The Gilmo Report

July 18, 2012

July 18, 2012

Things were looking very grim for the market Tuesday early in the trading day as all the major market indexes appeared to be staging an ominous “outside reversal day” to the downside on very heavy volume that was running well over 20% higher vs. the prior day on both the NYSE and the NASDAQ exchanges. But, as the market has done so many times, and as I discussed in my report of this past weekend, the crowd was faked out as the market turned and went higher. Sure, Tuesday’s “upside double-reversal” might indicate a market that has gone “schizo,” but at least by now it should be the “schizo” that you know rather than the one you don’t. While this may not provide comfort in what is already a difficult market environment, it has driven my thinking with respect to the fact that making progress in this market will continue to be tough, and so far that has been precisely the case. We’ve even seen leading stocks go “schizo” on us, and I would offer Mellanox Technologies (MLNX), which had run up over 20% from where we first were onto it before plummeting all the way back down and giving all of its gains away. With the market up for the week and volume increasing to the upside on the indexes over the past two days, we might conclude that the market is set for more upside. But with little in the way of strong leadership, I am more inclined to sell into a rally than to buy into it.


Thus, despite some rotation away from areas like tech and into medicals and financials, there is little reason, in my view, to take an aggressive stance here either way as the action overall strikes me as dicey and sparse. Facebook (FB) got tagged on Monday in the face of news that its subscriber growth rates have slowed severely. And while the stock was “constructively” drifting lower on light volume the increase in selling volume was not the resolution we were looking for, as I discussed in my weekend report. Thus the stock should have been summarily tossed on the open Monday if one had a small “nibbler” position based on the light-volume pullback within the handle. As we can see on FB’s daily chart, below, the stock might be en route to building something more akin to a double-bottom formation, but this would require undercutting the 25.52 low of early June for it to become a proper double-bottom. Bottom line: I am not a buyer again until the stock sets up more constructively from here, although it did make a good showing of itself off the 27 lows yesterday. FB’s story is a forward-looking one. And as I see it, it is less dependent on the subscriber growth numbers and more on how they leverage their existing subscriber base. But we can rely on the stock’s price/volume action to guide us in this regard, and for now the message is simply to stay away until further notice.

Facebook (<a href=FB) Gilmo Report Stock Chart" title="Facebook (FB) \" />

The rotation into areas like bio-techs is getting more obvious, but there are a number of emerging names in the space to make it at least worth keeping an eye on. I’ve discussed previously Seattle Genetics (SGEN), shown below on a daily chart, which has cleared to all-time highs from a short, v-shaped type of move straight down and straight up. My tendency is to look at this as an unconvincing move that should probably be sold into as I don’t think the stock is ready to run for the 30 price level just yet, and I am happy to bank a 10% profit in the stock on this run-up off the Monday lows.

Seattle Genetics (SGEN) Gilmo Report Stock Chart

Big fertilizer stocks are on the move again, and both Agrium (AGU), shown below on a daily chart, and CF Industries (CF), not shown, have broken out of these long base formations they’ve been trapped in since February of last year. Both CF and AGU have come up in more or less a straight line off of their early June lows, and so these breakouts might be a bit too obvious at this point. Also, notice that AGU’s big gap-up move today comes at the end of a sharp upside advance from the 74.28 price level and has more of the appearance of an exhaustion gap rather than a buyable gap-up move. Maybe this works, maybe it doesn’t, but given that there are very few stocks breaking out, these look fairly obvious to me. And given the technical positions of coming straight up from the bottom of their recent lows, I am left unenthusiastic about buying into these moves.

Agrium (<a href=AGU) Gilmo Report Stock Chart" title="Agrium (AGU) \" />

Apple (AAPL) continues to hold up as it builds a base here and moves very tightly along its 10-day moving average, as we see on its daily chart, below. The last buy point in AAPL was just above the 50-day moving average on a pocket pivot that occurred 13 trading days ago on the chart. Since then the stock has not come close to testing the 50-day line. So far, this is constructive action, but it is likely that no resolution to this pattern will be forthcoming until earnings are announced next Tuesday, July 24th. I should disclose that, at long last, I have finally bought an iPhone, but only after diving into the pool with my Blackberry (something my kids refer to as an “old person’s phone”) in the pocket of my swimming trunks and thereby frying the venerable old mobile device. I remember buying my first pair of Crocs (CROX) back in October 2007, so take it from there. Meanwhile, AAPL is still hanging in there but we can likely expect little to happen until earnings come out.

Apple (<a href=AAPL) Gilmo Report Stock Chart" title="Apple (AAPL) \" />

Zillow (Z) showed some strength today by flashing a pocket pivot buy point off of its 10-day moving average, and this comes on the heels of a previous pocket pivot buy point coming up through the 50-day moving average in late July as well as what I interpreted as a pocket pivot buy point that occurred on this past Monday (see July 15th report), as we see on the daily chart below. Interestingly, I would consider today’s move in Z to be more like a continuation pocket pivot, but notice that it is occurring within a cup-shaped base as it moves right up to the right-side peak. Z has moved steadily up from its June lows, and at this stage I might look for the stock to back off a little and try to form a handle as a breakout to new highs from here might turn out be premature.

Zillow (Z) Gilmo Report Stock Chart

After-hours, Mellanox Technologies (MLNX) is continuing in its typical Jekyll & Hyde character as it blew away estimates by 27 cents and guided revenue to $150-155 million vs. estimates of $104 million in the next quarter. This is sending the stock up towards the $100 price level, nearly a 50% gain from where it closed at 66.38, as I type. This is quite fascinating given the terrible action of the stock over the past two weeks as it gave up all of its prior gains since issuing a pocket pivot at roughly the 60 price level in early June. MLNX picked up some volume support today off the 50-day moving average for a pocket pivot, as we see on the daily chart, but this is one tough way to try and handle a stock going into earnings. The way the stock acted last week one would have thought something was amiss, and one would be hard-pressed to want to buy the stock going into earnings this afternoon and essentially engaging in the dreaded “earnings roulette.” However, MLNX would have come up a winner, but if it opens up tomorrow morning where it is trading after-hours, the stock would be far too extended to get involved with at this point.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Despite the continued uptrend, the overall environment is something of a mixed bag and is typical of the summer doldrums, a big earnings roulette surprise from MLNX notwithstanding. In fact, I haven’t seen a 50% move following an after-hours earnings announcement since the 1990’s. Generally I believe investors should keep any long positions on a short leash and be willing to take some profits when stocks make extended moves of 3-4 days if taking aggressive positions. Otherwise, I would not seek to get heavily invested if I was going to try and sit with some positions. Stay light and nimble. That has been my approach in July and it has been moderately successful in an environment where the market is not producing a lot of sharp uptrends and the action tends to want to fool the crowd. Gilmo members should review my reports in July for discussion of other names that I’ve mentioned in recent reports as the action in most has remained uneventful or unchanged from prior discussions.

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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