, then I would not sit too long if the stock doesn’t hold and moves lower.

 

GR090813-GMCR

 

Trulia (TRLA), which had flashed a “bottom-fishing” pocket pivot buy point coming up through its 10-day and 20-day moving averages on Wednesday, as I discussed in my report of that day, is holding up along the 10-day line as it encounters logical resistance from the left side of the pattern. Friday’s pullback occurred on lighter, well below-average volume, as we see on the daily chart below. I see the stock as buyable with the idea that it can continue to hold above the 20-day moving average at around 42.20.

 

GR090813-TRLA

 

The last time I discussed Chinese social-networking firm YY, Inc. (YY) was back in my June 9th report when it flashed a continuation pocket pivot buy point, as we see in the daily chart below. That pocket pivot failed, but the stock was able to find support at its 50-day moving average before turning and breaking out again. One of the factors that has caused me to shy away from YY is its tiny institutional sponsorship, currently consisting of 28 mutual funds who own 4,389,000 shares. Otherwise, the fundamentals for YY look quite good, and it will be interesting to see whether a strong increase in sponsorship will be evident when the new numbers are announced after September. Currently YY is in the midst of building what is so far a five-week base and on Thursday the stock flashed a pocket pivot buy point on big upside volume. On Friday the stock closed down on above-average volume as it encountered resistance from the left side of the pattern. This stock can be a bit volatile, but if it can hold the lows of Thursday’s pocket pivot buy point at around the 20-day moving average, it could be ready to break out again. Venturesome investors can take a position here using the 20-day line as a selling guide.

 

GR090813-YY

 

After announcing poor earnings in July, U.S. Silica Holdings (SLCA) gapped down on heavy volume, but surprisingly has been able to hold above its 50-day moving average since then, as we can see on the daily chart below. Even more surprising, SLCA flashed a pocket pivot buy point on Friday as it tries to come up the right side of what is now a 26-week base. While SLCA disappointed in July with 6% earnings growth, the stock is expected to turns things around as earnings growth estimates over the next four quarters are showing sequential growth of 19%, 28%, 34%, and 39%. Earnings are expected to double between now and 2016, so this current pocket pivot and trendline breakout, as I see it, might be the harbinger of higher prices to come for the stock. The 50-day line should be used as a selling guide for SLCA given that it has so far shown a strong tendency to hold that particular moving average, even after missing on earnings in July.

 

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There are some interesting recent IPOs that catch my eye these days, and foremost among these is Noodles (NDLS), a company that boasts a CEO and a COO who both held senior roles at Chipotle Mexican Grill (CMG). Like CMG, the company is bringing a unique concept to the restaurant industry. Since coming public at $18-a-share in late June, NDLS has more than doubled from its IPO price and is now in the midst of building what is so far a nine-week IPO base. On Thursday the stock flashed a pocket pivot buy point along its 10-day moving average, and despite trading heavier volume on Friday was able to close relatively tight for the week. This may require more time before a breakout occurs, but I think Thursday’s pocket pivot provides an early entry point for those willing to take an initial, measured position.

 

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Sprouts Farmers Market (SFM) is another recent IPO that has shown strength following its debut on August 1st when it came public at $18-a-share, coincidentally the same price as NDLS. Earnings growth in the last two quarters has jumped to 71% and 200%, respectively, so the company is showing some strong numbers in this regard. The stock is currently in the process of building what is so far a five-week base where the stock has found support along the 35-36 price area. SFM moved up sharply on Friday in the face of volatile general market action that day, and is now above both its 10-day and 20-day moving averages, as we can see on the daily chart below. In my view, this one bears watching for any possible buy points along the 10-day moving average. The stock tried to stage a pocket pivot breakout in mid-August, 10-days ago on the chart, but that move reversed and closed near the lows of the day. Obviously, this was premature given that the stock was attempting to break out in the midst of a market correction at that time. I will continue to monitor SFM in future reports as the situation develops.

 

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Underpinning the outperformance of the NASDAQ Composite, many “big-stock” NASDAQ names, from the bio-techs to NFLX, FB, LNKD, and TSLA, have acted well. Adding to the mix lately has been constructive action in Amazon.com (AMZN), not shown, as it has bounced off of its prior breakout point and approaches the $300 price level. Apple (AAPL), shown below on a daily chart, has also helped over recent weeks after launching higher off of its late June lows and pocket pivoting up through first its 50-day moving average in late July and then its 200-day moving average in the earlier part of August. After such strong gains the stock has taken the last three weeks to consolidate its price move and so far appears to find support along its 20-day moving average. On Friday AAPL was able to close above its 10-day moving average, and this sets up the possibility of some sort of pocket pivot buy point emerging along the 10-day line. Keep an eye out for this.

 

GR090813-AAPL

 

Finally, adding to the constructive action of big-stock NASDAQ names, Priceline.com (PCLN), which failed on a buyable gap-up attempt after announcing earnings in the earlier part of August, has found consistent support along its 20-day moving average as it re-formed and set up in what  is so far a four-week base, as we can see on the daily chart below. On Friday PCLN flashed a pocket pivot buy point as it popped back above its 10-day moving average in a clearly actionable move with the idea that it will continue to hold its 20-day moving average. As I’ve written in recent reports, I have found that many leading stocks will find support at the 20-day exponential moving average in this current environment, and in most cases stocks which pull back to this moving average and find support have eventually turned back to the upside. It remains a key moving average for me in monitoring the current action of leading stocks.

 

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A great deal of constructive action percolates beneath the surface of this current general market environment, but there remains some bifurcation among the major market indexes with respect to the stark underperformance of the NYSE-based indexes which remain below their 50-day moving averages. News out of Syria and the constant speculation of when and how much the Fed will implement QE tapering adds to the volatility. But the bottom line is that I have, on a practical level, found it quite possible to make upside progress in certain leading stocks, and in my view this is the ultimate litmus test of any market environment. Thus I am more interested in watching the action of leading stocks more and the indexes less.

It would be highly constructive to see the S&P 500 and the Russell 2000 move above their 50-day moving averages to confirm the strength seen in the NASDAQ, but so far that hasn’t happened. I do consider Friday’s action, where we saw the market sell off hard on news that Russia would provide support to Syria in the event of a U.S.-led attack, to be constructive based on the market’s resilience in being able to close roughly flat on the day. I would expect, however, that more volatility may be forthcoming as the situation develops. This is why I think investors are better off focusing on the action of individual stocks and paying less attention to  the noise created by the general market indexes. The market may be in a “correction” for those who need to rely on such labels, but so far I’m treating individual stocks as being in playable uptrends, and so far they have proven out. Stay tuned.

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 positions in LNKD, NDLS, SPLK, and TRLA, though positions are subject to change at any time and without notice.

 

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