The Gilmo Report

February 29, 2012 

February 29, 2012

Today’s action gave the NASDAQ Composite Index, shown below on a daily chart, its second high-volume reversal in a little over two weeks, coming on the heels of comments from Fed Chief Ben Bernanke regarding the potential for further QE. Apparently the market didn’t like what it heard, and so Helicopter Ben’s comments gave the market the excuse it probably has been looking for to sell off. Speaking for myself, today’s action was enough to cause me to move to cash. For some that might seem extreme, but today’s weak action was not an isolated event – there are some other developments in the market that I find troublesome, including today’s sacrifice of the precious metals at the sacred QE altar, but more on that in a paragraph or two. For now, the chart below provides a clear view of where the market is at, and as I’ve considered in recent reports, it is certainly due for a 3-5% short-term correction, and of course there is always the possibility of something worse than that, so we must see how things develop here.

NASDAQ Composite Index Gilmo Report Chart

The action of the NASDAQ Advance/Decline line, shown below, illustrates how the market may be losing some steam here. Note how breadth expanded very sharply off the late December lows, confirming the strength of the rally. As the NASDAQ has rallied to new highs, however, breadth has turned sideways to slightly down over the same period, showing that fewer and fewer stocks are leading the market higher. I don’t subscribe to the idea that breadth needs to confirm a move to higher highs by doing so itself, but I do want to see breadth not confirming but correlating to the strong action. With breadth slowing down here, that is, in my view, the precursor to the market slowing down, and whether that results in a total loss of lift and a subsequent stall-out remains to be seen. I prefer to watch from the comfortable sidelines while sitting on a pile of cash.

NASDAQ Advance/Decline line Gilmo Report Chart

Perhaps the A/D line is just telling us what is to be expected given the sharp run-up off the lows in January and February. But what makes today’s action notable overall was the pummeling that the precious metals took after Fed Chairman Ben Bernanke’s comments. The SLV broke its 200-day moving average in rapid fashion on what was essentially a massive-volume slam dance to the downside. The precious metals often have normal, sharp pullbacks on above-average volume, but this strikes me as qualitatively and quantitatively different, a sign that the QE bubble may be in jeopardy. And today I chose to heed that message by unloading all my precious metals ETFs on the basis of a 200-day moving average break in the iShares Silver Trust (SLV), shown below on a daily chart, and the idea that SLV can be bought back should it show strength coming up through the 200-day moving average as it did last week. That strength, however, has been short-lived, and if I was excitedly pleased with that move UP through the 200-day line last week, then of course there is reason to take action in the other direction when the SLV firmly slaps that pleasure in the face by doing what it did today.


When Mr. Market talks, you have to listen, so we can add a little more drama to the meltdown in precious metals by showing the daily chart of the SPDR Gold Shares (GLD), shown below. A one-day spinout for the precious metals. I suppose that is a slight probability. But as I said before, one-day sell-offs after sharp run-ups in the precious metals are common, such as the one that occurred in early February. What occurred today is not so common, and I simply do not like the look of it. The GLD will probably attempt to bounce off its 50-day moving average, which now coincides roughly with its 200-day moving average, the red line on the chart, but I feel better not relying on that possibility.

SPDR Gold Shares (GLD) Gilmo Report Chart

As I discussed over the weekend, Apple, Inc. (AAPL) has held its 10-day moving average, and my suggestion for re-entering the stock was based on the potential for an “ants breakout” which we got yesterday. To quote myself, “One way to handle this is to simply buy the stock if it clears to new highs on strong volume, using a violation of the 10-day line at 507.41 as your sellng guide for the stock.” That was a simple and effective strategy for re-entering the stock while remaining comfortable about taking some profits into the clmactic reversal of about two weeks ago. Yesterday’s breakout to new highs is a typical move where you first see the “ant” or “ants,” then a pullback, in this case right back to the 10-day moving average, followed by a move to new highs – the “ants breakout.” On the other hand, if one wanted to think of AAPL’s move two weeks ago as a climactic sort of top, the move back up into new high price ground is also a common maneuver one sees following climactic type action. The reversal fakes out the crowd and the stock moves to new highs and then tops. Note how AAPL closed mid-range today on heavy volume. Again, if one wants to use the Seven-Week rule here on AAPL, then a violation of the 10-day line, currently running through 517.23, would be a clear sell-signal.

Apple, Inc. (AAPL) Gilmo Report Chart

If the general market comes off here, then the proof in the pudding might be found in just how “ripe” (AMZN) is and whether the big head and shoulders top it appears to be forming will result in a downside breakout and lower lows any time soon. The Relative Strength line on this chart is a very light gray line running just above the neckline of the H&S pattern on the chart. You can see that it is making a lower low ahead of the stock as AMZN’s Relative Strength rating has weakened to 24 even as the market has been in its uptrend since early January. I like AMZN as a short here using the 50-day moving average at about 182-183 as a quick upside guide for a stop. If the general market breaks, AMZN will likely be the first short-sale fruit to fall from the tree, in my view. (AMZN) Gilmo Report Chart

My view on the market is clear – the overall action, when taken together, appears to paint a short-term troublesome picture for the market, and with leading stocks extended and mostly in positions where they are not necessarily buyable, there is certainly no reason to deploy fresh cash into this market. On the other hand, I have no problem taking profits since I am always confident that leading stocks, should they correct and then set up again, will provide ample opportunities to re-enter positions in the form of pocket pivots and other buy points that we employ. Thus I move to cash and take one step to the short side of the market with AMZN.

Gil Morales

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

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