The Gilmo Report

August 21, 2013

August 21, 2013

After a brief bout of fireworks on Thursday of last week, the market once again quieted down to form a short, four-day, bear flag prior to today’s release of the Fed’s latest meeting minutes. The market was perhaps hoping for some clarity on the issue of QE tapering, but Fed board members appear to be split on what precise course of action to take. Thus the market is left with uncertainty in this regard, and the market generally doesn’t like uncertainty. This led to an immediate and sharp downside reaction followed by a swing back into positive territory before the indexes ended near the lows of the day on decently heavier volume. The NASDAQ Composite Index, shown below on a daily chart, held within its short bear flag formation but looks poised to test its 50-day moving average. The big move in Apple (AAPL) since it had its bottom-fishing pocket pivot gap-up move on July 24th, which I discussed in my July 28th report, has likely helped to bolster the relative performance of the NASDAQ.




The S&P 500, shown below on a daily chart, is grossly underperforming the NASDAQ as it breaks to lower lows after finding resistance at the 50-day moving average both yesterday and today. Technically, the indexes are in a downtrend, and as I wrote over the weekend I like cash, with the alternative of attacking the market on the short side where proper set-ups can be found.




Meanwhile, gold, as represented by the SPDR Gold Shares (GLD), shown below on a daily chart, is holding in a short bull flag after last week’s big spike and pocket pivot move up through the late July to early August price range. Silver, as well, is holding up nicely in a short bull flag after rallying well over 20% above its late June lows.




As I wrote over the weekend, the interesting paradox here is that bonds and stocks appear to be pricing in QE tapering while precious metals appear to be pricing in something else. The Barclays 20+ Year Treasury Bond Fund (TLT), shown below, made a new low today as sellers rushed to dump the ETF.




While the long end is taking the most heat, the middle part of the Treasury yield curve, as represented by the iShares 3-7 Year Treasury Bond ETF (IEI), shown below on a daily chart, is also plumbing its early July lows. In my view, the pain for bond holders, most of whom are retail investors deluded into believing that somehow bonds are always safe (they obviously didn’t live through the bond market crash of February 1994 that led to a lot of “safe” short-term bond funds getting smashed), is not likely to end soon. But if one thinks about it, loading up on bonds during a period where the Fed has injected historically massive and unprecedented easy-money liquidity into the system while keeping interest rates artificially low at near zero levels begs the question: Exactly how was this story supposed to have a happy ending?

I suppose if one banks on holding their bonds until maturity, they might, but it is certainly not a situation I would relish being caught in. The only thing that will save bond owners at this point is the Fed coming in with QE4, and right now it doesn’t look like that’s a very strong possibility. Meanwhile, the action in precious metals seems to argue for movement out of bonds and stocks and into hard currencies, which is what I consider precious metals to be. Money is what people accept as money, and as investors become less enamored of paper fiat currencies, other forms of currency will find favor. That just might be what is driving the current move out of stocks and bonds and into precious metals. Maybe somebody should call up the Chinese and ask them what they’re doing with their massive U.S. Treasury holdings right now so we might have a more definitive answer.




Short-sale target SolarCity (SCTY) found temporary support along the June lows of its prior cup-with-handle formation, as we see on the daily chart below, but I think this is headed for lower lows if the general market continues lower as well. In my August 11th report I went into detail about SCTY’s resemblance to Sunpower (SPWR) in early 2008, which broke down sharply from a similarly failed cup-with-handle base. That break, however, coincided with a big break in the general market, so I think for SCTY to break down hard from here, we will need to see additional weakness in the general market. For now I would only be interested in initiating a short in SCTY on a rally up towards the 50-day moving average, currently at 38.97.




First Solar (FSLR) reached a short-term cover point yesterday as it met up with its 200-day moving average. The bounce has been less than impressive, however, as the stock stalled out at the 10-day moving average today on slightly heavier volume. My guess is this thing is eventually going to go through the 200-day moving average and head for the 30 price level, but like with SCTY it will take a weak general market to help pull that off. I tend to see resistance at the 40 level, an area that had previously served as support for the stock, so that would be my maximum upside trailing stop on the stock for now.




Regeneron Pharmaceuticals (REGN), another one of our short-sale targets that was initially shortable at the 50-day moving average last week (see August 11th report), stalled out on a bounce attempt yesterday, as we can see on the daily chart below. It continued to stall today. Support came in along the early July lows, so we’re not really seeing any undercut & rally from these lows as much as we are seeing the stock find support at around these levels. If the general market remains weak, however, I continue to look for at least a test of the 200-day moving average, currently at around 205.73. This could coincide with an undercut of the late-June low, something I discussed in my report of this past weekend.




Cree (CREE) is a good example of how “earnings roulette” season is exactly that: earnings roulette. Spin the wheel and see if your number comes up. CREE is also an example of how an earnings report doesn’t have to be a disaster to cause a massive downside price gap. And this in a stock that was acting quite well going into earnings, breaking out and flashing pocket pivot buy points all the way up. Of course, broken-down former leaders are the fodder for new short-sale targets, and CREE is now one of them. So far what we have is a massive break off the peak which creates the right side of the stock’s “head” in any potential head and shoulders formation it might form from here. Of course, that would require a rally to form a right shoulder in the pattern, something that is obviously missing at this early stage of the breakdown. However, I do see this as a potential short-term short-sale looking for a move down to the 200-day moving average based on the stock’s “dead cat splat” sort of bear flag following last week’s earnings gap-down. The highs of the current bear flag range, around 58.40, provide a quick upside guide for a stop.




Some leading stocks are holding up well, such as Netflix (NFLX), which I discussed over the weekend after it had another pocket pivot buy point along its 10-day and 20-day moving averages. NFLX then launched to a two-year high yesterday on strong volume, as we see on its daily chart, below. The move came on news that The Weinstein Company would make NFLX the exclusive U.S. subscription TV service for its first run films. My view on the stock now: not a bad place to take profits if the general market continues to weaken.




As far as any other long ideas go in this market, at this time I see no reason to place any emphasis on the long side until we see some sort of stabilization in the general market. Currently it appears that things are worsening, and so the odds of further downside keep me from buying stocks outside of short-term trades where I’m trying to play oversold types of bounces. For this I usually keep an eye on a stock’s 20-day exponential moving average as this is often a short-term area of support for leading stocks on initial pullbacks. But the extent of a stock’s bounce off the 20-day line is not always easy to gauge, so it is short-term trading at best, and for most investors this is not advisable.

In this weekend’s report, I will review some bases in potential and current leaders that I like and which should be watched once the market’s correction has run its course. The only issue is that while we know for certain that the market is in a correction, we have no idea of its extent or duration, which is why I continue to favor cash. September tends to be a weak month for the market, and such weakness is often resolved in the October time frame, so I might expect continued weakness or at least choppiness over the next several weeks. Of course, in the end, the market will do what the market will do, and so for now we simply take the action on a day-by-day basis. For now, the action tells us to be in cash, or at least be ready to take action to protect ourselves on the downside. 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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