The Gilmo Report

December 21, 2011

December 21, 2011

Everyone was scratching their heads on Tuesday wondering why the market was up so wildly, seemingly out of nowhere after looking a bit grim on Monday. By this morning the European Central Bank made a formal announcement that it will provide 489.2 billion Euros to 523 banks starved for liquidity, so perhaps somebody knew something. If my math is correct, however, this works out to 1.09695 billion Euros per bank! With the news cat out of the bag, European markets reversed course to the downside and the U.S. market turned tail right off the open this morning and sputtered around for most of the day before closing unevenly. Technically, yesterday’s action did constitute a 17th-day follow-through-day (FTD), but in my view it is highly suspect given the weak action of potential leaders. Meanwhile I continue to see breakdowns in my short-sale target stocks, which certainly gives a different look to the market “under the hood.” I see no reason to go plunging headlong into this market on the long side, and on a stock-by-stock basis, my own experience has been that the short side has been much more profitable over the past week or so, so this is likely a clue about what is really going on in this market currently, despite yesterday’s FTD. On the other hand, today’s action featured increased volume with the NASDAQ finding support off of its lows of the day, as we see in the daily chart below, making the situation somewhat muddied.

NASDAQ Gilmo Report Chart

Among my short-sale target stocks, the downside blow-out-du-jour today was (CRM), which took its cue from Oracle Corp.’s (ORCL) earnings miss last night and gapped down through the $100 price level, as we see on the weekly chart below. To me this looks like a downside “breakout” on a huge-volume gap-down move. This reminds me, of course, of Netflix, Inc.’s (NFLX) huge-volume downside breakout that saw the stock gap down below the neckline of a head and shoulders formation at around the 196 price level, leading to a very sharp drop over the past three months that has seen the stock go from above $200 to $70-and-change more recently. CRM ‘s downside breakout took the stock down through the October 2010 lows at 97.92, bouncing off the 94 level before staging a little bit of an “undercut & rally” type of move. For now, CRM can be treated as if the 100-102 area, either the bottom or the top of today’s gap-down “falling window” is upside resistance, and I would use that as my stop for any short position in CRM at at this stage. CRM was hit hard after the open, and drifted back up to the top of the day’s trading range on light volume, so we will see where it hits resistance from here, although this will likely depend on what the general market does going into the long Christmas weekend. (CRM) Gilmo Report Chart

Apple, Inc. (AAPL) has climbed back above its 50-day moving average on news that it won a ruling from the International Trade Commission (ITC) against Android-based devices. As we see on the daily chart, below, AAPL’s push back above the 50-day line has come on decidedly below-average volume, but I am not going to maintain a short position here as I was using the 50-day line as my upside stop, and I see no need to beg the question, particularly when there are other short-sale target stocks working for me. I would need to see it break back down below the 50-day moving average on heavier selling volume to get negative on the stock again. Remember that AAPL remains a widely-owned institutional favorite, and so it tends to get support from value-oriented money managers given that it sells at 11 times forward earnings estimates. I tend to think the low P/E is a troublesome sign, much like RIMM selling at 7 times forward earnings when it was selling at 70 (RIMM is a “young teenager” now). Unfortunately, if the stock is not going to break down, there is no reason to maintain a short position at the current time, so I’m back to watching AAPL for now.

Apple, Inc. (AAPL) Gilmo Report Chart (AMZN) on the other hand, doesn’t seem to get the kind of institutional support that AAPL does, but that may be because it isn’t selling at a P/E that might attract value-oriented managers to the stock, as I see it. AMZN staged a classic “undercut & rally” move last week that took it up into the 10-day moving average at around 183.47 where it found ready resistance, as we see on the daily chart. Volume picked up sharply today and just cleared average daily volume as the stock broke 4.48% to the downside. If AMZN clears through the 170.25 low of last week then my next downside target in the stock is the 169.59 low from March, which is far to the left of the chart and not visible. We identified AMZN’s nascent and narrow H&S top formation a few weeks ago as it broke down through the 200-day moving average in late November, and since then the stock has not disappointed by continuing to trend lower. If you are not already short the stock then it is not advisable to try and short it here, although any reflex rally back up to the 180 level could be shortable, so watch for that. (AMZN) Gilmo Report Chart

Over the weekend in my report of December 18th, I pointed out resistance for Baidu, Inc. (BIDU) in the 118-120 price area, which I’ve highlighted on the daily chart below. BIDU jacked with the market yesterday, but notice that this move took it right up into this area of resistance, and today the stock peeled away from yesterday’s close on the downside. BIDU was unable to move up very far off its intra-day lows despite the market being able to do so, but what the indexes do is, on some days, a separate affair to what is going on with former leading stocks that have been on our short-sale target list. You may also note that having just a small handful of stocks to focus on as short-sale targets, namely AAPL, AMZN, BIDU, and CRM, has yielded results, with the sole exception being AAPL which refuses to break down. The other three move down far more on a percentage basis, so overall a “basket short position” of all four stocks would be making money. But it’s not necessarily easy, and BIDU’s big jack to the upside yesterday would not be comfortable to sit through, however if you intend to make money on the short side, you may have to go through this to some extent.

Baidu, Inc. (BIDU) Gilmo Report Chart

So with BIDU jacking right up into resistance where it could have been shorted, we can consider where resistance might be in Fossil, Inc. (FOSL), which I added to my list of short-sale target stocks this past weekend. FOSL has failed on a breakout attempt from an improper double-bottom type of formation, as I discussed in my weekend report of December 18th, and continues to find near-term support at the 80 level, more or less. FOSL isn’t finding much buying volume down here, but it did manage to reverse back to the upside today, albeit on less volume than yesterday. Perhaps another bounce off support is in the cards, and there are several roadblocks for FOSL on the way up. The first is the top of this six-day sideways consolidation at the bottom of the highlighted area on the daily chart, below, and the second is the 50-day moving average at the top of the highlighted area. Resistance could be found anywhere between these two points, although I would first look for the highs of this recent six-day range to act as initial, although admittedly potentially weaker, upside resistance. Barring that, a high-volume “breakout” to the downside through the 80 support level would be a signal to get short FOSL on as well.

Fossil, Inc. (FOSL) Gilmo Report Chart

As I wrote over the weekend, I have been leaning towards the short side in this market currently, but the bottom line is that as we move into the long Christmas weekend the action might get a little funky. Not that it hasn’t been funky enough already. My solution has been to hold very few if any short positions overnight, preferring to “campaign” stocks as they break lower every day and avoiding the bizarre overnight gap-ups and gap-downs that typify this market environment. So far this has worked as most of my short-sale target stocks have moved lower in more or less contiguous fashion. There has been constructive action in some stocks, but little real price movement, such as with stocks like Mastercard (MA) or Visa (V), which I’ve discussed in previous reports, or Intuitive Surgical (ISRG), Biogen (BIIB) and Questcor Pharamaceuticals (QCOR), which continue to base, but the best percentage moves to play have been those on the short side. Thus I tend to think that as long as this continues to be the case then all market rallies are suspect. Meanwhile, whatever stocks are currently acting well might simply be the next ones to get hit, as we saw today in high-flyer Solarwinds, Inc. (SWI) which got knocked below its 50-day moving average today on heavy selling volume.

Meanwhile, keep an eye on gold as it remains about 15% off of its all-time highs and just below its 200-day moving average. As I wrote over the weekend, gold in August 2008 also busted its 200-day moving average, and this was a harbinger of a sharp downleg to come in the stock market that occurred a little over a month later in September 2008. Back then gold corrected over 30%, and if it can’t hold or get back above its 200-day line in 2011 or early 2012, this may be telling us something about the state of QE and the potential fragility of stocks as we move into 2012. Stay tuned.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 positions in AMZN and CRM., though positions are subject to change at any time and without notice.

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