The Gilmo Report

September 9, 2012

September 9, 2012

The chart of the NASDAQ Composite Index, below, doesn’t really require much in the way of commentary – the daily chart says it all. After consolidating in a tight sideways range throughout the second half of August, the market finally broke out to a four-year high on Thursday. This is also its highest level since the March 2009 market lows. The European Parliament gave its approval to European Central Bank chief Mario Draghi’s “sterilized” bond-buying program, and the market promptly rocketed to the upside, breaking out of the big cup-with-handle type of formation it has been in since late March. Meanwhile I was quite amazed to see NYSE short interest continue to climb, reaching at least a five-year high of 21.3%. My guess is that a lot of institutional money managers are late to the party, and Thursday’s action had the feel of an elephant stomp as the “pain trade” forced lagging money managers to pony up and deploy funds into the market as quickly as they can in order to keep from lagging the indexes even further. Friday’s weak jobs number did not send the market into much of a move either way as it remained relatively flat on the day. This continued employment weakness is expected to bring the Fed in with some announcement of QE3 on Thursday.

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Meanwhile the expectation of QE to come is confirmed by the action in precious metals, as gold and silver both turned on the after-burners Friday with another big-volume gap-up. Gap-up moves have been the order of the day for the precious metals, and the daily chart of the SPDR Gold Shares (GLD), shown below, illustrates the insane upside thrust to this move. At this point both the gold and silver ETFs are quite extended from any buy points, and all that is left to do is to strap yourself in and hang on if you own any of the precious metals ETFs. While a sharp pullback could happen at any time given the sharp upside movement, it is likely that the GLD and the SLV will need to slow up at some point and give their 10-day moving averages a chance to catch up. Currently the GLD is about 5% above its 200-day moving average, currently at 159.75, and 3% above its 10-day moving average at 163.24. Meanwhile the SLV is 11% above its 200-day line and 7% above its 10-day line. Members can view video of my appearance this morning on Fox Business News where I discuss the metals in detail: http://video.foxbusiness.com/v/1827201557001/morales-riding-gold-trend-to-1780

SPDR Gold Shares (GLD) Gilmo Report Stock Chart

The breakout in the market was accompanied by breakouts in nascent leaders, including LinkedIn (LNKD), which had broken out of an unusual cup-with-handle formation on Wednesday, as I discussed in my report of that day, September 5th. LNKD held tight along with the market on Friday after running up earlier in the day to test and exceed its old IPO high of 122.70 as it hit an intra-day high of 122.85. I might expect a tiny bit of overhead resistance at these levels, and LNKD backed down to close at 119.04, up 11.74 points, or just about 10%, for the week. As the weekly chart below shows, LNKD is just barely starting to emerge from this long base it has built since coming public in May of 2011. As we move from left to right along the chart we can also see how the pattern has steadily tightened up on a relative basis, and as I’ve discussed in previous reports there have been subtle signs of support and accumulation within the base. As well, the move that LNKD was able to generate off the early 2012 lows saw six straight weeks where the stock moved higher and closed at the peak of the weekly range, an initial sign of strength and accumulation off the lows. At Friday’s closing price of 119.04, the stock is just barely extended more than 5% past the 113 standard-issue new-high buy point in the base, so would only be buyable on pullbacks towards that level.

LinkedIn (LNKD) Gilmo Report Stock Chart

Online real-estate and rental website Zillow (Z) looks similar to LNKD on its weekly chart, shown below. Z came public in mid-2011 at $20 a share, opened up the first day of trading at $60, and then proceeded to plummet from there, closing the day at 35.77 and leaving in the lurch those who thought they were going to buy the IPO and make a bundle. Since then it has been working on a big, ugly base that is just barely starting to show some cohesion. What impressed me about Z this past week is that the company announced a 4-million-share secondary offering that initially sent the stock lower, but ultimately the secondary was priced well at $43-a-share on Friday. On the weekly chart, all the volume as a result of the secondary gives it the look of a stock trying to break out, and I think the stock is buyable with the idea that it should hold above the 10-day moving average. What catches my eye most about Z is the big jump in institutional sponsorship over the past quarter as the number of mutual funds owning the stock has jumped from 133 to 178, and with that many institutions in a stock with an 8-million-share float it is no surprise that the secondary was priced so well. While earnings were down 33% in the most recent quarter, next quarter will see Z grow earnings 75%, and so I think this is more of a forward-looking situation that is showing strong institutional interest.

Zillow (Z) Gilmo Report Stock Chart

When you own leading stocks you must expect that they will have pullbacks from time to time, and sometimes the pullbacks will be unexpected or even a bit “hairy.” After all, we know from studying leaders from the past that 11-12% declines in leading stocks during their overall uptrends are normal. Michael Kors Holdings (KORS), shown below on a daily chart, pushed to an all-time high on Friday. But after-hours on Friday KORS announced a 20-million-share shelf filing which sent the stock down to 54 in after-hours trade. In my view this is not a big deal. Once this secondary is priced and issued, the stock can get back to business. Right now a move down to 54 would simply take the stock down to its short-term upside trendline and its 10-day moving average. As well, remember that KORS has had a sharp move to the upside off the lows of its base since gapping up after announcing earnings in mid-August. The last two buy points have been the buyable gap-up at around 48, and then the standard-issue new-high breakout through the 50.69 high in the base, so a pullback to 54, even 52 or 53, would not be abnormal action and would simply bring the stock back into buyable range.

Michael Kors Holdings (KORS) Gilmo Report Stock Chart

A little more problematic, however, is the situation with Mellanox Technologies (MLNX), shown below on a daily chart. The stock had been tracking along its 10-day moving average on the upside until Friday when it was downgraded on the basis of valuation. As well, it probably got a little heat from Intel (INTC) coming out and lowering guidance given that INTC is also a player in InfiniBand technology, MLNX’s bread and butter. There are two ways to handle this as I see it, and the first is to use the last close under the 10-day moving average, six days ago on the chart with the intra-day low of that day at 111.77 as your selling guide. With MLNX closing at 110.85 on Friday, it is about 1% below that price and so could be sold on that basis. Otherwise one could give the stock a little more room and use Friday’s intra-day low at 109.33 as your sell point. If MLNX violates this level next week, then it should be sold and allowed to build a new base or issue a new buy signal in its pattern later on down the road. Bottom line: regardless of how much you like the stock and its story, stick to your selling rules!

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Getting back to some of the breakouts this past week that have coincided, more or less, with the market’s breakout to higher highs, I like the buyable gap-up move in Ulta Salon Cosmetics & Fragrances (ULTA), shown below on a daily chart. ULTA surprised on earnings Thursday after the close and launched higher Friday morning at the bell, closing up strongly on a 304% increase in volume. This is an easy gap-up to buy given that the stock closed at 101.54, just about 2% above the intra-day low of 99.26, and about 3% above the 98.42 standard-issue new-high buy point in the base. Thus it is buyable as a gap-up move as well as a base breakout that remains within range of the buy point. As always, I’m interested in stocks showing big increases in institutional sponsorship, and like Z, discussed earlier in this report. ULTA has shown a big increase in mutual fund ownership over the last reported period. While the data for the September quarter is yet to be reported, the number of mutual funds owning the stock has jumped from 512 to 576. This gives me further confidence in buying this gap-up and breakout right here.

Ulta Salon Cosmetics & Fragrances (ULTA) Gilmo Report Stock Chart

Bio-tech stocks continue to flex their muscles, and the group remains at #2 among all industry groups. Thursday saw a number of bio-techs move higher, including those that I have liked, Regeneron Pharmaceuticals (REGN) and Onyx Pharmaceuticals (ONXX). I also saw Alexion Pharmaceuticals (ALXN) flash a pocket pivot on Friday as it just barely emerged from a short base, while Celgene (CELG) also broke out of a cup-with-handle base on Thursday. Not to be outdone, Biogen-Idec (BIIB), shown below on a daily chart, broke out of a five-week flat base on a 33% volume increase. In my view this is potentially buyable with the idea that the stock should hold the 148 high on the right side of the base, less than 3% from Friday’s close, making it a rather low-risk proposition.

Biogen-Idec (BIIB) Gilmo Report Stock Chart

While I am likely starting to sound like a broken record, there is nothing much to do but remain long as the market’s uptrend is not only intact, but appears to be gathering some steam with a big-volume breakout to higher highs on Thursday. This, of course, does not mean that there will not be any leading stocks that falter along the way, such as MLNX, but in such cases simply make certain that you stick to your selling rules and methods in order to keep any losses to a minimum.

The big event of the week will be Thursday’s Fed meeting announcement where the market appears to expect the Fed to announce some sort of Act Three in the ongoing Theater of Quantitative Easing, and it will be interesting to see how the market reacts to whatever the Fed ends up deciding upon. In the meantime, I would not look to game the Fed announcement. I would simply keep an eye on my stocks and act accordingly based on what they are doing, unless we were to see some massive volume sell-off and failure in the major market indexes that negates Thursday’s strong breakout. So for now we simply remain on track, and members should refer to my recent reports for any names discussed in previous reports but not discussed in this report.

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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