The Gilmo Report

April 27, 2011

April 27, 2011

The market trend remains to the upside as the major market indexes have blitzed into new high ground in this market rally that began in September 2010, as we see in the daily chart of the NASDAQ Composite Index, below. And while not all the action is all that even in individual stocks, there are some resurgent names adding their influence to the market’s positive tone, many of which are providing opportune entry points. The Fed came in today with their policy announcement and did little to make the markets believe that the end of QE2 means the end of the massive liquidity that has been driving stocks and commodities higher. Even a first-ever post-Fed meeting press conference held by Chairman Bernanke was not enough to get the chief Fed Head to say that QE was dead for good. A lot of gobbledegook about “mandate level inflation,” “monitoring” of “temporary” inflation trends, and slow economic trends only served to fuel the market’s upside move going into the close. The U.S. dollar also responded by moving to a lower low, although I don’t show that on a chart here. Today’s action paints a very clear picture of a NASDAQ Composite Index that has now moved to a new 10-year high on higher volume, which can only be viewed as constructive for a continued uptrend in stocks and probably commodities.

NASDAQ Composite Index Gilmo Report Chart

The big story on Monday was the climactic-type action in silver as the futures pushed up to 49.82 just before the open of stock trading, with the ProShares UltraSilver (AGQ) ETF trading up at 374, some 34 points above its Friday close. Short-term this was what I was looking for, as I discussed in my report of this past weekend, and it provided a short-term spot to sell silver ETFs into. Since then the metal pulled down and held the 10-day moving average, as we see in the daily chart of the iShares Silver Trust (SLV), below. Today, however, the SLV came back and flashed a re-entry buy signal with a pocket pivot buy point right up and off the 10-day line, roughly. The quick resurgence in the precious metals is testament to what the market thinks of Fed policy, particularly when mixed up with U.S. fiscal policy, and that is, “default or devalue!” While I wasn’t surprised to see the blow-off type of action on Monday, the quickness with which the metals found their feet and turned back to the upside did surprise me. Nevertheless, a re-entry point is a re-entry point, and it is a simple matter to add back here. Given the heavy selling into the move to new highs on Monday, it is also possible that the SLV could still consolidate for a few days, but today’s action in the SLV is constructive if not mind-blowing!

iShares Silver Trust (SLV) Gilmo Report Chart

With silver taking some time to back up over the past three days, gold took the opportunity to move into the driver’s seat as it moved to new highs on a pocket pivot volume signature. As we see on the chart of the PowerShares 2x Gold ETF, the DGP, there was no similar climactic type of short-term sell signal in gold on Monday, and in the case of the DGP a short pullback to the 10-day moving average yesterday simply led to a move to all-time highs today. In my view, gold remains very much in play, as it is nowhere near being in a position to suddenly morph into a climactic top as it has not been in an extended run as has silver. If anything, gold is likely just beginning an upleg here, and while we can nibble back some SLV on today’s pocket pivot, the only thing to do when it comes to the yellow metal is to “hold the gold.” Today’s strength in gold could also be considered an add point where one could add a little to their position here, with the idea that it should hold the 47.50 level.

PowerShares 2x Gold ETF Gilmo Report Chart (AMZN) announced earnings yesterday after the close and it provides a decent example of why sometimes it’s best not to mess with after-hours trading. The stock initially traded down to about 170 before rallying back near closing levels and opening flat this morning, more or less. I’ve discussed AMZN before as a “stealth” cloud company, long before it was recently revealed that companies like Netflix, Inc. (NFLX) use its network capacity, and I think that this will become the driver for AMZN even though earnings came in with -33% earnings growth. Over the next few years AMZN’s cloud business, known as Amazon Web Services or AWS, will continue to grow and become a larger and growing part of its overall business. That I believe is what drove today’s massive-volume breakout to new highs, as we see on the daily chart below. Next quarter earnings growth is expected to be back up to 25%, so given the strong technical action I would allow for one bad quarter in AMZN. This is, as they say, “on the come,” with AMZN as an emerging and big cloud player. It is potentially buyable here with the idea that it should hold the 190 level, roughly. (AMZN) Gilmo Report Chart

Netflix, Inc. (NFLX) came out with earnings on Monday after the close and promptly tanked, gapping down on very heavy volume before finding some support today along its 50-day moving average, as we see on the daily chart below. NFLX’s breakout last week was somewhat suspect as it occurred on very light volume, and of course I can’t say I was surprised that the breakout quickly failed yesterday. That kind of a gap-down break on huge volume is often an extreme cautionary sign, so for now I would let NFLX try and heal and maybe set up again. On the other hand, a high-volume breach of the 50-day moving average would make the stock a late-stage base-failure, but only further evidence can prove that conclusively. The last time NFLX looked like it was a late-stage failure was back in March, and it quickly recovered. Right now I’m just watching NFLX, no pun intended!

Netflix, Inc. (NFLX) Gilmo Report Chart

I tend to like the way VMware, Inc. (VMW) is consolidating after its massive-volume gap-up after earnings last week, as we see on the daily chart below. The stock hasn’t been able to decisively clear the 97.61 peak on the left side of this cup type of base, but given how sharply it has moved up off the lows of the base over the past 2-3 weeks it is entitled to encounter a little resistance and do a little backing and filling here. I like the way the stock has pulled back here on light volume, holding the 92 low of the gap-up day, which is our selling guide for the stock currently. Today’s pullback saw little to no real selling volume, and the stock was able to snap back into positive territory on the day. This is very buyable here, in my view, using the 92 level as your downside guide for a stop given the buyable gap-up set-up from five days ago. If I were taking a small position here, my intent would then be to lever up if the stock can convincingly smash through the 97.61 level, bringing the $100 “century mark” into play. Keep an eye on this one.

VMware, Inc. (VMW) Gilmo Report Chart

As I wrote in my report of this past weekend, (CRM) flashed a bona fide pocket pivot buy point last Thursday as it moved in sympathy with VMW’s strong earnings announcement. I also felt over the weekend that the stock should hold above the 135-136 level on any pullback, and as we can see on its daily chart, below, it did exactly that today on low volume. CRM doesn’t announce earnings until the latter half of May, so for now no such news events are anything to think about here. The question is whether the stock will be able to move higher from here based on the pocket pivot buy point of five days ago combined with the constructive pullback over the past four. It remains within buyable range of the pocket pivot, and could easily move higher in anticipation of a strong earnings announcement. At the very least, the 135-136 price level should provide some near-term support and a guide for your downside stop. (CRM) Gilmo Report Chart

Acme Packet, Inc. (APKT) put on a strong showing today as it initially looked to be selling off on earnings before reversing back to the upside on massive buying volume following its earnings announcement yesterday after the close. APKT came in with 69% earnings growth on sales growth of 45%, beating estimates and raising guidance, although at first the stock sold off down to 70 in after-hours trading yesterday right after the announcement. This struck me as odd, but by this morning the stock was vindicated with a big outside reversal day to the upside on huge volume. Today’s pullback earlier in the morning brought the stock right down to its previous breakout level right above the 75 price level, and as of today’s close it is now extended. I would look at a pullback down to the 80-81 level as potentially buyable if it occurs constructively. APKT is considered another twist on the overall “cloud” theme, which appears resurgent here with stocks like VMW and CRM making strong comebacks recently.

Acme Packet, Inc. (APKT) Gilmo Report Chart

Cummins, Inc. (CMI), maker of diesel engines, is normally a “slow” stock, but after announcing earnings yesterday morning the stock gapped up sharply to stage a buyable gap-up, as we see in its daily chart below. The intra-day low of yesterday’s gap-up was 114.25, so that would be your downside guide for a stop. Even after today’s close at 119.08 CMI remains in range of the buyable gap-up given that the 114.25 level is about 4% below today’s close, hence is not out of range. First quarter sales were up 56%, and the company raised revenue guidance to $17 billion from its prior guidance of $16 billion. Earnings growth came in at 133% on $1.75 in earnings, a “meaty” level of earnings and sales, to say the least. Generally a slow stock, CMI’s massive-volume gap-up seems like a slight change of character, and it will be interesting to see if this current constructive upside action will lead to a sharp price move from here.

Cummins, Inc. (CMI) Gilmo Report Chart

After the close Fortinet, Inc. (FTNT), a stock whose story I’ve liked for some time as the #1 provider of global Unified Threat Management solutions, announced earnings and came in with 17 cents a share vs. analysts’ estimates of 14 cents. The stock closed at 41.73, as we see on the daily chart below, but did flash a very subtle pocket pivot buy point today going into earnings. After-hours, as I write, the stock is trading up, is bid at 44.25, and looks like it could try and break out of a short five-week base formation here as it has held tight along the 39 price area, more or less, over the prior four weeks. FTNT also announced a 2-for-1 stock split with a record date of May 9th, which could help to propel the stock to new highs. I would keep an eye on this one tomorrow, as the peak in the base is around 44.90. Prior to early April FTNT had been holding up very well even as the market had corrected sharply, and with the NASDAQ making a 10-year high, perhaps FTNT follows suit with some price highs of its own. One to watch for tomorrow.

Fortinet, Inc. (FTNT) Gilmo Report Chart

In my report of April 13th I noted the lagging Philadelphia Semiconductor Index, also known as the “SOX,” and showed a daily chart of the iShares Philadelphia Semiconductor Index (SOXX) ETF, which I show again below. Back then I was concerned that this was a cautionary sign, but as I noted then, this could easily end up being similar to what the SOX did right after the market follow-through in September 2010 when it lagged through October but then began to rocket to the upside as it played “catch up” to the major market indexes. Now we see the SOX, as represented by the SOXL, below, moving back above its 50-day moving average and holding today’s intra-day pullback. Note that the SOXL flashed a pocket pivot volume signature five days ago as it moved above its 65-day exponential moving average. Normally, a pocket pivot buy point occurs as a stock comes up through the 50-day or 10-day simple moving averages, but I find this action an interesting display of strength in this 3-times leveraged ETF. This looks buyable using the 50-day line as a selling guide.

SOXL Gilmo Report Chart

With semiconductor stocks like CY, TSM, ALTR, NETL, TXN, SNDK, XLNX, and even INTC, to name just a few, doing well here, one of the more convenient ways to play a group move in the semi’s would be through the SOXL, which is why I like it here.

Given the move to new highs in all the major market indexes, including the NASDAQ Composite which made a new 10-year high today on heavier volume, the market’s uptrend remains well intact. As well, with new breakouts in stocks like AMZN, VMW, APKT and others providing new, optimal buy points and potential new leadership in a continuing rally, the market’s near-term future looks reasonably bright. Most existing leaders have continued to act reasonably well, and with some new things to be looking at on the buy side the overall environment remains constructive.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, and/or Gil Morales & Company, LLC held positions in AMZN, DGP, SLV, SOXL, and VMW, though positions are subject to change at any time and without notice.

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