The Gilmo Report

April 17, 2013

April 17, 2013

Last week’s uptrend resumption did not last very long as this week has now produced the third sharp downside break in the indexes that we’ve seen so far this year, as the daily chart of the NASDAQ Composite Index illustrates below. The breakdown in gold last week was a harbinger of trouble for stocks; something I thought was a distinct possibility, as I wrote over the weekend. With this week’s breakdown serving as the third sharp sell-off over the past two months, we have to wonder whether the crowd
has been conditioned to expect a quick rebound to new highs, and therefore on this basis the “Rule of Three” implies that the crowd is about to get faked out.

 

GR041713-NAZ

 

We already know that fewer actionable buy points in individual stocks have occurred in this most recent move by the major market indexes to new highs, with the S&P 500 and the Dow Jones Industrials indexes making all-time highs that essentially take them back to the top of a 13-year “secular bear” range extending back to the great dot-com bubble market top of March 2001. And those stocks breaking out or showing other actionable buy points have for the most part failed to follow through. This is also evident to some extent in the Advance-Decline numbers in recent weeks. While the NYSE Advance-Decline line has followed the NYSE-based indexes to confirm the higher highs that have occurred each time the indexes have recovered from sell-offs in 2013, the cumulative Advance-Decline line for the NASDAQ, shown below, has shown a sharp divergence, as we can see in the chart below.

 

GR041713-NAZ A-D

 

As the NASDAQ breaks below its 50-day moving average, the S&P 500, shown below, was able to find support at its 50-day line today. A violation of the 50-day moving average by the S&P could confirm a change in the market’s trend, but the bottom line is that with the market internals deteriorating and individual stocks showing no ability to sustain any upside trends outside of narrowing leadership such as we’ve see in the bio-tech sector, risk is very high.

 

GR041713-SPX

 

One of the big stories today as far as individual stocks goes was Apple (AAPL) breaking through the $400 price level on an intra-day basis and just barely piercing the neckline of a very large head-and-shoulders top formation, as we can see on the weekly chart, below. The $400 level likely becomes a temporary psychological area of support, but I would look to short any bounce up and off of the 400 level using the 420 level as my upside stop-out guide. AAPL announces earnings next week, and expectations are already pretty low for the company. But we may get a glimpse of just how bad things are that sends the stock heading for my longer-term downside target in the 350-360 price area. That would constitute a 50% decline for the once bullet-proof “investment” favorite, but the stock could eventually fall further, perhaps even below $300. All of this is amazing to behold for a company that not even a year ago rolled out plans, to great fanfare, for a new “space-age” office campus that is now seeing some serious cost overruns. Perhaps we can add AAPL to the long list of former leaders whose ultimate demise came after the companies had built monuments to themselves, from the Chrysler building in Manhattan that was completed a year before the 1929 crash to the acquisition of Time-Warner by America Online in January of the year 2000.

 

GR041713-AAPL

 

I don’t think anyone should try and be a hero here by attempting to catch the proverbial falling knife, which is exactly what gold, and silver for that matter, have become after gold broke the key 1526 support level on Monday, as we see on the daily chart of the nearest gold futures contract, below. I consider the sell-off in the precious metals to be more related to liquidity issues in the system, somewhere, and not the idea that the U.S. economy is improving or that QE will now come to an orderly conclusion. In my view, it is a sign that something is not quite right, and if stocks continue to sell off from current levels we can consider that precious metals will continue lower just as they did in 2008. As I wrote over the weekend, a breakdown below $1300 seems likely, and so far there is no reason to believe we’ve reached the bottom just yet. Talk of European sovereigns having to sell their physical gold holdings to fund bailouts as well as China’s weekend announcement of slowing GDP growth were two reasons cited for gold’s demise. But as I see it, if we are headed for some sort of crisis, then paper gold or silver isn’t going to do anyone any good, and thus the case for more selling in the precious metals remains intact.

 

GR-041713-GoldFutures

 

With earnings season now coming into play, taking initial positions in anything, long or short, carries a great deal more risk. For that reason I do not think investors need to get involved here in a big way as we look for confirmation of a change in the market’s trend. Fed heads continued to jaw-bone support for the markets by indicating that the Fed has room to increase its monthly injections of QE bond-buying, which adds another twist to any further sell-offs in the general market indexes. The bottom line is that unless you feel you have a sufficient cushion in any current positions, you do not want to be taking any new positions, and in some cases taking profits would be well-advised. Certainly, AAPL is an interesting short-sale set-up, but shorting the stock going into next week’s earnings has risks as well, and is only for those willing to accept such risks. Outside of this I have very little to say as for now I’m content to see how this week’s action develops before committing precious capital in either direction. If a change of trend is indeed in the wind then there will be plenty of time to identify and capitalize on potential short-sale targets. Stay tuned.

 

Gil Morales
CEO, Gil Morales & Company, LLC
Managing Director & Principal, MoKa Investors, LLC
Managing Director & 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 no positions, though positions are subject to change at any time and without notice.

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