The Gilmo Report

April 29, 2012

April 29, 2012


While some are calling this past Wednesday’s action on the S&P 500 Index a follow-through day, given the index’s 1.36% move on increased volume compared to the prior day, as we see on the daily chart of the S&P 500 below, I tend to look at this as a somewhat wishful stretch. In this market I would want to see one of the major market indexes produce a clear 1.5% or better gain on strong upside volume. 1.36% on one index, the S&P 500, which then has to be “rounded up” to 1.4% by some sources in order to make it look like it was bigger than it actually was, strikes me as a marginal follow-through at best. Thus I am not going to get excited about the general market per se on the basis of what one wants to call a follow-through day. In any correction as we have been in for the past month, roughly, I tend to shift to seeing the market less as a stock market and more as a market of stocks, preferring to focus on the action of individual stocks and the opportunities, or lack thereof, that they might present. In this vein, there have been some fresh breakouts recently, and of course “earnings roulette” season helps produce some wild gap-up moves that lend to the impression of broadening strength in the market.

S&P 500 Gilmo Report Stock Chart

Earnings “roulette” season also produces its share of those brutal and dreaded earnings-related gap-downs, and we’ve seen plenty of those as well over the past week. From Apple to Amazon and everything in between, those big-stock gap-ups also help to shore up the indexes, so I would tend to think we’ll get a better sense of the market’s current “flavor” as earnings roulettte season winds down this next week. Meanwhile, as the S&P 500 gets investors excited with a “follow-through” day this past week, the NASDAQ Composite, which has been the de facto leading index in the 2012 market rally, languishes without a follow-through day, as we see on the daiy chart below. In my view, if this rally has “legs” then we should soon see a follow-through day on the NASDAQ Composite as well. The S&P 500’s relative strength may be the result of what I called rotation into “stuff” stocks like fertilizer stock CF Industries (CF) and oil leader Continental Resources (CLR) as I discussed in my Wednesday report. So far both of those stocks have moved higher into the end of the week, confirming my positive views of their pocket pivots earlier in the week.

NASDAQ Gilmo Report Stock Chart

Earnings roulette came into play with two stocks I have been discussing recently when both Western Digital (WDC) and Seagate Technology (STX) gapped down on what was a very strong earnings report from WDC after the close on Thursday. WDC busted its recent breakout, but between the two stocks STX has been the stronger one, and it proved that on Friday after gapping down to the top of its prior base and breakout buy point. It held and rallied well off the lows of the day on heavy volume, as we see in the daily chart below. The question that arises, of course, is that while we know that WDC is out the window and one should have sold any initial position taken in the stock on Friday, STX is another story altogether. In my view, as long as the stock holds the breakout buy point at the top of its prior base, which also roughly coincides with the 50-day moving average, the stock is okay. There is a fundamental dynamic here with these hard-drive makers, namely that their products, theoretically, are on the way out as faster SSD technology moves in. This may be a reason why STX sells at three times (that’sright, three times) forward earnings. However, SSD remains very expensive, and the rapid growth in cloud-computing has made storage a critical issue, and of course the immediately-available solution is in traditional hard-drives. This has led to huge earnings growth in STX and WDC, and for now it looks like STX is the winner – for now.

Seagate Technology (STX) Gilmo Report Stock Chart

If one wants to participate in any continuing market rally, however, then why not just wait for the next buy point to show up in the biggest, “baddest” stock in this 2012 market, Apple (AAPL), shown on a daily chart below. AAPL finished the third week of a potential new, second-stage base by finding support at its 50-day/10-week moving averages and closing at the peak of the weekly range. Following the big earnings-related gap-up on Wednesday of this past week, AAPL has settled back nicely with volume drying up in the extreme over the past two days as the stock has come in slightly. In my view, if the market rally is to continue, AAPL will come out of this current pullback/base it is trying to form and move to new highs. One should be aware that leading stocks can often have their first pullback to the 50-day/10-week line, bounce off it, and continue higher from there. Thus we can view this successful pullback and bounce off the 50-day line on the daily chart below as a potentially buyable pullback solely on that basis, using the 50-day line as our selling guide. The 50-day line is coming up through the 578 price level, a mere 4% from Friday’s close. In any case, it is interesting to see how quickly selling has dried up in the stock.

Apple (AAPL) Gilmo Report Stock Chart

As AAPL takes a break, (AMZN) defied its weak head and shoulders-like pattern to burst to the upside on a huge, gap-up move off the lows of the base and the 50-day moving average, as we see on the daily chart below. I’ve been discussing AMZN for a while as a possible, albeit unresolved, H&S top, but the stock never broke its 50-day line and the various trend lines I’ve been drawing on the daily chart, as we see below. As I wrote last weekend, earnings would probably provide the answer to AMZN’s chart pattern, and so with Friday’s huge gap-up move the question becomes whether this is a buyable gap-up. Technically, any gap-up move emerging from a consolidation, in this case a “low-base” type of consolidation, can be bought. All you do is use the intra-day low of the gap-up day plus another 1-3% on the downside to allow for “porosity,” as your stop. This might also go for other earnings gap-ups we saw this week in stocks like Expedia (EXPE), SolarWinds (SWI), GNC Holdings (GNC), etc. In a case like GNC, however, not shown, this week’s gap-up move was its third buyable gap-up in 2012, and thus may be getting a little long in the tooth. Usually a third buyable gap-up in a pattern within 2-3 months simply becomes too obvious. (AMZN) Gilmo Report Stock Chart

Adding to my argument that the market may be rotating into “stuff” stocks is the strength in the housing sector. This week we saw homebuilders, currently the #3 industry group, like Ryland (RYL), Lennar (LEN) and Toll Brothers (TOL) break out of short bases on the basis of better-than-expected housing data released Thursday. On Friday we saw some follow-on groups respond as well, and this included a recent spin-off from Fortune Brands (FB), Fortune Brands Home & Security (FBHS), shown below on a daily chart. FBHS hit my volume screens very early in the day as it launched off its 50-day and 10-day moving averages and cleared to new highs. FBHS came in with a big upside surprise when it announced a 700% earnings growth number and raised guidance for 2012 to 77-87 cents a share vs. analysts’ estimates of 71 cents. The magnitude of FBHS’ trading volume on Friday tends to argue for further upside in the stock, which has been in a steady uptrend since being spun off from its parent company late last year. I don’t know if the stock is going to pull back from here, but buying the stock anywhere below Friday’s close at 22.53 puts it within 5-7% range of its 50-day moving average, which I would use as an ultimate downside selling guide. If the housing sector is strong, I like “new merchandise” in the sector like FBHS as a way to play it.

Fortune Brands Home & Security (FBHS) Gilmo Report Stock Chart

LinkedIn (LNKD) announced the unveiling of a new iPad app on Friday, and this led to a less-than-desirable volume breakout to higher highs. LNKD comes out with earnings this Thursday, and I suppose that “earnings roulette” will figure strongly into the stock. Either it gaps up and out of this base on big volume, or it gaps down. One of the biggest arguments against LNKD has been its so-called lofty valuation, and this week’s earnings announcement, in my view, will have to show a strong acceleration in earnings and sales growth in order to keep the stock’s uptrend alive. I have been trading the stock between the high-90’s and 105-106 price level in recent weeks, but this sort of “channel” trading only works because LNKD is somewhat volatile. In fact, I don’t really care for the look of its weekly chart which shows absolutely no tightness in the pattern over the past month while the weekly ranges remain very wide. I suppose the critical factor here is that LNKD is, in reality, still locked within a big base it has formed since coming public last year, and any “real” price move would begin with a big-volume breakout from this current base formation, as I see it. Right now, rather than taking a stab at the stock going into earnings this week, I prefer to wait and let the stock prove itself right here and now.

LinkedIn (LNKD) Gilmo Report Stock Chart

In my report of April 18th I discussed the buyable gap-up move in United Rentals (URI), shown below on a daily chart, and the stock has held up well since then. I tend to see as favorable any stock that is trying to break out while the general market is correcting, and URI held its recent gap-up low on Monday when the general market gapped down to start off the week. On Friday URI produced what I might call a slightly marginal pocket pivot buy point based on the fact that the stock is just slightly extended from the 10-day moving average and is also coming out of this little straight-down-and-straight-up little v-formation. I tend to like the stock on pullbacks towards the 45 price level although technically the stock is just barely more than 5% beyond its recent breakout level at around 44.20. URI is merging with another rental company, RSC Holdings (RRR), and Friday’s move was likely given impetus by the announcement that both URI and RRR shareholders voted in favor of the merger, which is now cleared to go through. If one is interested in acquiring URI shares, I would look for a pullback under 46 to do so as Friday’s pocket pivot doesn’t strike me as convincing enough to do any more than add a bit, possibly, to an existing URI position bought close to the 45 price level.

United Rentals (URI) Gilmo Report Stock Chart

I admit that I didn’t see what was so “special” about boutique
Francesca’s Holdings (FRAN) when it gapped up out of a double-bottom-with-handle formation seven weeks ago as it cleared to new highs, but then back in January I didn’t see what was so “special” about apparel-maker and retailer Michael Kors (KORS) either just before it launched on a 90% upside price move. FRAN eventually violated its buyable gap-up move of seven weeks ago, confirming my decision to leave the stock alone at the time. But the failure of the buyable gap-up was also influenced by the general market and the company’s announcement of a 9-million-share secondary offering that was priced at 27.60 last week, accounting for the big volume spike in the weekly chart, below. Note that weekly volume came in above average this past week as the stock found support at the 10-week moving average. Thus I consider the stock potentially buyable on this pullback to the 10-week/50-day line, using a violation of the 50-day line as your selling guide. Barron’s magazine panned the stock last week on the basis of its typically mindless P/E analysis, which I always consider a good sign for any strong, emerging company. A big driver for retail leaders is always the potential for store growth, and FRAN is looking to expand its current store count from 283 to 900 over the next seven to ten years. With a thinner, smaller stock, I think a pullback to the 10-week is the best way to buy the stock.


Francesca's Holdings (FRAN) Gilmo Report Stock Chart

Facebook (FB) is coming public in May to widespread fanfare and anticipation, and one company that is a potential stealth beneficiary is Red Hat (RHT), which I last discussed in my report of April 18th. With 12% earnings growth reported by the company in the most recent quarter, I’ve wondered why the stock acts so well technically given the tight flag and tight weekly closes we see on its weekly chart, below. The “secret” to RHT’s strong action is the fact that Facebook and Citrix Systems (CTXS) had placed staff on the board of Gluster, a company that RHT recently bought. According to one report in IBD, Gluster’s technology is something of a game-changer with respect to how storage is deployed in cloud and enterprise virtualization, and this is what Facebook and CTXS are interested in. RHT tried to pocket pivot out of its flag formation two weeks ago on the 19th, the day after my report, but general market weakness put a lid on that breakout attempt. This past week the stock found support just above its 10-week moving average as it holds up very tightly around the 60 price level. The stock seems to find resistance at the 62 price level, at least for now, and it may be a matter of watching for the weekly price ranges to tighten up in anticipation of a potential breakout.

Red Hat (RHT) Gilmo Report Stock Chart

It’s been a long time since I last discussed precious metals, but then it’s not like gold or silver have been issuing any strong technical buy signals recently. However, as you are all well aware, sometimes the best time to buy precious metals is when absolutely nobody wants them. And right now, based on any number of precious metals sentiment indicators, gold and silver are being viewed by the crowd as little more than paper weights. With QE3 allegedly off the table, one can argue what impetus is there for gold on the upside? On the other hand, I might argue that with QE3 supposedly out of the picture, why are gold and silver not simply collapsing as they remain well above their lows of late December 2011? Engaging in a little bit of “fun with trendlines” we can see that the SPDR
Gold Shares (GLD) ETF is at a critical point as it tries to maintain a higher low relative to where it was in late December, as the rising-lows trendline highlights on the weekly chart of GLD below. Frankly, I don’t see how the U.S. government gets around having to print more dollars when it is running deficits well north of $1 trillion. Last year the Fed accounted for 61% of Treasury debt purchases, and so in 2012 we have to wonder who will step up to buy all the new debt issuance required to finance all this continued, mad deficit spending. I think gold and silver are poised to turn up, so stay tuned as we look for actionable, technical buy signals to show up in the near future.

SPDR Gilmo Report Stock Chart

Silver, as represented by the iShares Silver Trust (SLV) ETF, shown below on a weekly chart, also looks like it is trying to finish off what appears to be a roughly 50% or so retracement of its prior move off the late December lows. As well, the weekly pattern shows three clear selling waves with each wave coming on less and less selling volume. I look for the SLV to try and hold the $30 price level here, and look for the fact that the crowd absolutely hates the precious metals here to work in the precious metals’ favor.

iShares Silver Trust (SLV) Gilmo Report Stock Chart

If this market is now in a new “confirmed” uptrend, I suppose it could be a little more robust when it comes to producing bona fide follow-through days beyond a tepid 1.36% move in the S&P 500 alone. If this rally does have “legs” then I think we will need to see a follow-through day coming from the NASDAQ Composite Index as well. And so that is something I would look for as confirmation of the market’s improving tone. Meanwhile, on a stock-by-stock basis, there are some fresher opportunities to look at. Existing leaders act constructively, if not necessarily robustly, as they go about the business of building potential second-stage bases, as I’ve discussed in this report and in my month-end video discussion which Gilmo members can view at:

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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