The Gilmo Report

July 10, 2011

July 10, 2011

This week made for back-to-back jobs numbers surprises on Thursday and then Friday that did little to clear up questions regarding the health of the current economic environment. Investors appeared confident that the ADP employment report, which came in with a surprising 157,000 new jobs vs. expectations of 70,000, was an “in the bag” harbinger of an equally strong jobs number from the Bureau of Labor Statistics on Friday. Instead, what they got was another surprise, as the change in non-farm payrolls came in at a mere 18,000 jobs vs. expectations of 105,000. This sent the futures spiraling to the downside before the open, but the selling never gained any real traction as volume ran well below Thursday’s levels, thus not meeting the technical definition of distribution. And as long as we are getting into technical “definitions,” Friday’s action on the NASDAQ was little more than a gap-down open that first filled the upside gap from Thursday before closing near the highs of the daily trading range on light volume, defying the bad economic news emanating from a pathetic BLS jobs report. I suppose what was most astounding about the jobs report was the reaction of President Obama and other members of his administration, who blamed the woeful lack of job creation on the fact that businesses are uncertain over whether Congress will hike the debt ceiling and hence are not hiring. Thus if Congress comes to an agreement to raise the debt ceiling, businesses will magically start hiring again, according to the administration’s bizarre logic.

NASDAQ Gilmo Report Chart

While I have trouble connecting the dots when it comes to understanding the logic of politicians, the market likely does a much better job in perhaps understanding that the only expertise any politician brings to the table is a certain know-how when it comes to profligate borrowing and spending, As investors, we can dispense with the politics and come to the conclusion that the cycle of borrowing and spending will continue, as a debt-ceiling deal will no doubt be forged in the coming days or weeks. Thus, the “solution” to the astronomical levels of government debt, both in the U.S. and in Europe, will again revert to “default or devalue.” QE3 is coming, in some form or another, as I see it, right alongside the new wave of “Euro-QE.” Perhaps the best clue in this regard is this week’s action in gold, as represented by the SPDR Gold Shares ETF (GLD), shown below on a daily chart.. The GLD gapped up three days out of the entire four of this past holiday-shortened week, coming up sharply off its lows of exactly one week ago. A breakout by the GLD up through the 151-152 price level would be the place to begin entering positions in the yellow metal ETF. When gold has had the opportunity to build a reasonable consolidaton for a period of time, clean breakouts out of such consolidations have resulted in playable upside trends, therefore waiting for such a breakout appears to be the best course of action for those interested in playing the GLD.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

Last weekend I noted that LinkedIn Corp. (LNKD) had finally begun to show the makings of its first legitimate base formation since coming public and postulated that perhaps a cup-with-hande formation was in the offing. A cup-with-hande formation is one thing, but it appears that LNKD has decided to emulate the dot-com mania of 1999 when hot internet stocks would often form cup patterns where an ensuing handle would take all of 1-2 days to form before the stock would break out to infinity and beyond. LNKD provides a strong lesson why one should never buy a hot IPO too soon, as the stock plummeted all the way down towards the $60 price level before forming its current C&H formation. This handle is exactly three days long, but I am not too concerned with this given the pocket pivot
breakout that occurred on Friday, which appears buyable to me. This is likely to be a volatile ride, so I would suggest a small position using the $90 level as a downside stop.

 

LinkedIn Corp. (LNKD) Gilmo Report Chart

My GoView.com video presentation last weekend featured a lengthy discussion of Coffee Holding Company, Inc. (JVA), hands-down the hottest stock in the market over the past four days. Last weekend I noted the pocket pivot buy point from an ascending flag type of formation right off the 10-day moving average at 17.50, and by mid-week it looked like the stock needed to at least take a break as it moved rapidly into the low 20’s. The stock instead logged a four-day move of 52.8%, an insane price move by any measure. JVA is a member of the Wholesale-Food group, along with Green Mountain Coffee Roasters (GMCR), the company that accounts for 47% of JVA’s sales and which continues to make all-time highs as well. Thanks to JVA and GMCR, the Wholesale-Food group is ranked #1 among all industry groups currently. JVA is well extended and is up 7 out of 8 days in a row with Friday’s move constituting a 4.40 price move of 19.69%, thus it is getting climactic here and any members holding JVA currently should be aware of this and alert to taking profits by selling into this sort of uber-parabolic move.

Coffee Holding Company, Inc. (JVA) Gilmo Report Chart

Chart courtesty of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

As JVA illustrates quite well, many a powerful move in individual stocks is presaged by a pocket pivot buy point within an already strong pattern. Business intelligence software maker Qlik Technologies (QLIK), shown below on a daily chart, flashed a strong continuation pocket pivot buy point of its own as it reversed back above its 10-day moving average on an above-average pocket pivot volume signature. QLIK has not been a strong past earnings grower, but forward earnings are expected to pick up sharply as the company is expected to grow earnings 57% and 58% in 2011 and 2012, respectively. As well, their products represent a simpler mousetrap in that they make it quite easy for business users to install their software for the purpose of building “dashboards” that making it very easy to visually display critical business information. Where their competitors’ products require knowledgeable techies to install their software, QLIK’s products are notable for their extreme ease-of-use by endusers. Note all the big blue upside volume spikes in the formation, which is very constructive. This is potentially buyable using the 10-day line as your selling guide.

Qlik Technologies (QLIK) Gilmo Report Chart

Chart courtesty of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

The Specialty Retailing group has been very strong as of late, currently ranking #10 among all industry groups. Among stocks in this group, I tend to see Ulta Salon Cosmetics & Fragrances (ULTA) as being more related to the Cosmetics/Personal Care group, which is currently ranked #7. Three stocks that have been acting very well lately from this group are EL, HLF, and NUS, and none of these gives any indication of slowing down just yet. Most recently, ULTA has had the most persistent uptrend as it has continued moving up along its 10-day moving average even as the market corrected during the first half of June. On Friday ULTA flashed a continuation pocket pivot buy point off the 10-day line, which I see as potentially buyable using the 10-day line as your selling guide. While ULTA does not generate huge sales growth, with sales growth hitting a multi-quarter peak of 20.6% in the most recent quarter, it does produce consistently strong earnings growth, as we see in the data portion of the daily chart below. As well, forward estimates are expected to remain in the mid-double-digit range.

Ulta Salon Cosmetics & Fragrances (ULTA) Gilmo Report Chart

Chart courtesty of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

My GoView.com month-end video review last weekend was unusual in that I used it as a forum for discussing a couple of ideas, such as JVA, further above, that were not included in the written report. One of these from that video presentation was Interactive Corp. (IACI), perhaps the granddaddy of internet content stocks. IACI has been on a slow and steady recovery path since getting decimated 53.8% in one week during August of 2008, and the company is also getting its earnings house in order. While this is not the most exciting situation in the market, I note that it has been forming a slowly ascending pattern since late April with three price peaks followed by three pullbacks down into the formation. More recently, the stock appears to be finding strong volume support along the 10-day moving average, which is at least constructive. The driver for IACI’s constructive action is perhaps recent developments with their Citysearch service which is linking to “deal providers” like Groupon and others as a one-stop-shop for deals. IACI doesn’t provide the pure-play dynamism that other players in their various search, social networking, content, and e-commerce businesses do, but it is producing steady earnings and sales growth.

Interactive Corp. (IACI) Gilmo Report Chart

Among stocks that make up the #6 ranked Medical-Biomed/Biotech industry group currently, I still prefer big stock bio-tech leader Biogen Idec, Inc. (BIIB), shown on a daily chart, below. Since breaking out to new highs a couple of weeks ago, BIIB has spent the past six days quietly consolidating its gains as it has the look of forming a “high” handle in a cup-with-hande formation. BIIB found ready support along its 10-day moving average as selling volume remains relatively subdued. BIIB was one of the more constructively-acting stocks when the market turned in mid-June as it flashed a pocket pivot buy point off of its 50-day moving average before gapping higher and pushing through the 100 price level. As well, this strong move resulted in the appearance of “ants,” those little black triangles that show up on my daily charts whenever a stock is up 12 out of 15 days in a row or better. BIIB held its 10-day line on Friday as the market came off, and from here I would keep my eyes peeled for any potential pocket pivot buy point materializing here off the 10-day moving average.

Biogen Idec, Inc. (BIIB) Gilmo Report Chart

Most investors are well aware of the fact that we are in the third year of a bull phase that began off the lows of March 2009. This knowledge comes with the old bromide that the third year a bull market will tend to be more volatile than the prior two. To me all of this reflects a need to classify and box the market into some sort of well-defined macro-view. And while it might be useful from a macro-level, the bottom line is that our methodology dictates investing at the micro-level, e.g., buying individual stocks, not the market. As JVA showed this week, sometimes the strongest of opportunities occurs right under your nose, even in the most questionable of environments, and so I would remain focused on treating the market not as a stock market but as a market of stocks.

Certainly, if the third year of a bull market is more “volatile and difficult” than the first or second years, it appears that nobody bothered to tell this to JVA, or any other stock that continues to flash compelling strength and strong buy points. Thus I prefer to focus on quality, and not quantity, in the search for profit opportunities in an otherwise difficult market. The market held up well on Friday, in my view, and a short, constructive consolidation of the prior, strong upside move off the mid-June lows would be a strong precursor to a bona fide breakout from the choppy trend we’ve been in since February of this year. A clean breakout to new highs could start another meaningful upside leg, so I would not assume anything as we look to play individual stocks.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, and/or Gil Morales & Company, LLC held positions in BIIB and LNKD, though positions are subject to change at any time and without notice. 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, 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. ©2011 Gil Morales & Company, LLC. All rights reserved.

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.