The Gilmo Report

January 4, 2012

January 4, 2012

What better way to start the New Year off than with a knee-jerk gap-up move on the first trading day of the year! With U.S. markets closed on Monday, European markets took the opportunity to set off the New Year with a bang as they all rallied strongly. The U.S. markets then took their cue from their European counterparts by gapping up on Tuesday, their first trading day of the New Year. The fish bit nicely right on the open, with many stocks gapping up and then treading sideways for the rest of the day as the NASDAQ Composite Index, shown below on a daily chart, ran into its 200-day moving average where it found ready resistance. Today, however, the index found support above the 50-day moving average as it closed well off of the intra-day lows on slightly higher volume for the day. From the point of view of the index itself, the action looks quite acceptable.

NASDAQ Composite Index Gilmo Report Chart

And while the NASDAQ looks “acceptable,” the S&P 500 Index looks much more “exciting” as it has broken out and up through its own 200-day moving average, as we see on the daily chart below. Today it held that breakout, closing just positive for the day after pulling back in the morning. But the market, at least under the hood, is much more mixed than the indexes themselves might seem to be telling you. The action in the oils aside, leading stocks that have been acting well as of late, such as Mastercard (MA), Autozone (AZO), and Questcor Pharmaceuticals (QCOR), for example, were hit yesterday on volume as they broke down decisively through their 50-day moving averages in an up market. The outperformance of the S&P 500 Index is mostly due to the moves in “stuff stocks,” basic materials, conglomerates, and industrial goods which have rallied very well and led the market over the past week. Gold has also been bouncing, but so far remains below its 200-day moving average. As long as it remains below the 200-day line gold is off my radar screen.

S&P 500 Index Gilmo Report Chart

With the media crowing about all the wonderful ways in which the market has greeted the New Year, one might find it surprising that I am off to a +10.72% start in my own account in the first two trading days of 2012 – the best two-day start for me in my entire 20-plus year investment career! Even more surprisingly, I’ve done it all on the short side of the market, and so far in 2012 have not purchased a single long position. Of course, with only two days into the year, that’s not saying much. Nevertheless it does make a statement about the illusory nature of this market at times. (CRM), discussed in my report of this past weekend, January 1st , as a primary short-sale target, has rolled over after rallying into a logical zone of resistance around the top of the “falling window” or gap-down day of nine trading sessions ago, as we see on the daily chart below. Thanks to weak earnings from Acme Packet (APKT) last night, CRM gapped down today on heavy volume, and looks poised to test the 94.09 low of nine trading days ago, which is my ultimate downside profit target for the short-term. CRM could go a lot lower over time, depending on what happens with the general market, but that is our first reference point for a possible “undercut & rally” and short-term profit objective.

CRM Gilmo Report Chart

Fossil, Inc.
(FOSL) was another lay-up short on the gap-up opening yesterday as it rallied up to the 82-and-change price level before turning tail and reversing on the day. As we see on the daily chart below, the stock ran right into the 10-day moving average yesterday before reversing back to the downside and “breaking out” to the downside and clearing the 80 support level. That downside “breakout” was pushed along today as the stock continued to lower lows on much heavier volume that was 59% above average daily volume. This looks primed to go lower, using the 80 price level as a trailing upside stop, or the 10-day or 20-day moving averages on the upside as maximum upside stops, depending on your risk preference. For now I’m using the 73.01 low of early October as my downside profit objective and price target, as I’ve indicated on the chart below.

FOSL Gilmo Report Chart

Baidu, Inc.
(BIDU) blew right through resistance at the 118-120 price zone, causing a quick stop-out if you were using that as a tight upside guide for a stop. As we can see on the daily chart below, the stock has been able to hold above that prior short-term resistance and its 20-day moving average. The 50-day looms above at 128.38, which might present another short-sale point at logical resistance should the stock continue to rally up that high. BIDU does seem to point out the fact that in a market where the indexes act better than a lot of leading stocks, the biggest index stocks are the ones that have a tendency to be supported, such as BIDU. This is probably why we find more success with names like CRM and FOSL on the downside right here than BIDU. The benefit of a gap-up day like yesterday was that it identified for you which of the three short-sale target stocks I discussed over the weekend, BIDU, CRM, and FOSL, was the weakest. With CRM and FOSL reversing hard to the downside yesterday during an otherwise strong general market, they flagged themselves as preferred short-sale targets, and proved that today with more downside.

BIDU Gilmo Report Chart

While CRM and FOSL may prove that what is weak remains weak in this market environment, Biogen-Idec (BIIB) perhaps helps to show that stocks which act constructively can continue to do so, at least until they don’t, such as MA, PNRA, AZO, etc. more recently. BIIB’s proof of its staying power was offered yesterday when it flashed a pocket pivot buy point, as we see in the daily chart below. Over the weekend, I discussed BIIB’s base and the fact that it was sitting right on top of its prior base and around the 110 price level, more or less, where I felt it absolutely must hold. It did that just fine yesterday, but remains in the midst of building a base. However, if one is so inclined, the pocket pivot can be bought here with the idea that the stock should hold the 50-day moving average at 111.97 if indeed this pocket pivot is presaging further positive action in the stock. BIIB, however, is the only one of the bio-tech stocks I discussed over the weekend that has also rallied over the past two days.

BIIB Gilmo Report Chart

With all these tired leaders rolling over, maybe the market just needs more new merchandise. Thus I was intrigued to pick up Invensense, Inc.
(INVN) on my pocket pivot screens today as it blasted up and off of its 10-day moving average on the heaviest volume seen since its IPO debut on November 16th. INVN claims to be “the pioneer and global market leader in intelligent motion processing solutions. We define motion processing as the ability to detect, measure, synthesize, analyze, and digitize an object’s motion in three-dimensional space.” Their products are used in video games, smart phones, tablet devices, and cameras, among many other end uses. Anyone who has played on a Wii video gaming system has made use of their technology. The last three quarters show earnings growth of 160%, 1200%, and 275%, sequentially, with associated sales growth of 78%, 62%, and 83%. This pocket pivot is, of course, buyable, using the $10 price level as your maximum downside stop.

INVN Gilmo Report Chart

While the pundits and talking heads may be excited about the action of the general market indexes in these first two trading days of 2012 and what it allegedly means for the rest of the year, I find that under the surface the action is less positive. Stocks which have been acting constructively often seem to become the next ones to fall, and this is why I remain cautious on the long side of this market, although I see some interesting situations cropping up here and there on the long side, such as those names I discussed in my weekend report (January 1st). Ultimately, the proof in the pudding is found in how and where one is able to make progress in any market environment. Therefore, if we are able to make progress on the short side with greater ease than on the long side, that may be one message to heed. The year is still young, so despite the attempts by pundits and commentators to make an allegedly strong start for the market indexes in the New Year a harbinger of a bull market to come in 2012, I am not able to jump to a similar conclusion, at least not based on the evidence at hand.

Gil Morales

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

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.