The Gilmo Report

January 11, 2012

January 11, 2012

In an environment like this, investors will try to find reasons to be bullish or reasons to be bearish. On an individual stock basis, at least in this nutty environment, there are at times reasons to be either, or both, or neither! From my perch in front of my glowing flat panel screens out here on the beach in southern California, on any given day I can see stocks I might like to buy, and stocks I might like to short. The key, obviously, is in making sure you have the gun pointed in the right direction before you decide to pull the trigger! As Livermore said, it is not about being on the bull side or the bear side, but the right side. Easy to say, but harder to execute, no doubt. Right here, right now, I’m feeling a bit more “neutral” than anything, as the bottom line for now is that the major market indexes continue to make higher highs, but the more difficult problem remains which stocks one can stick with in order to ride a continued movement to higher highs, as we see on the daily chart of the NASDAQ Composite Index, below.

NASDAQ Composite Index Gilmo Report Chart

Over the past month, the topsy-turvy character of the market is illustrated to some extent in the way stocks have exchanged roles in sudden fashion. We know that stocks like Intuitive Surgical (ISRG) and MasterCard (MA) were acting quite nicely coming into the new year, perched at or very near all-time highs in each case. Meanwhile, Apple (AAPL), shown below on a daily chart, languished. But in the New Year AAPL has streaked to the upside much as it did in late June and into July of 2011 while MA, for example has gotten beat up pretty good and ISRG has suffered a less deleterious pullback down to its original breakout point. Back in early July, AAPL paused at the peak of its base for a few days before continuing higher. Here we see it pausing again at the peak of its current base, wondering if it is going to continue the June/July pattern by moving higher still. Whatever happens will likely be driven by AAPL’s earnings announcement next week, but AAPL is definitely one of the drivers helping to take the NASDAQ Indexes higher.

Apple (AAPL) Gilmo Report Chart

 

The action in AAPL for now has to be seen as a positive for the market, but it can still become a minefield at times. Questcor Pharmaceuticals (QCOR) is another example of a strong-acting leader coming apart in short-order. The stock was acting reasonably well going into the end of December before slicing below its 50-day moving average on the first trading day of 2012. The stock spent the next three days underneath its 65-day exponential moving average, as we see on the daily chart below, before gapping up on Monday on raised earnings and sales guidance from the company. That gap-up did not hold at all and today the stock faltered before cratering on news of an upcoming “investigative report” coming from a major short-seller of the stock. The short-seller is “TheStreetSweeper,” a website that allegedly exposes fraudulent business practices. Today’s action took the stock below the intra-day low of the late October buyable gap-up move, and for now this stock is done, given the severe technical damage.

Questcor Pharmaceuticals (QCOR) Gilmo Report Chart

Some shift has also been evident in the fact that railroad stocks have suddenly broken out. Also, a number of “stuff stocks” have tried to turn up off the bottoms of their bases (not in positions from which we would normally buy them), including metals like FCX and X, agriculturals like AGU and CF, and some oil stocks which have been on the move lately. “Stuff” also means commodities, which have been on the upswing over the past couple of weeks or so, and this includes the precious metals. Gold exhibited some contrarian strength today as it diverged from stocks and closed up on the day, as we see in the daily chart of the SPDR Gold Shares (GLD), shown below. Gold has also managed to regain its 200-day moving average, which is not the same pattern it followed in late 2008 after it broke its 200-day moving average back in August of that year. As I pointed out over the weekend, the undercut of the earlier December low and the 150 level set up a nice bounce into the 200-day moving average. This of course looked shortable but as it turned out gold was able to get back above the 200-day line yesterday and continued to hold above the line all day long despite the choppy action in stocks. Currently there are no actionable buy points in gold, but the situation bears watching here as it bounces off of its prior base and tries to hold the 200-day line.

SPDR Gold Shares (GLD) Gilmo Report Chart

I discussed Spectrum Pharmaceuticals (SPPI) in my weekend report and noted that members should keep an eye out for a possible pocket pivot coming out of this short flag type of formation. SPPI came through a lot faster than even I expected, flashing a pocket pivot buy point on Monday, as we see in the daily chart below. The pattern was looking pretty good over the weekend given the series of tight closes right along the 14.60-14.70 price level on the daily chart that we see below, and these were followed by a pocket pivot move on Monday that launched up through the 10-day moving average. Fairly textbook. I would watch for a small pullback down to the low 15 area, should that occur, as a potential secondary entry point if you missed the pocket pivot, using the 10-day line as your downside guide for a stop. Note that SPPI has not violated its 10-day moving average since early October, over seven weeks, despite closing below the line back in early December. However, back then it never moved below the intra-day low of that first day below the line, so therefore never met the definition of a 10-day moving average violation. A small detail, but important in understanding that for now I am using the 10-day moving average as a selling guide for the stock.

Spectrum Pharmaceuticals (SPPI) Gilmo Report Chart


Invensense (INVN) strikes me as the Omnivision Technologies (OVTI) of motion sensor technology. You may recall OVTI as the company that made chips for mobile-phone and PC cameras and rode the wave of cameras becoming standard gear on smartphones and PCs. Likewise, motion sensor technology is starting to blossom as a new add-on for the same types of devices. As I wrote in my report of January 4th, maybe what the market needs is a sharp dose of “new merchandise,” and I suppose INVN fits the bill in this regard. Keep in mind, however, that it remains a thin name, trading 435,000 shares a day on average, which partly accounts for its sharp rise since flashing a pocket pivot buy point on January 4th just before it also flashed a standard-issue new-high base-breakout buy point three days ago. This move is impressive, no doubt, and I find the INVN story quite compelling, but remember that thin stocks can be volatile, so be very careful not to get carried away here by buying too much stock when INVN is up and allowing yourself to get “top heavy” by bringing your average cost on the position up too high too quickly so you don’t get shaken out in many cases may be a normal snap-back type of pullback in a thinner, smaller stock. My preference here would be to buy a pullback into the 12 level, optimally.

Invensense (INVN) Gilmo Report Chart

I was happy to see some emails come in asking about Lululemon Athletica (LULU) which did in fact post a buyable gap-up move yesterday after raising forward guidance before the open. While technically LULU is a buyable gap-up type of situation, one thing I don’t like about its situation is that this gap is coming at the latter part of a straight-up-from-the-bottom type of move since mid-December and is also not clearing to new highs, so it may need to do some work if it is to continue higher. As well, note how today the stock dipped below the intra-day low of yesterday’s gap-up range at 59.15 today but managed to hold on and close above that level. If one were trying to buy this, it helps to recognize that the bit of overhead in the pattern from the peak way on the left side of the pattern (dotted line) can come into play here, and given that LULU is a somewhat more volatile name, some “porosity” around the intra-day low of yesterday might be expected. Thus today’s shakeout just barely below the 59.15 level was understandable, and it is possible to use the intra-day low of a gap-up day +2% on the downside as a general rule for more volatile stocks to help prevent against such shakeouts, as LULU never got much more than 1% below the 59.15 low today.

Lululemon Athletica (LULU) Gilmo Report Chart

On the short side Salesforce.com (CRM) has rallied right up into resistance at around the 105 level, skidding just past it, as we see on the daily chart below. The stock has been getting some lift from analysts who describe it as a “long tactical play.” When analysts start using terms like “long tactical play,” that can’t be a good thing, but in any case, it has caused the stock to rally back up to the 105 price area, where it has some overhead. If you were using a tight stop at 102.35, you would get stopped out as of yesterday but can always come back after the stock here as it runs into a higher, subsequent potential “zone of resistance.” That is the essence of “campaigning” stocks on the short side. The way CRM made a marginal higher-high to run in shorts and suck in longs, and then reversed on weak volume, makes me think the stock is vulnerable here. I could be wrong, but again I am willing to short the stock here and use a quick stop at today’s intra-day high of 107.70.

Salesforce.com (CRM) Gilmo Report Chart


Fossil (FOSL), not shown, also remains in play as a potential short-sale target using the 20-day moving average at 81.47 as a very tight upside stop. Despite two brokerage firms coming out with buy recommendations over the past few days, the stock has remained under this short-term moving average. What I’m looking for here is for the stock to “break out” to the downside as it looks to be consolidating the prior downside move off the peak of 11 trading days ago, as we see on the daily chart below.

Fossil (FOSL) Gilmo Report Chart

If there is a bold new bull market in the works here, then its leadership so far consists of AAPL, dinky stocks like INVN and SPPI, and perhaps the group of bio-techs that we’ve been following in previous reports like ALXN, BIIB, SLXP, and VPHM, all of which continue to act okay, albeit without any spectacular upside. In my view, the elixir that would spark a meaningful upleg in a new bull market would be more QE from the Fed combined with a market that is beginning to see a future where the present economic policies become a thing of the past. In the meantime, the “facts on the ground” in terms of leadership don’t seem to provide a complete and firm foundation upon which a wonderful new bull market can be built.

But it doesn’t mean that we can’t have a market that continues to chop around as it starts to seed and fertilize the makings of the next bull market. It also doesn’t mean that we can’t break to the downside again, particularly if things in Europe start to unravel, and begin a new downleg in a continuing bear market. As I wrote over the weekend, the market isn’t giving us a lot to sink our teeth into, and so far this week the story remains mostly the same. 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

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