The Gilmo Report

August 26, 2012

August 26, 2012

A frequent question I receive these days is whether I am concerned about the low levels in the CBOE Volatility Index, known more popularly as the VIX. Some market pundits see this as sealing the deal on a “triple top” for the general market. I frankly do not see any use in attempts at finding correlations between VIX levels and the ensuing market trend that simply do not exist. On the weekly chart below that extends back to 1991, I show the NASDAQ Composite Index (red) with the VIX (maroon), and this chart shows that, if anything, low levels of the VIX are often associated with the start of major new rallies. Thus I reject out of hand any bearish view of the market based on this analysis, and it strikes me as similar to other “bearish” concoctions like being concerned about the “divergence” in the Dow Jones Transportation Index that I debunked last week. It all strikes me as trying to understand the market in terms of what one thinks it
should be doing rather than what it is actually doing. And trying to predict what the market will do by watching where the VIX is trading qualifies in this regard. Even if one considers that the VIX is at a very low level, we can see that on a historical basis it has a ways to go before reaching truly extreme low levels. In any case, all I know for sure is that I’m not smart enough to predict where the market is going based on some reading of such “indicators.” I only respond to what I’m seeing in real time.

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And what I’m seeing in real-time is a market that has had a sharp upside run so far in the month of August and which is now digesting those strong gains as it pulls back in a constructive manner after running into the all-too obvious “Zone of Logical Resistance” as I’ve highlighted it on the daily candlestick chart of the NASDAQ Composite Index, below. Selling has not picked up at all after the NASDAQ was rejected at the 3100 level four trading days ago. Consulting the “magic candlesticks,” we can see that Friday’s action is a bullish “engulfing” day, otherwise known as an outside reversal to the upside for you boring bar chartists. Maybe I’ll have to go drink a few martinis and look at the VIX chart for long periods of time without my reading glasses before I get bearish, but I don’t see anything wrong with this current market pullback. Not that things couldn’t change at any time, but sign of a healthy pullback is that during such a pullback leading stocks will act well or often just continue to move higher in spite of the market’s pullback, and we have seen that in several cases. As I wrote on Wednesday, I see the long side as the better side of the market to be on given the currently intact rally, and using bouts of weakness to pick up shares of leading stocks has been a good strategy on this pullback.

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Silver and gold continue to move sharply to the upside, with both clearing their 200-day moving averages. As I discussed in my Wednesday report, I like the silver ETFs better as I thought that a precious metals move based on talk of impending QE would be better leveraged in silver. And so it has, as the charts of the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV), shown below, illustrate. For now the metals are a hold, using pullbacks to the 200-day line to add to positions in the GLD.

SPDR Gold Shares (GLD) Gilmo Report Stock Chart

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Among the big-stock NASDAQ leaders, AAPL continues to hold up fine, as I discussed in my report of this past Wednesday, and is potentially buyable on any pullbacks down to or below 650. Meanwhile, Amazon.com (AMZN) tries to keep pace with another pocket pivot move on Friday that took the stock to higher highs as it approaches its all-time high at 246.71. As I’ve discussed previously, the bears love to hate AMZN on the basis of it being “wildly overvalued,” but that sort of thinking doesn’t seem to get you anywhere with the stock, certainly not as much as just going with the price/volume action and being long the thing. AMZN isn’t necessarily the fastest stock in the world, and the best way to buy the stock, in my view, is to use weakness such that the pullbacks below 240 and above the top of the prior range from which AMZN broke out last week at around 238 are spots to pick up shares. One could also potentially add to a position in AMZN on the basis of Friday’s pocket pivot action.

Amazon.com (AMZN) Gilmo Report Stock Chart

I am always fascinated by stocks that are so vehemently hated by bears (read: the frustrated shorts), like AMZN. In a similar vein, Salesforce.com (CRM) has frequently come under fire by the shorts as a company that lives in a mythical world of manufactured revenues and P/E ratios further out in space than a Mars rover. I’ve even read some pretty scathing pieces on CRM’s CEO, Marc Benioff, as a self-indulgent, party-throwing hype-ster. Maybe he is, but all of that is not of any concern to us as the stock’s price/volume action appears to presage further upside, as we see in the daily chart below. CRM came out with earnings Thursday after the close and promptly tanked under 140 in after-hours trade, but by the open was back above 140 as it spent the rest of the day hammering out a massive-volume pocket pivot reversal buy point as it jammed right back above the 10-day moving average, closing near the highs of the day. Notice also the little black “ants” on the chart indicating the stock has been up 12 out of 15 days in a row or better. This looks potentially buyable to me using a stop that could be as tight as the 10-day moving average at 146.51 or as loose as Friday’s intra-day low.

Salesforce.com (CRM) Gilmo Report Stock Chart

Equinix (EQIX) continues to act well after its pocket pivot breakout six trading days ago on the daily chart below (see August 19th report), and in fact flashed another pocket pivot on Wednesday as it bounced off of the 10-day moving average to close up on the day. Remember that volume for a pocket pivot only needs to be higher than any down-volume day in the pattern over the prior 10 trading days. There are some higher volume bars in the pattern, but they are all blue upside bars, not red down-volume bars. Thus this becomes a second buy point in the pattern after last week’s pocket pivot breakout maneuver, and the stock continues to act quite resilience, closing up on each of the past three days after pulling back intra-day. EQIX remains within range of Wednesday’s pocket pivot buy point, if not right at it, and the stock is potentially buyable with the idea that it should hold the 185 level, roughly on any potential pullback.

Equinix (EQIX) Gilmo Report Stock Chart

Regeneron Pharmaceuticals (REGN) provided some instant gratification for those who acted quickly on Wednesday’s pocket pivot buy point within the handle by buying shares on Thursday morning as the stock dipped just a bit right after the opening bell. By the close, REGN had broken out of its cup-with-handle base on volume that was 74% above average. I’ve been discussing REGN for some time now since it came up through the 50-day moving average on a pocket pivot move back in late July. The stock remains well within range of this breakout and one can comfortably buy it at current levels with the idea that it should hold the breakout and, roughly, the 140 price level. Some have asked whether I am “concerned” about REGN’s “late-stage” base but I would avoid trying to get into the business of labeling what “stage” a base is as this alone is not a reason to avoid a leading stock. Leading stocks can build 5, 6, 7 or more bases in price moves that go further than most believe, and REGN has the fundamental backdrop to justify a sustained rally from here, and I prefer to take its price/volume action on its face.

Regeneron Pharmaceuticals (REGN) Gilmo Report Stock Chart

Michael Kors Holdings (KORS) held in very tight after Monday’s breakout to all-time highs with volume drying up sharply, as we see on the daily chart below. This led to a pick-up in volume on Friday that has taken the stock to even fresher all-time price highs as it pushes into the 54 price level. At this point the stock should hold the 50 level on any pullback, as it did following Monday’s new-high base breakout. At this point, if one bought the stock on the buyable gap-up two weeks ago as the stock came up through the 48 price level and then added to one’s position on Monday’s breakout, it is mostly a matter of sitting more and thinking less as long as the stock can hold the breakout. A number of retailing stocks have come on recently, but among all of these, including names like Francesca’s Holding (FRAN) and American Eagle Outfitters (AEO), I much prefer KORS as a first-stage breakout in a retail stock that represents “new merchandise,” and so if I want to own retail stocks I only need to own KORS.

Michael Kors Holdings (KORS) Gilmo Report Stock Chart

I last discussed Lumber Liquidators (LL) in my report of August 12th as it was building a tight little flag formation. Since then the stock has broken out of that flag formation, as we see on the daily chart below, but buying volume never really materialized for the stock. Without the fuel of at least a pocket pivot volume signature on the breakout, LL has drifted back into the top of the flag and the 20-day moving average, the green line on the chart. On Friday the stock found support at the 20-day line and the top of the prior flag base, just missing the volume required for a pocket pivot buy point. As the stock moves back above the 10-day moving average I would keep an eye out for a pocket pivot type of move off the 10-day line on volume that exceeds 572,500 shares, the biggest down-volume in the pattern over the prior ten days. The housing area has remained relatively constructive lately, and among housing-related retailers we’ve seen Home Depot (HD) act well while Fortune Brands Home & Security (FBHS) flashed a pocket pivot buy point on Friday. LL is one to keep an eye on within the context of improving action in the group.

Lumber Liquidators (LL) Gilmo Report Stock Chart

Last, but not least, I continue to follow the sage of LinkedIn (LNKD) as it continues to make an attempt at remaining the “last man standing” among the much ballyhooed social-networking stocks which have now fallen flat on their face, including the sad example formerly known as the hottest IPO on the planet, Facebook (FB). LNKD has remained relatively quiet all week long after gapping back above the 50-day moving average on Monday, and while the weekly chart below shows the stock closing just below its 10-week moving average the stock is holding above the 50-day moving average on the daily chart. We might also notice that this past week saw a slight increase in volume as the stock traded up off of its weekly lows for what I would term a “small-scale” demonstration of weekly supporting action on the chart. I continue to look for some type of pocket pivot move up and off of the 50-day moving average as a reason to get big in LNKD shares, and for now that remains something to watch for.

LinkedIn (LNKD) Gilmo Report Stock Chart

For other long ideas that I’ve discussed in previous reports but which are not mentioned in this report, refer to the last four reports for discussions of any of those stocks as my thoughts remain the same for those situations.

Thus far the market’s pullback off of its recent peaks has occurred on low volume and in an orderly fashion. Major breakdowns in leading stocks have not dominated the action, and in many cases, as has been the case with names like AMZN, KORS, and REGN, for example, leading stocks have continued to break out and/or move higher. Without trying to predict where the market will go from here, all we know for certain is that the market’s rally remains intact until further notice, and leading stocks, hopefully some of which we own, continue to act well, so there is no other course of action to take than to simply stay the course until further evidence proves otherwise.

On a final note, I would like to remind members that stock holdings for me, Gil Morales & Company, LLC, MoKa Investors, LLC, and Virtue of Selfish Investing, LLC are disclosed in the disclaimer shown at the end of all reports. These names are shown for disclosure purposes only, not discussion, and it is not wise to waste one’s time trying to figure out what I own or don’t own, or what I’m trading based on the stock symbols shown or not shown from report to report as they 1) are only disclosed if those stocks are also discussed in the same report and 2) can be portfolio holdings for any number of personal or client accounts or funds that we manage among the three different firms. You can easily make yourself dizzy trying to “sleuth” exactly what and how we are trading based on these basic disclosures which are for regulatory and compliance purposes only.

Gil Morales
CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.