The Gilmo Report

July 21, 2013

July 21, 2013

Big stock NASDAQ names have taken it on the chin over the past couple of days, with such luminaries as eBay (EBAY), Microsoft (MSFT), Intel (INTC), Google (GOOG), and Intuitive Surgical (ISRG) getting pounded after announcing earnings Wednesday and Thursday after the close. While INTC and ISRG were already looking ugly, EBAY, MSFT, and GOOG were making bids for new highs prior to announcing earnings. The net effect was a high-volume stalling day Thursday on the NASDAQ Composite Index, shown below on a daily chart, and a high-volume gap-down on Friday thanks to MSFT, GOOG, and options expiration. While the big-cap NASDAQ names have taken heat, other stocks are not acting so badly. Perhaps a sign that the market might be getting a little bit tired here was the market’s reaction to Fed Chairman Ben Bernanke’s testimony before Congress on Wednesday and again on Thursday. As I pointed out in my Wednesday report of this past week, the market’s reaction was extremely muted relative to the gap-up move engendered by Bernanke’s after-hour speech and Q&A on July 11th. As the assurances of QEternity continue, they lose their impact on the market over time, and with “earnings roulette” season in full force, the market’s attention is temporarily diverted as earnings misses in big NASDAQ stocks send that index reeling.




Meanwhile the Russell 2000 Index, shown below on a daily chart, and the S&P 500, shown further below on a daily chart, didn’t pay too much attention to the NASDAQ’s swoon on Friday. This tells you that while the big-stock NASDAQ names have been subject to hitting the wrong number on “earnings roulette,” so far the smaller names and the NYSE-based names have been spared a similar fate. This was confirmed by the fact that the Advance-Decline lines on both major exchanges were roughly even, with the NYSE advancers slightly ahead and NASDAQ advancers slightly behind the decliners. Bottom line: The uptrend is still intact.






Despite getting slammed after-hours on Thursday and gapping down to an intra-day low of 875.61 Friday morning, much better than the 858.80 low it hit after-hours on Thursday, Google (GOOG) managed to recover in constructive fashion. By the close it was down all of 14.08, or 1.55%.




Such was not the case for MSFT.




With the selling concentrated in the biggest NASDAQ names, I don’t think investors have too much to worry about unless, of course, you happen to own these big NASDAQ names. GOOG’s recovery, however, points out its strength as a market leader in the current environment, while a company like MSFT has very little going for it. GOOG remains a force to be reckoned with on different levels.


I’ve discussed Silica Holdings (SLCA) many times before as I’ve continued to look for some sort of buy signal in the daily chart given that the weekly chart has been constructive along the lows for a while (see May 15th report). I finally got what I was looking for on Thursday as the stock pushed off of its 10-day moving average. This created a buyable pocket pivot buy point using the 10-day line at 22.42 as your stop.




SLCA’s weekly chart shows four weeks of supporting action off the right side lows of the base which adds to the constructive action I initially described in my May 15th report. Among oil-related names I tend to favor the fracking-related issues after the Department of Energy this week ruled that fracking does not pose a significant threat to ground water supplies.




Tesla Motors (TSLA) touched its 10-week moving average this week for the first time since March 29th, when it first began its huge price move. This can be seen as a big-volume supporting week, but with earnings coming up on August 7th the stock may continue to move sideways here. On the other hand, if a lot of shorts swarmed the stock earlier in the week thinking that the ugly demise of the “wildly overvalued” TSLA was finally at hand, a bunch of trapped shorts could set up another short squeeze.




SolarCity (SCTY) has spent the last eight days moving roughly sideways since its pocket pivot of nine days ago. I have to admit I was looking for more upside velocity following that pocket pivot move. As earnings approach on August 12th, I would like to see the stock move further up towards the 50 price level if I’m going to hold the stock into the number.




First Solar (FSLR) looks a lot like SCTY here as it, too, pulls back, dipping below the 50-day moving average but holding the 10-day moving average. My view is that the stock can be bought here with the idea that it should move back above the 50-day line in short order well in advance of its August 1st earnings announcement if I’m to be comfortable holding the stock into the number.




If one bought the initial pocket pivot in Sunpower (SPWR) one certainly has the option of bagging profits before its July 31st earnings announcement. The flip side is that as the stock pulls back into its 10-day moving average on light volume, it sets up a potential continuation pocket pivot along the 10-day line, which is something to watch for here.




Despite big-cap NASDAQ names getting hit over the past two days, the big-cap NASDAQ bio-techs have acted far better. Celgene (CELG) gapped down on Thursday on negative (this time) Revlimid news, but held its 10-day moving average. The stock held up again on Friday on a weak day for the NASDAQ, which is constructive, but overall the stock has made no real progress since its buyable gap-up of last week.




Biogen (BIIB) also bucked the weakness in big-cap NASDAQ names by flashing a third pocket pivot along its 50-day moving average. Going into earnings this Thursday, both CELG and BIIB are holding up well. It is a matter of how big a position one wants to hold in either of these stocks going into the numbers, although I would stick to 10-20% maximum.




Overall, bio-techs of all stripes have continued to act well. Regeneron Pharmaceuticals (REGN) trades up on enough volume for a pocket pivot volume signature, but was too far extended from its 10-day moving average for an actual pocket pivot. It is, however, breaking out of a short, four-day “ants” price range, where “ants” are the little black triangles indicating a stock is up 12 out of 15 days in a row or better.




After moving higher following its buyable gap-up of ten days ago, Santarus (SNTS) is engaging in an orderly pullback to its 10-day moving average. In fact, most of the better acting stocks, including the bio-techs, have merely pulled back to logical areas of support at their 10-day or 50-day moving averages.




Valeant Pharmaceuticals (VRX) is also pulling back in constructive fashion after moving up from its late June buy zone. I pointed this out in my June 30th report, and it came on the heels of two prior pocket pivots in the pattern. If one is in at that level, roughly 85-86, the current pullback looks normal as the stock heads into its earnings announcement on August 7th.




LinkedIn (LNKD) broke out of a cup pattern that I wouldn’t really call a cup-with-handle since the “handles” are only 2-3 days long. However, the breakout was a constructive follow-up to last week’s pocket pivot trendline breakout. LNKD announces on August 1st so it has plenty of time to sort itself out before then.




The resurgence of Chipotle Mexican Grill (CMG) is an interesting thing to see, and I’ve been asked of its recent strength several times. The base breakout of about three weeks ago was an initial sign of strength. On Friday the stock staged a buyable gap-up after announcing positive earnings with growth at 11%. This isn’t the type of growth that will knock your socks off, but consider that we saw McDonald’s (MCD) rally strongly over the first four months of this year on earnings growth of 2% and 4% in January and April respectively. In comparison, CMG is “ripping it up” with double-digit growth, but perhaps the more relevant number to consider here is the fact that they will open 165-180 new stores in 2013. For retail operations, this is an important metric, since new store openings are a big factor in how these companies drive growth. If one likes the stock, this buyable gap-up is actionable using the 395.02 intra-day low of Friday as your stop. That said, since this is the second earnings-related gap-up that CMG has had so far in 2013, I would like to see the stock gain some velocity from here. In this market, a company that can churn out annual earnings growth of 20% can easily find favor with institutions.




Despite the fact that the indexes look “way up there,” I’m still noticing a lot of leading stocks building bases and setting up in positions for buy points to emerge, which strikes me as positive. The indexes may look extended, but underneath the surface a lot of stocks are still rounding out the lows of new bases, and I’ve covered a number of these since the market low of July 24th. “Earnings roulette” season will make or break most of these patterns. In many cases it is not necessary to gamble going into earnings by holding a huge position in a particular stock that you like. Even if a stock has been acting well as an earnings report date approaches, say like SPWR, for example, a buyable gap-up following earnings could turn out to be very buyable and lead to a much sharper upside move. If we consider TSLA in May of this year, the stock was already in a strong upside trend as it rallied from around 40 to 55 from early April to mid-May, a move of about 30%. Thus some of the sharpest moves can occur in stocks after an earnings announcement, even though they were already trending higher going into the number.


So one doesn’t necessarily have to feel like they need to gamble going into earnings. If you have a nice cushion in a stock and aren’t worried about the stock gapping down following any kind of earnings disappointment, then certainly you can hold into the number. If you don’t, then it is a simple matter of doing the math in terms of how much you are willing to lose should a worst case scenario arise. Earnings season is always challenging as stocks frequently gap this way and that. But I think in such an environment the buyable gap-up remains your most potent weapon in getting on board or back on board any leader that displays such powerful technical action following an earnings announcement. If stocks like FSLR or SCTY, for example, don’t rally further from current levels to give investors a decent cushion going into earnings, then for those who are risk averse it may simply be easier to wait for earnings to come out and see if any buyable gap-ups moves occur first. I’ve seen this occur in several names recently, with CMG being one example. As we move into the heart of earnings roulette season, this is one concrete way to operate while minimizing risk.


Gil Morales

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

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in SLCA, though positions are subject to change at any time and without notice.


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