The Gilmo Report

January 8, 2012

January 8, 2012

 

The first four trading days of 2012 have been a largely uneventful affair when taken in the aggregate. The daily chart of the very broad S&P 1500 Index gives some idea of what stocks are also doing in aggregate. Judging from the chart below, the short answer is: not much. The index experienced two up days on higher volume and two down days on lower volume, which on balance looks more constructive than negative, certainly. But the market index still did little more than track dead-sideways for the week as it crawls along its 200-day moving average. Perhaps what is most notable about this week’s action is that despite surging employment numbers in the ADP employment report that came out Thursday and the Bureau of Labor Statistics’ monthly jobs report, the market’s reaction was in fact quite tepid. It would seem that a market just champing at the bit to move higher would have seized upon this news to rally sharply and in sustainable fashion. But the market perhaps was keen on the flaws in the data, as John Williams of Shadowstats.com points out, “The reported seasonally-adjusted 200,000 jobs surge in December 2011 payrolls included a false, seasonally-adjusted gain of roughly 42,000 in the ‘Couriers & Messengers’ category. That gain was an artifact of the seasonal-adjustment process and will remove itself in the January 2012 numbers.” Obviously, the market saw through the data in a manner that the compliant financial media did not.

S&P 1500 Index Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 all rights reserved.

Sentiment-wise it appears that individual investors are getting excited over the prospects for a bullish 2012, as the chart of the AAII Investor Sentiment poll shows below (©2012 Decisionpoint.com, used by permission). This past week has seen a spike in the percentage of bulls to 48.88% while bears have dried up to a mere 17.16%. We can see from the chart, however, that a similar spike in bulls and dry-up in bears occurred at the end of 2010, and this did not lead to an immediate top in the market. It did, however, occur near the market’s ultimate peak in early 2011 and presaged the choppy, trendless environment that characterized the market after a decent January 2011 move to higher highs. What it means at the current time is anyone’s guess, I suppose, but one cannot say that this market is necessarily going to climb a wall of worry when the sentiment polls clearly imply that there isn’t much of a wall of worry for the market to climb, at least from the point of view of individual investors. Meanwhile the Investor’s Intelligence survey of investment advisers shows 49.5% bulls to 30.5% bears, so again it’s not as if the market is seeing bearish sentiment dominating the views of investors.

AAII Investor Sentiment Gilmo Report Chart

And while individual investors and investment advisers remain quite bullish, the National Association of Active Investment Managers (NAAIM) sentiment survey shows that currently active investment managers are barely 40% invested in this “confirmed rally.” They haven’t been this hesitant to buy into the market since the latter part of 2008 when the market blew apart into March of 2009, and their reluctance to get involved in any meaningful way in this current environment may be a sign that the “smart” money isn’t getting suckered into what remains a mushy and choppy market scene. On the other hand, if the market continues to drift higher some of these “smart” money managers may be forced to become more aggressively invested as they risk falling behind the curve in any continued market upside. The main point of examining the sentiment data is that I hear a lot of pundits and talking heads on financial TV discussing the predominant bearishness among investors given that all the news is so terrible, but the fact is that the sentiment polls themselves paint a far different picture of individual investors who are quite bullish while professionals remain somewhat hesitant to buy into this move off the early October lows in any meaningful way, preferring to keep most of their powder dry. As a professional, and given my assessment of this environment as choppy and difficult, I would have to say that keeping plenty of dry powder around is also my own preference.

National Association of Active Investment Managers (NAAIM) Gilmo Report Chart

The last two days of the week saw the NASDAQ Composite outperforming as it closed up both days while the Dow closed down both days and the S&P 500 Index split the difference, closing up on Thursday but down on Friday. The NASDAQ, of course, is being helped along by the action in Apple, Inc.
(AAPL), which I stopped eyeing as a potential short-sale target once it was able to get back above the 50-day moving average over two weeks ago, as we see in the daily chart below. What is surprising is the impetuous, light-volume move that AAPL has put on over the past two weeks as it made an all-time closing high on Friday. The key is that with AAPL trading at 11 times forward estimates, money managers looking to deploy funds in this market can’t get in trouble buying AAPL at such a low P/E. If you are familiar with the way the professional money management game is played, covering your rear-end is of paramount concern, not necessarily performance, but AAPL is benefitting from the fact that while buying volume isn’t heavy here, selling volume is virtually non-existent!

AAPL Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 all rights reserved.

This sort of straight-up-from-the-bottom action in AAPL is difficult to buy, for sure, but the action in Alexion Pharamaceuticals (ALXN), which I discussed in my report of last weekend, is much easier to buy into as the stock made a clean breakout through the 60-70 price area. Two pullbacks to the breakout point shook out the last weak hands as the stock then spent the last two days of the week pushing to all-time highs where it is now too extended to buy at this point. ALXN’s action is typical of the healthier action we see in the medical and bio-tech areas of the market. ALXN’s move is being driven by the fact that their orphan drug, Poliris, used to treat a rare blood disorder known as PNH, has now been approved to treat another rare disease known as “aHUS” in both the U.S. and Europe, effectively expanding ALXN’s potential market. ALXN is one of the better acting stocks in this market, and as long as it holds above the 69-70 breakout level it remains fine.

ALXN Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 all rights reserved.

ALXN has led the constructive action in the bio-techs, and as I discussed in my mid-week report of January 4th, has been joined by BIIB, SLXP, and CBST, all of which acted well this week. Another smaller bio-tech name with big earnings that is hitting my radar screens is Spectrum Phrarmaceuticals (SPPI), shown below on a weekly chart. SPPI broke out to new highs several weeks ago through the 11-12 price zone and has steadiy moved higher. Now it is in the midst of forming a three-week series of tight weekly closes. This week saw a little more movement to the downside but this was met by an increase in volume as the stock closed mid-range for the week, a sign of support. SPPI makes its living by reviving other companies’ failed drugs, and the earnings and sales growth over the past four quarters demonstrates their ability to capitalize on this approach. Keep an eye on this for any kind of pocket pivot within this short base, as it could presage a breakout from a possible three-weeks-tight formation.

 

SPPI Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 all rights reserved.

Of course, not all the action in bio-techs is always powerful. Viropharma, Inc.
(VPHM), which I discussed for the first time in my mid-week report of January 4th, looked primed to break out of a very tight flag formation it’s been working on over the past month. I actually bought shares of VPHM on Thursday, and the stock closed well, near the intra-day peak. After-hours VPHM announced 2012 revenue guidance of $600 to $660 million compared to concensus estimates of $595 million. This sent the stock gapping higher on the open Friday morning but it reversed to close down on heavy volume. This is similar to Tuesday when it could not clear to new highs and stalled out on increasing volume, as I’ve annotated on the daily chart below. The short story here is that the stock is not ready to break out just yet as sellers come in whenever it pokes its head out of this four-week pattern. The stock is slightly wedging along the lows so it may need more time to correct the pattern, but for now I’m out of it waiting to see if it can set up again.

VPHM Gilmo Report Chart

While the better-acting stocks have tended to act well, the weaker ones have tended to act weakly, and Fossil (FOSL) remains on my radar as a short-sale target stock. As we see in the daily chart below, the stock began to “break out” to the downside on Wednesday, but Thursday a minor-league broker came out with a buy recommendation and $105 price target.

This brought in some willing buyers on Thursday given that the stock is some 41% off of its all-time high and the fact that it is a huge winner from the market rally that began in September 2010, more than tripling in price during that time period. Thursday’s upside was met with above-average volume selling on Friday, and I still view this as potentially shortable as long as it cannot get above the 20-day moving average, precisely where it failed on Friday, per my previous discussion regarding the stock in recent reports.

FOSL Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 all rights reserved.


Salesforce.com (CRM), not shown, remains on my list of short-sale targets, even after rallying on Thursday and Friday but remaining below what I see as near-term resistance at the 102 level. I’m also watching the action in VMware (VMW) as a cousin stock to CRM that has also been acting in weak fashion lately. VMW undercut a big low a couple of weeks ago, as we see in the daily chart below, and it has stalled three times up here in the mid-80’s. On the weekly chart, the stock is closing relatively tight over the past three weeks, and the 80 level, give or take a couple of percent, has served as key support for the stock over the past year. The question is whether the stock is going to break that support level, and it may be possible to test a short position in the stock here using the 84.33 high of Friday as a quick stop. VMW announces earnings on January 23 after the close, and I might look for it to start giving some clues regarding earnings the same way CRM did before it announced earnings in November and began selling off two days before.

VMW Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 all rights reserved.

Lastly, but not leastly, we consider the state of gold these days, although it is well off my radar screen as a long idea as long as it remains below the 200-day moving average, as we see on the daily chart of the SPDR Gold Shares (GLD), below. Predictably, gold found support at the top of its breakout point in July and has bounced up into its 200-day moving average. Notice how the undercut of the key 150 level and the prior early December low occurred on light selling. The test for gold here is now whether it can get back above the 200-day moving average, or whether this becomes a short-sale point for those who might want to play a short-term move in gold to the downside using inverse gold ETFs like the DGZ or 2x leverage DZZ. My tendency is to leave gold alone either way for now, since if gold does in fact move lower from here it will likely coincide with stocks doing the same, and therefore more profitable short-sales would likely be forthcoming in individual stocks vs. inverse ETFs. I get a lot of emails and questions about gold and the prospect of shorting gold, and certainly that trade can be made here using the 200-day line as a quick stop and thus at a lower-risk point given the handy reference that the 200-day provides for such a stop.

GLD Gilmo Report Chart

As the chart of the S&P 1500 Index shown at the outset of this missive indicates, the broader market is still mostly tracking sideways, despite the market being in a “confirmed rally.” A confirmed rally simply means that we saw a technical follow-through day several days ago, and we must remember that in 2011 pretty much every follow-through day seen throughout the year failed. Thus I do not place my faith in follow-throughs alone, but in the manner in which progress can be made in any market environment. With earnings season in full swing, perhaps a catalyst for a true market trend will be found, but in the meantime the market hasn’t really given us much to sink our teeth into. Perhaps the market’s tepid reaction to a “fantastic” jobs number is a clue that it sees some storm clouds approaching on the horizon. 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

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.