The Gilmo Report

February 16, 2014

February 15, 2014

The NASDAQ Composite has now rallied for seven straight days off of the lows of two Mondays ago and up to a new 13-year high, as we can see on its daily chart below. While I indicated that the market had already turned over a week ago, other financial media have now chimed in with their calls of a rally resumption on Tuesday, which I consider late. Most leading stocks are extended at this point, and the hunt for fresh set-ups in individual stocks shows that there is not very much here that is in a proper buy area. Not quite two weeks ago we were already seeing buyable gap-ups in leading stocks like Facebook (FB), Michael Kors Holdings (KORS), and Tableau Software (DATA), and those stocks have moved steadily higher since then.





With the S&P 500 Index, shown below on a daily chart, also knocking on the door to new highs after its own steep, v-shaped rally off the lows of two Mondays ago, the overall market is in a position where it might need to take some time to digest the recent action. The current v-shaped rally off the lows looks similar to four rallies we saw in the second half of last year that were characterized by an almost whipsaw-like rebound off the lows followed by a sharp straight-up move to new highs. Three out of four of these rallies moved to marginal new highs before rolling over sharply. It was only the October rally off the lows that was able to subsequently move higher after several days of sideways consolidation around the cusp of October and November.

So far, the market’s correction in 2014 has conducted itself according to the script it went by last year – quick 5-7% corrections followed by sharp rallies right back up to the prior highs. However, if we extrapolate this script from 2013 into the current environment, then we might consider that it will play out again as rallies to marginal new highs end up failing once they’ve sucked everyone in. This is why over the past six months I have advocated watching the stocks first, and the indexes second as the indexes will simply lead you around by the nose. Those who focus on the action of the indexes and the security blanket of a follow-through day or some financial media source giving the “all clear” signal based on arbitrary assessments of a new “confirmed” rally simply end up getting led around by the nose.




What is likely helping to drive this current jack in stocks off the lows is the realization that QE is here to stay, and the fantasy that the Fed can magically engineer a “soft-landing” after engaging in the most off-the-charts monetary stimulus in the history of the country remains just that – a fantasy. As I wrote last weekend, the Fed is stuck, and they will be no more successful at engineering a soft-landing this time around than they have in previous periods where they began to reverse the easy money cycle. Thus, the prices of precious metals, gold and silver, began to move higher in sync now that gold, shown below on a the daily chart of the Gold Spot Price ($GOLD), has cleared its 200-day moving average and is heading for the next area of resistance at around the 1350 level. Meanwhile, after brief blip to the upside in the U.S. Dollar earlier in the week right after new Fed Chair Janet (“I ♥ QE”) Yellen’s testimony, has reversed as the dollar moved to lower lows by the end of the week. If this trend in the dollar continues then the metals, including silver, should continue higher.




Tableau Software (DATA) pretty much sums up the action in other leading stocks that had buyable gap-up moves not quite two weeks ago, as we can see on its daily chart, below. Last week I considered the stock buyable around the 88-90 price area as it consolidated its buyable gap-up move of two Wednesday’s ago, and it finished this past week about 10% higher from there. At this point, as is the case with both FB and KORS, not shown, DATA is extended and beyond any possible buy point until the 10-day moving average is able to catch up with the price, one way or another, whether this occurs by the stock holding tight and the 10-day moving up to meet it, or the stock pulling back down towards the 10-day. With any of these stocks that have moved up since a buyable gap-up move over a week ago, all you are doing at this point is waiting and watching for a secondary buy point to show up as the 10-day moving average has a chance to catch up to the price. Other recent buyable gap-up moves that I would also throw into this group with DATA, FB, and KORS include Harman International (HAR) and UnderArmour (UA), both of which I don’t show here on charts.




Tesla Motors (TSLA) has finally made it up to the $200 century mark price level but so far has not been able to clear it convincingly, as we can see on the daily chart below. While we might be able to invoke Jesse Livermore’s Century Mark Rule here as TSLA flirts with the $200 price level, we must also keep in mind that a century mark can represent an area of resistance for a leading stock. In fact, in the book, “Reminiscences of a Stock Operator,” Livermore uses the example of Anaconda Copper in the early 1900’s as a stock that failed at the $300 price level, and after initially buying the stock on the basis of his century mark rule, Livermore then used the stock’s failure to hold the $300 price level as a reason to reverse his long position and go short the stock.

In the past we’ve seen Apple (AAPL) top out at $200 in late 2007 and then again at $700 in September of 2012. In the first case, that top at $200 marked the start of the brutal 2008 bear market, and in the second case, the ultimate top in AAPL itself. TSLA is expected to announce earnings this coming Wednesday, and while I have considered the stock tradable on the way up from the pocket pivot in early January, I have no intention of holding any shares going into earnings as I prefer to avoid playing “earnings roulette” regardless of how great I think the company is.




LinkedIn (LNKD), which has been my #1 short-sale target so far in 2014 and which I billed as my Short of the Year for 2014 in my early-January reports, has now broken down through the descending lows trendline on its daily chart, below. You might notice how we are seeing a gray vertical band showing up here, which in the past has signaled short-term lows for the stock. Based on my discussion of the stock in my report of this past Wednesday, the additional factor to consider is that it is coming down on top of a base it formed last year as it moves into the 180-190 price area. I still tend to think that LNKD has a lot more downside left in it, and the only question is whether we get a 5% or so bounce back up into the $200 price level, which I see as clear upside resistance from here.




Organovo Holdings (ONVO) continues to move sideways along its 50-day moving average, as we see in its daily chart, below, but so far no actionable buy signals have shown up. What I’m looking for is some sort of pocket pivot move coming up through and off of the 50-day line, or even the 10-day line which is down at 9.49. On Friday ONVO dipped below the 50-day line, so we might look for the 10-day line to offer some resistance if it continues to pull back here. For now, remain alert to any potential pocket pivot buy point occurring in real-time as the stock remains in position to do so.




Cree (CREE) has been one of my short-sale targets as of late, but I have shifted my position on the stock here as I test a long position based on the recent action. Having played this on the short side and testing the rally off of last week’s lows, I get the sense that there is support for the stock here as it hugs its 50-day moving average, as we can see on the daily chart below. Notice that the past three days have seen the stock pull down on an intraday basis but find support to close up each day. I’ve seen this sort of action in other short-sale target stocks from the past, and when I have tried to short into this sort of tight action along the 50-day line I end up getting squeezed as the stock pushes past the line.

Thus my theory here is that CREE wants to move higher above the 50-day line, and so I am willing to test a long position (not a short position) here with the idea of using the 10-day line as de minimus, quick downside stop. While I may be wrong, my sense at this point in time based on my feel for the stock based on watching it trade in real-time right here, right now, is that this could be an “Ugly Duckling” situation. There has been some talk of General Electric (GE) buying CREE given its status as the leader in LED lighting, an area that is expected to see strong longer-term growth as consumers are mandated to shift away from incandescent light bulbs.  




Sunpower (SPWR) is the first of the leading solars to announce earnings, which it did on Wednesday of this past week, beating estimates handily but selling off Wednesday in after-hours trade following the report. However, on Thursday SPWR found support early in the day and reversed course as it jacked above its 50-day moving average on huge trading volume to flash a nice pocket pivot buy point, as we can see on the daily chart, below. SPWR pulled back slightly on Friday which I consider constructive action given the magnitude of the move off the lows on Thursday, which exceeded 13% as measured from the intraday low of 29.34 up to the close of 33.19.

The other two leading solars, Canadian Solar (CSIQ) and SolarCity (SCTY), both of which I discussed last weekend but do not show here, continue to form bases as they approach their own earnings announcements with SCTY expected to announce in the first week of March and CSIQ towards the middle of the month. For now SPWR is the only one which has issued an actionable buy signal based on Thursday’s pocket pivot, but the solar group as a whole remains the #1 ranked industry group in this current market environment.




Finisar Corp. (FNSR) continues to work on a base after flashing a weak pocket pivot ten days ago on the daily chart, below. I discussed that pocket pivot in my report of two weeks ago, but the stock immediately broke down with the general market before undercutting the mid-December low at 21.21 and then rallying back to the upside. That rally off the lows over the past nine trading days has seen better upside volume vs. downside volume as the stock has clambered above its 50-day moving average.

I still think the bigger names in the Fiber-optic group are viable, as Ciena Corp. (CIEN), not shown, demonstrated on Friday with a buyable gap-up move (using the 24.34 intra-day low as your stop) after it announced a partnership with Ericsson (ERICY) “to develop and distribute packet-optical, converged IP/optical and SDN framework solutions globally.” Both FNSR and CIEN are turnaround plays in the fiber-optic area, with FNSR showing the strongest earnings growth with turnaround earnings growth of 158% and 187% over the past two quarters. Both companies announce earnings in early March, and both should remain on your buy watch list.




I last discussed Southwest Airlines (LUV) in my January 8th report as it was moving up through the 20 price level, and since then the stock moved another 10% higher before pulling back and correcting down to its 20-day exponential moving average, the green line on the daily chart, below. LUV is now tightening up along the 10-day moving average as volume dries up, setting up a potential pocket pivot move off the 10-day line as it moves within what is basically a very tight four-week base. Airline stocks in general have remained constructive as they have pulled back in recent weeks in the process of consolidating prior gains. Watch for a pocket pivot to develop in real-time here with LUV, which has shown very strong turnaround earnings growth of 162% and 267% in the past two quarters with estimates calling for 129% earnings growth in the next quarter.




Global Eagle Entertainment (ENT) is emerging as the stronger of the airline internet access plays as it holds up in a four-week base while rival Gogo (GOGO), not shown, has fallen back below the $20 level and right back to its prior breakout point from early November. With the airlines and related groups acting well, I have to think that in-flight internet access is a growth proposition. From a sheer earnings perspective, ENT is expected to earn a profit of 14 cents a share in 2014 vs. GOGO which is not expected to show a profit until 2016 when analysts figure it will earn 74 cents a share for the year. ENT, meanwhile, is expected to grow its profit to 57 cents in 2015, so from a profitability standpoint it is well ahead of GOGO.

The price/volume of each seems to reflect this as ENT holds up well while GOGO slides back into the abyss. ENT also holds favor among institutional investors as 117 mutual funds owned 28.7 million shares of the stock at the end of the December 2013 quarter while 106 owned 7.5 million shares of GOGO. With ENT holding tight along its 50-day and 10-day moving averages, watch for a pocket pivot to emerge in real-time as the stock approaches its mid-March earnings report.




Taser International (TASR) is expected to announce earnings two Wednesdays from now, and the stock has continued to work on a new base after failing on an early January breakout attempt, as we can see on the daily chart, below. While I don’t consider a failed breakout to be constructive, the fact that it has been able to hold the 50-day moving average as it builds a new base is. TASR has announced several deals with law enforcement agencies over recent weeks, but the proof in the pudding will likely show up when it announces earnings, thus I’m keeping a close eye on this as earnings approach. With the stock holding tight along the 10-day and 50-day moving averages, the potential for a pocket pivot developing in real-time here before earnings is relatively decent, so keep an eye on this.




Chipotle Mexican Grill (CMG) is an old big-stock leader that has again gapped up following earnings, as we can see on its daily chart, below. CMG gapped up back in October following earnings, but its net progress from there was nothing special, particularly when the stock fell all the way back towards the intraday lows of that October BGU just before it announced earnings at the end of January. Now we have another gap-up move that isn’t going anywhere, but the stock is holding tight along its 10-day moving average which sets up a possible pocket pivot off the line. CMG is showing a reacceleration in earnings growth, so perhaps it’s good for another 10% of upside, as it was following its BGU of last October.




FireEye (FEYE) broke out of a short flag formation on Monday of this past week before it announced earnings on Tuesday after the close and promptly fell back into its base, as we can see on the daily chart below. FEYE has nearly doubled since I first discussed it in my December 29th report when it was trading at around 44. In my view, given that the company had already guided higher back in early January before its February earnings announcement, sending the stock launching sharply higher over the next five weeks, the actual earnings report became a sell-the-news event. And this makes perfect sense given the magnitude of the stock’s move since early January. It may need more time to work on a new base, and so I would be happy to see the stock do so over the coming weeks.

The gap-down following Tuesday’s earnings announcement was contained by the 20-day moving average, and FEYE spent Thursday and Friday taking back a good chunk of that price drop, indicating that it does have some support off the 20-day line and the lows of its prior flag formation. This might back up to the 10-day line, or even back to the 20-day line, at which point I believe it would be worthwhile to watch for a possible pocket pivot buy point develop along either moving average as the stock tries to settle down.




Time Warner Cable (TWC) finally received an increased buyout offer, something I figured was an obvious shoe-in as I discussed in my January 15th report. The only wrinkle was that it did not come from Charter Communications (CHTR), but a new suitor, Comcast (CMCSA), which raised the ante to about 152 a share. TWC immediately gapped up and traded up to 144.81 by Friday. If you bought shares back in the base down near the 133-135 price area, you have a nice profit here and could consider selling all or part of your position. The risk in holding out for the higher buy-out price is that the government will step in and rule that such a buyout violates anti-trust laws, so one has to decide whether a bird in the hand is worth two in the bush.




Keeping an eye out for short-sale targets, I note that a former successful short-sale target from late October of last year (see October 30, 2013 report), Trulia (TRLA), gapped down on Friday after missing on earnings Thursday after the close, as we can see on the daily chart, below. TRLA has been forming a big head and shoulders “complex” as we might call it, and this gap-down move represents a possible shortable gap-down move which can be tested by taking a short position in the stock around the $30 price level and using the 32 high of Friday’s gap-down intraday price range as your upside stop. If the stock gaps down further on Monday I would not chase it, but if you can get a short off around or just above the 30 price level then it may be worthwhile to play on the short side.




TRLA’s close cousin, Zillow (Z), also broke down on Friday after missing on earnings, as we can see on its daily chart, below. Both stocks have had similar patterns, although the correction in Z was not as deep as TRLA’s, but both are basically in head and shoulders “complexes” with multiple right shoulders which sets up a group short phenomenon. When stocks are breaking down in groups, just when they are moving up in groups, the movement benefits from group confirmation. Thus I consider both of these stocks as being in trouble here with potential for further downside. One could short Z here using the 50-day moving average, just above where the stock closed on Friday after selling off on heavy volume, as your guide for an upside stop.




I think it’s pretty obvious that in this report I’ve focused on looking for the next wave of potential upside set-ups given that most, if not all, of the leading stocks I’ve discussed in recent reports since I called for a turn in the market over a week ago are fairly extended. These include FB, NFLX, YELP, KORS, DATA, etc., while others, like UA and HAR, are still working on short flag formations following prior buyable gap-ups. Meanwhile, the market looks overbought on a short-term basis, at least as far as the indexes are concerned, so a bit of backing and filling here would not surprise me.

But again, I would place less emphasis on what the indexes are doing and more emphasis on what individual stocks are doing with an eye towards capitalizing on opportunities on either the long or short side as they arise in real-time. While the market remains in a so-called confirmed uptrend, the bottom line for me is that it also remains a market of stocks, and not a stock market. I refuse to allow myself to be led around by the nose based on the action of the indexes alone!


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 a position in CREE and SPWR, though positions are subject to change at any time and without notice.

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