The Gilmo Report

April 24, 2013

April 24, 2013

As I discussed over the weekend, by Friday of last week the market was in a logical position from which to rally with the NASDAQ having undercut its early April low and the S&P 500 Index finding volume support at its 50-day moving average on that day. Thus we find the market in the midst of a four-day rally, as measured on the S&P 500 Index, shown below on a daily chart as it moves within an otherwise trendless environment. Economic data continues to come in weak, with today’s durable goods orders numbers coming in much weaker than expected. But the paradox here is that a weak U.S. economy just keeps the Fed playing its QE hand. This results in a tug-of-war between QE and still-feeble economic growth that in turn sends the market from “uptrend resumes” back to “market in correction” and back again. Wash, rinse, repeat! Today’s action, however, constituted churning action on higher volume, although volume was below-average. Perhaps the market rolls over here, or perhaps it simply pauses as it did in late February following a sharp sell-off back then and just continues higher on an index basis. As far as individual stocks go, leadership remains narrow, and watching the bio-techs get slammed today seemed to confirm that today’s bullet-proof stocks can be riddled with bullet holes tomorrow.




Let’s first check in with some of the positive action in the market. Earnings roulette season has resulted in the usual buyable gap-up type moves, most notably in Netflix (NFLX) after it beat estimates on Monday after the close. This is NFLX’s second gap-up so far in 2013, and the 209.51 intra-day low of yesterday constitutes the selling guide on this signal. However, does the second buyable gap-up in three months make it a bit too obvious? Only your stop knows for sure!




Lumber Liquidators (LL) staged a buyable gap-up move today after it announced earnings this morning and promptly made a bee-line for the $80 price level before backing down a couple of hairs. Today’s 74.70 low would be the downside selling guide on this trade.





Genetic analysis systems maker Illumina (ILMN) came in with a buyable gap-up move yesterday following its earnings announcement. It remains within buyable range using the 59.99 intra-day low of yesterday’s gap move as the downside selling guide for this trade.




The bio-tech sector, however, suffered some carnage as, on the flip side of earnings roulette season, Amgen (AMGN) gapped down hard after missing on earnings, and this brought down the entire bio-tech group. AMGN had flashed a continuation pocket pivot buy point on Friday, as I discussed in my report of this past weekend, but a high-volume, gap-down move off the peak like this is a death knell as far as I’m concerned.




This brought down the likes of Celgene (CELG), which had also flashed a continuation pocket pivot buy point last Friday. This was also a very high-volume gap-down smack down off the peak that is a very negative sign for CELG. Heed your stops on this one.




And of course we can’t leave out Gilead Sciences (GILD), a chart of which I showed in my weekend report illustrating the stock’s continuation pocket pivot on Friday. GILD also sank on AMGN’s earnings news. Suddenly, the strongly-performing bio-tech group has lost its luster, just as many other leading groups have as the market has continued to chop its way higher in 2013.




Vertex Pharmaceuticals (VRX), which I discussed over the weekend as yet another bio-tech/medical stock flashing a continuation pocket pivot on Friday, was the only one able to hang in there as it has tracked sideways over the past three days following Friday’s pocket move.




But no worries! With bio-techs rolling over we can now witness the homebuilding stocks suddenly jack to the upside as we see in the daily chart of group leader Ryland Group (RYL), below. And yes, I am being sarcastic here. In this market, it seems that the uglier something looks, the greater its chances of a massive snap-back rally, and RYL illustrates this nicely as it went from an ugly duckling to a swan in the short span of four trading days. Par for the course in this market.




Google (GOOG) was able, however, to follow-up on Friday’s post-earnings trendline breakout, albeit without a little bit of sliding around early in the trading day. But 15% earnings growth is not the type of stuff that our investment methodology looks for, and the stock is showing some wedging action as it drifts above its 50-day moving average on declining volume.




Lions Gate Entertainment (LGF) has acted well since its pocket pivot buy point within a three-weeks-tight formation last Friday, and today’s action constituted a pocket pivot/breakout move as it came up and out of its 3WT pattern. Technically this is another buy point for the stock, with the idea that it should hold above the 24 breakout level providing a quick stop-out guide.



Acadia Pharmaceuticals (ACAD), which over the weekend I noted looked ready to jump out of its tight six-day flag formation following the buyable gap-up move early last week, did come through and produce some instant gratification in the form of a 10%-plus gain on Monday.




LinkedIn (LNKD) is breaking out to new highs on below-average volume in advance of its May 7th earnings announcement, which is problematic since one would prefer to see some volume come into the stock on any such breakout. This move is similar to its fake-out breakout nine days ago on the daily chart, shown below.





Apple (AAPL) announced earnings yesterday after the close. The stock couldn’t figure out which way it wanted to go, rallying up beyond 428 yesterday after the close when it re-opened for trading following its earnings announcement. But it closed below yesterday’s close in the after-hours session before moving first lower and then higher on an intra-day basis today. If that was too much for you, then just consider that when all the dust had settled by today’s close, AAPL’s earnings announcement resulted in a net stock price change of -66 cents. My view here is simple: If the stock cannot get above today’s high of 415.25, the next move might be lower as those who were sucked in by the company’s 15% dividend increase could create a new set of trapped longs in the stock. Meanwhile, the market doesn’t seem all too attracted to AAPL’s even lower P/E of 9 times forward earnings.




While there have been some strong price moves in a few stocks, the overall environment strikes me as somewhat sloppy and incoherent. Wild rotation and v-shaped price moves seem to rule the day as stocks overall go nowhere unless one successfully engages in the always exciting game of “earnings roulette.” As I wrote over the weekend, actionable long situations strike me as more short-term trades, and in the case of the continuation pocket pivots we saw in the big bio-techs over the weekend, that’s exactly what those were: three-day wonder trades that have now been utterly negated. Thus I view a stock like ACAD having a 10%-plus move on Monday that was entirely playable at that time as something to sell into rather than in which to begin building a big position in anticipation of a longer-term move. From my perspective this also means that buying gap-up moves in stocks like NFLX, LL, or ILMN, for example, may have its short-term rewards, but the market is at a critical juncture here, and risk should certainly be controlled in these situations by buying as close to the gap-up day’s intra-day low as possible. The bottom line is that this is an environment where, as I like to say, investors might be better off being out of the market wishing they were in rather than in the market wishing they were out. If stocks one owns continue to act well, such as, for example, a situation like LGF, then it is simply a matter of heeding trailing stops at the breakout level or the 10-day/50-day moving average. But if you own a stock that suddenly gaps down on massive volume, say like AMGN or CELG did today, that is often a warning signal that should be heeded. As I see it, in this market a good defense is as much as, or more valuable than, a good offense. 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 no positions, though positions are subject to change at any time and without notice.

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