“Calm with an upside bias” is the only way to describe the market’s low-volume action going into the three-day Christmas holiday weekend. Troubles in Euroland have been stemmed by another fat thumb being stuck into the crumbling Euro-dike of insolvency as the markets perceive that the Europeans have bought themselves some time. The question in Europe has been whether the ECB would in fact bite the bullet and commence with the money printing, and the decision to lend 489.2 billion Euros has given the markets a pontoon or two to grab onto. Meanwhile the action slows down in typical year-end holiday fashion. Historically, the seven days on either side of New Year’s Day tend to be positive for the market, so on the surface, and based on history, we don’t expect any real fireworks this week, and the market could easily continue to drift higher on less-than-average volume, as it has done on the NASDAQ Composite Index daily chart shown below. The NASDAQ has pushed up into its 50-day moving average and the upper boundary of a big sideways triangle formation it has been working on since the early October lows on low holiday volume.
But while the NASDAQ pushes up into what might be perceived as resistance at the upper boundary of its triangle formation, there is a bit of a divergence that is starting to emerge here as the S&P 500 Index, shown below on a daily chart, has in fact broken out above the upper boundary of its own triangle formation. In the near-term we are seeing S&P stocks begin to outperform their NASDAQ brethren, and this is mostly due to weakness in technology stocks. The only technology group in the top 30 industry groups is Computer Software – Enterprise, which is currently ranked #1, but that is only because there have been a number of buyouts of cloud-related names in the group by big tech companies like SAP, IBM, and Oracle. It has been of interest to note that while tech stocks have been struggling, a number of medical groups have been moving to the top of the list, including Medical Systems/Equipment, Medical – Ethical Drugs, and Medical – Biomed/Biotech, which are ranked #10, #11, and #15, respectively. Three weeks ago these same groups were ranked #17, #36, and #25.
Gold remains in its first real correction since late 2008, and I consider this a key barometer of “QE traction” in this market. We know the formula: As liquidity dries up, gold gets sold off with everything else, and with gold now living under its 200-day moving average, it is not clear how much further below the line it will go, if at all, particularly if the Europeans are now showing a “willingness to print.” Note in the GLD daily chart below that gold has undercut its late September low, which could set up a big double-bottom in the yellow metal from here. During the 2008 correction in gold, it went down over 30% from its peak in March 2008, and it took five months for gold to finally break down below its 200-day moving average. In 2011, gold has broken below the 200-day line three months after the peak and is currently 15% off of its all-time highs, which is not much, in my view. Gold in 2011 is less weak than it was in 2008, and its breakdown off the March 2008 peak signaled the beginning of a severe liquidity-crisis-based sell-off that culminated in the March 2009 market lows, while gold itself bottomed in November 2008. If stocks are going to try and move higher in 2012, then gold will have to lead the way in my view, and that will have to start with a move back above the 200-day moving average, so this is something I am keeping a close eye on as we go into the last trading week of 2011.
If you are trying to play the short side here, it is important to keep in perspective where you are in the pattern and just how obvious the selling has likely become in some stocks, at least for now. For example, Amazon.com (AMZN) has continued to move lower over the past ten weeks as it has filled out a narrow head and shoulders topping formation, but we can see that it is now in a position where it is beginning to undercut a number of prior lows in its chart pattern, as we see on the weekly chart below. Note as well that last week shows the stock closing roughly mid-range on heavy volume, which has the look of support along these lows in the 170 price range, and the stock has had three clear and quick selling waves off the peak. AMZN remains a big institutional stock, as well as THE e-commerce juggernaut in this market, and unless the general market indexes embark on another downleg in January, I would not keep trying to short AMZN with the idea that it is going to split wide open. AMZN is not NFLX, and it will take a weak general market to fully dislodge a major leading stock like AMZN in a manner that takes it to lower lows. It could simply move sideways here, or even build an entirely new base.
Salesforce.com (CRM) remains weak here, and it has been a decent short-sale campaign target over the past couple of weeks after finding clear resistance at its 50-day moving average and the peak of its third right shoulder in an overall H&S topping formation, as we see on the daily chart below. This is a very ugly chart, but a couple of things stand out, at least to my eye, when I study this very carefully without trying to have a short-side bias. Oftentimes you will see what you want to see in a chart, and so it is a good exercise to try and see what you don’t want to see. In CRM’s case, we can consider that the downside move from the peak of the right shoulder and the 125 price area, roughly, extended for 11 days before a big-volume gap-down three days ago took CRM to lower lows. In the short-term, this could be viewed as a downside “exhaustion gap,” and so a bounce from here is possible. In my view, if you want to short the stock here, you had better stick to a tight stop in the 100-102 level, because it is possible that the selling in the stock has likely become too obvious and the stock will probably need to spend some time consolidating.
All charts courtesy of High Growth Stock Investor (highgrowthstock.com), © 2011 used by permission
Baidu, Inc. (BIDU) continues to find resistance in the 118-120 price area, as I’ve highlighted on the daily chart below, and Friday’s move up into this zone of resistance came on very light pre-holiday volume. If one chooses to try and short BIDU here, then it is a simple matter of keeping a tight stop at the 120 price level. I’m not sure what this will do in the last week of the year, and I am definitely not interested in buying BIDU as it remains in a weak H&S type of pattern. In my view, BIDU is more a short than a long here, but it could continue to drift higher into year-end if the market continues to do so as well. In general, my view towards the short side is simply to adopt a wait-and-see approach, as there is no need to take decisive action in what is often just a slow-upside-drift type of environment going into year-end. Apple (AAPL) remains off the table as a short as long as it remains above its 50-day moving average, while my last short-sale target as discussed in my report of this past Wednesday, Fossil, Inc. (FOSL), is bouncing off support in the 80 area. In my view, right here right now, it is prudent to ease off the gas if you have been shorting stocks.
All charts courtesy of High Growth Stock Investor (highgrowthstock.com), © 2011 used by permission
So if we intend to ease up on the short side, does that mean the long side is the place to be? I have to admit that even the long side of this market doesn’t get me terribly excited, but the fact is that in this market stocks that have been acting well continue to act well, albeit with little to zero net upside progress, while doggie stocks have remained, well, doggie. Thus strength begets strength, while weakness begets weakness, resulting in a market of stocks rather than a stock market. As I wrote at the outset of this report, the medical area is moving up in the group rankings, and of course I’ve already discussed stocks like Biogen-Idec (BIIB), shown below on a daily chart, Intuitive Surgical (ISRG) and Questcor Pharmaceuticals (QCOR) as names to keep an eye on should this market gain momentum to the upside. Bigger “pharma” stocks like BMY, MRK, AMGN, CELG, PFE, and ABT have all been trundling to the upside, so seeing some pocket pivots in BIIB this past week as it moved tightly along its 50-day moving average in the midst of building an eight-week base here may be a clue of an impending move by BIIB up off the 50-day line here. This might be playable using a very tight 2-3% stop.
Smaller pharmaceuticals have also acted well, including stocks like Viropharma (VPHM) and Spectrum Pharmaceuticals (SPPI), which I don’t show here. One of the more powerful movers in the “small pharma” space is Salix Pharmaceuticals (SLXP), shown below on a daily chart. SLXP is one of the most solid fundamental plays in the space with a more powerful version of an existing drug in its stable, Xifaxan, which was approved last year for the treatment of Hepatic Encephalopathy. It has been designated as an “orphan drug” with seven years of exclusivity and a lot of growth ahead of it. Because of this, SLXP is showing some big earnings and sales growth over the past four quarters, and forward estimates over the next two quarters are quite robust. SLXP focuses on gastroenterological treatments and has another drug, Methylnaltrexone, in test phase. The stock looks like it is “way up there,” but four days ago SLXP flashed a buyable gap-up type of pocket pivot point on news of positive resuls for Oral Methylnaltrexone. The gap-up day has an intra-day low of 45.35 which serves as a quick 5% downside stop from Friday’s closing levels.
All charts courtesy of High Growth Stock Investor (highgrowthstock.com), © 2011 used by permission.
The theory going into year-end is that good stocks will continue to be “good” while bad stocks will continue to “bad” as money managers allegedly seek to show only the best stocks among their holdings once 2011 is in the record books. Barring any news surprises, my guess is that what we can expect as we move into the last week and the last four trading days of the year is a general market enviornment that remains “calm with an upside bias.” Translation: It’ll be a lot like watching grass grow since, as everyone knows, grass tends to exhibit a nature that is for the most part “calm, with an upside bias.” Stay tuned.
I wanted to alert Gilmo Members to my appearance tomorrow morning, Tuesday, December 27th, on Fox Business News’ Stuart Varney & Company show at the opening bell. I’m not sure what the topic will be, as they will notify me of this first thing tomorrow (I love it when they give me so much prep time!), but I’m guessing it will concern the outlook for stocks and gold in 2012, or something to that effect. Don’t miss it!
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 a position in SLXP, though positions are subject to change at any time and without notice.