The Gilmo Report

July 31, 2016

July 30, 2016

The NASDAQ Composite Index has continued to move higher as it gets to within just over 1% of its prior all-time highs of 5231.94 achieved on July 20, 2015. While the optics certainly show that the index is quite extended on the upside, it has still shown no desire to pull back in any meaningful way. The index achieved another higher high on Friday as volume picked up on what was the last day of the month. It also appeared that volume picked up into the close, as volume rates were running behind until the last ten minutes or so of the trading day.

 

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The S&P 500 Index also moved up on higher volume Friday, but was still unable to clear the highs of its current eight-day price range. Like the NASDAQ, NYSE volume appeared to pick up sharply in the final few minutes of trade on Friday.

Most of the meaty earnings reports among the biggest of the big-stock leaders have come and gone. But there are still a number of names that we follow that are set to report over the next two weeks as we move through the rest of earnings season. They may not, however, have as much potential to move the market as, say Apple (AAPL) or Alphabet (GOOGL), for example.

 

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In any case, the trend remains your friend despite the fact that things continue to get more extended on the upside. Thus I would not be surprised to see the market pull back sharply here at any point. Generally, my policy of taking profits into extended strength has kept cash in my pocket when such pullbacks have occurred.

Both the NYSE and NASDAQ Percentage of Stocks Above 150-Day Moving Average continue to edge up toward their six-year highs. They have both already exceeded their values at the market peak of last year, while the NYSE Percentage is also higher than it was at the peak in 2014.

In terms of precision, this particular indicator doesn’t tell you that a pullback, correction, or worse is imminent. We only know that peaks in this indicator will tend to occur around or before a market pullback ensues. However, I find that selling long positions into extended strength after entering on opportunistic pullbacks tends to sidestep the whole issue.

 

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The precious metals continued to act well into the end of the weak, but the iShares Silver Trust (SLV) did not make further progress beyond Wednesday’s post-fed pocket pivot move. However, it did hold tight on Thursday and Friday and was up slightly on Friday on a pocket pivot volume signature. Pullbacks into the 10-day line at 18.91 would offer lower-risk entry opportunities from here.

 

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Unlike the SLV, the SPDR Gold Shares ETF (GLD) did actually manage to make further upside progress after posting its own pocket pivot on Wednesday after the Fed policy announcement. The GLD still remains below its 52-week highs, and I would consider any pullback to the 10-day line at 126.94 as a potential lower-risk entry. Otherwise, if one chooses to buy into this strength, the 10-day line might serve as a tight selling guide.

 

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All of my favored precious metals moved up on Friday with the metals themselves. Stocks I’ve discussed in recent reports, Silver Wheaton (SLW), Agnico Eagle Mines (AEM), and First Majestic Silver (AG), all posted 52-week highs on Friday. AG looks to be the strongest of the three, and its Relative Strength rating of 99 confirms this. However, SLW and AEM aren’t far behind at 97.

All three are extended, as the daily chart of SLW illustrates below. As I’ve discussed many times previously, chasing upside moves in these stocks as well as the precious metals is generally not the optimal way to go. It is better to lay back and wait for an appropriate pullback as a lower-risk entry. The backward-looking evidence on the charts proves this out. So if you’re jonesing to own the metals or the metals stocks, wait for the pullbacks before pulling the trigger.

 

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Facebook (FB) was unable to hold its attempt at a buyable gap-up on Thursday morning after stomping earnings estimates the afternoon before. The stock had traded as high as 133.91 in after-hours trade on Wednesday, but by Thursday’s open was down to 127.52 at the bell.

From there it floated around a bit before trading down to the 128-129 price level before closing at an even 125, not much more than 1% up for the day. Initially I thought institutions that might be overweight the stock were selling to pare their positions down, but there was probably another reason for the weak showing the day after earnings.

On Thursday FB revealed in an SEC filing that it had received a Statutory Notice of Deficiency from the Internal Revenue Service which could result in a $3 to $5 billion tax liability. That appeared in the news on Friday when I saw it. As far as I can tell, the company reported this in an SEC filing without issuing any sort of press release. If you figure that FB reported $6.44 in revenue for the most recent quarter, then $3-5 billion could be relatively significant. However, it could just turn out to have a short-term effect. Therefore, I would watch how the stock acts as it pulls in here.

A pullback into or near the 10-day line at 121.86 with volume drying up could present a potential entry opportunity. I tend to think that if the general market remains in rally mode, FB will likely recover and turn higher. However, I would simply watch to see how the stock acts in the coming days as selling pressure perhaps dries up. For those who didn’t play earnings roulette on Wednesday, your patience may pay off with an entry opportunity at a level lower than Wednesday’s pre-earnings closing price of 123.34. Watch for it.

 

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Apple (AAPL) continues to hold its 200-day moving average after posting a bottom-fishing type of buyable gap-up move following earnings on Tuesday.  As I blogged on Thursday, I was shorting the stock as it failed to hold above the 200-day line, but as it pushed down to the 123 price level I could feel a persistent bid come in at that point.

For that reason, I felt that the APPL was probably best left alone on the short side and perhaps better viewed as a long at that point as it could easily push back above the 200-day line. By the close on Thursday it did exactly that, and then on Friday held very tight along the line as volume dried up. In my view this may be good for a possible move up to the 112 level and the prior 2016 high. Your selling guide is, of course, the 200-day line at 103.64 or the intraday low of the BGU day at 122.75, depending on how you want to handle it.

 

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Amazon.com (AMZN) reported earnings on Thursday after the close and initially sold off on the news. However, it eventually recovered and traded up to all-time highs where it opened up on Friday morning. Earnings growth came in at a whopping 837%, but the stock stalled at the intraday highs to close mid-range on very heavy volume.

I consider this just a hair extended here, and would like to see a pullback toward the 10-day line at 743.47 as a more optimal, lower-risk entry opportunity. Otherwise, if one simply wants to buy the stock right here, the 10-day line would serve as a tight selling guide.

 

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Alphabet (GOOGL) also announced earnings Thursday after the close, coming in with a 21% increase in earnings on a 21% increase in sales. Not bad for a big, old NASDAQ leader, and enough to send the stock gapping back up to its old all-time high at 810.35.

However, by the close, GOOGL failed to hold above the $800 Century Mark and closed at 791, near the lows of the daily trading range, on heavy volume. IF the general market were to get into trouble here, then it’s quite possible that the stock could become shortable on the basis of Jesse Livermore’s Century Mark Rule in Reverse.

In this case one would short the stock and then use the $800 level as a guide for a tight upside stop. I think whether GOOGL morphs into a short here or holds up as a buyable gap-up might depend on what the general market does from here, so this remains fluid in this regard. One could also look at this as an odd, double-bottom base breakout with the peak of the “W” at 790.95, the prior 52-week on April 19th of this year. We shall see how this plays out as it either sets up as a Century Mark short or a BGU.

 

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Before the open on Thursday I blogged to members that they should watch GrubHub (GRUB) on the open as an actionable buyable gap-up move following earnings Wednesday after the close. The stock opened up around the 35 price area, drifted a little lower to post a low at 33.88 and then launched to the upside.

The stock hit an intraday high of 39.29, a more than 10% gain from the initial entry down around 35. That’s a spicy meatball, and nice pay for a morning’s worth of work, if you can get it! On Friday, GRUB drifted down to about the mid-point of Thursday’s gap-up trading range and then rallied to close tight. Volume remained high on Friday as shorts probably scrambled to cover. As I noted in my Thursday pre-open blog post, the stock had something north of 26 million shares of short interest at the last reported date, more than a quarter of the float.

Depending on how much short interest remains, this could push higher. But for now, assuming you didn’t take the quick 10% profit on Thursday, one could use the Friday intraday low of 36.69 as a trailing stop. The bottom line is that you don’t want to see this profit disappear, as the stock could pull in further toward the 33.88 BGU low. In that case I’d rather be in a position to buy the stock back at that point, should that occur.

 

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Mobileye (MBLY) appears to be consolidating the sharp undercut & rally (otherwise known as a big-arse shakeout) off the lows of this past Tuesday morning. As with GRUB, an early morning blog that I put out to members discussed MBLY as an actionable post-earnings move. The difference in this case was that the stock was gapping down, not gapping up!

In any case, MBLY undercut the prior 42.94 low of July 7th, setting up a potential undercut & rally move. I also based my assessment of the stock on the basis of the meaninglessness of the news regarding ending its partnership with Tesla Motors (TSLA), as I discussed at length in my blog post and my Wednesday mid-week report.

Anyone who bought the stock Tuesday morning made out quite well as the stock recovered well over 10% and retook its 20-day moving average. Pullbacks into the 20-day line would represent potential lower-risk entry opportunities from here, and we did see one such pullback on Friday morning.

Volume was light, and MBLY was able to close back up near the Thursday close. The stock has had a sharp move off the Tuesday lows, and I might expect some further consolidation along the 20-day moving average. Therefore, as I said, look for pullbacks into the line as potential lower-risk entry opportunities.

 

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Netflix (NFLX) is still trying to make up its mind as to whether it’s a long or a short. The stock is managing to hold up in a little flag formation after Tuesday’s gap-up move on news of a big insider purchase of 600,000 shares. Volume has remained low as the stock pulls back slightly.

However, so far NFLX has been unable to regain and hold the 20-day moving average. While the stock has been able to hold above the 10-day moving average, the 20-day line has served as near-term resistance. Volume also picked up ever so slightly on Friday as the stock bumped up against the 20-day moving average and backed off.

Bottom line is that if I’m looking at the stock as a possible long play here then I want to see it continue to hold the 10-day line as volume dries up. Better yet, I’d like to see it pop back above the 20-day line with volume increasing, so this is something to keep an eye on.

 

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Fabrinet (FN) is one of those stocks that can have nice upside moves but as I’ve discussed in prior reports I would prefer to sell into those moves given the stock’s volatile nature. After a big upside blast on Monday FN held tight before busting to the downside on Thursday in sympathy to a poor earnings report from another telecom name, Infinera (INFN).

INFN is a doggy stock that has been in a downtrend for a considerable amount of time, while FN has been a leader making new highs as it trundles along in a strong uptrend. FN is expected to report earnings on August 15th, and it’s clear that INFN’s report spooked holders of FN.

FN blew right down to its 50-day moving average on Thursday on very heavy volume. But it held the line and bounced slightly on Friday on less than average volume. This may have to retest the 50-day line, which could bring it into a buyable position again, but if one bought the stock at the line on Thursday they were up about 4% from there by Friday’s close.

If you fancy yourself an opportunistic investor, then buying shares of FN on any subsequent retest of the 50-day line at 36.59 might be right up your alley. In this case, the 50-day line would also serve as a very tight selling guide.

 

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Gigamon (GIMO) to new all-time highs Friday morning after beating on earnings Thursday after the close. The stock opened up at 43.33 and within 10 minutes rallied up as high as 46.45 before turning tail and reversing all the way down to 42.24. Since I prefer to sell into such extended strength, a strategy of selling into the move to 46.45 would have worked out nicely. One could then look at buying shares back on the break to 42.24. The 620 intraday chart would have been helpful in re-entering the stock on the long side.

 

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I show the 5-minute 620 intraday chart below to give a sense of how something like this would work. We can see that following the rapid three-point rise in ten minutes following the opening bell, the stock reversed and sold off hard for the next 50 minutes. At that point the shorter MACD line stretched to the downside in the extreme and then crossed back above the longer blue MACD line. That is what I call the “MACD stretch and cross.”

One could take a shot at the stock at that point, but by the time the 6-period moving average crosses the 20-period line just above the 44 price level it’s game-on again for the long side. GIMO then keeps pushing higher all day long and closes at a new all-time high of 46.72.

While it’s certainly a roller-coaster ride of epic proportions to be sure, it’s not atypical for stocks in this market. This is one of the primary reasons I constantly take an active and opportunistic approach at all times. Obviously, GIMO is well-extended as of Friday’s close and not actionable at this point, but it certainly was on Friday!

 

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For those of you who missed the last voodoo pullback to the 10-day moving average by Ambarella (AMBA), here it is again. After coming off the line last week and then pushing to a higher high on Wednesday, the stock tested the 10-day line again on Friday. Volume came in at -43% below average, setting up a lower-risk voodoo entry point on what we can also refer to as a VDU, or Volume Dry Up. Personally, I prefer voodoo as it has a much more mysterious ring to it. AMBA is buyable on this pullback with the idea that it will continue to hold the 10-day line.

 

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Cloud stocks of all stripes got a big boost on Thursday morning after Oracle (ORCL), arguably the grand-daddy of cloud names (in the old days it was called “relational database software”), announced it was buying smaller cloud name Netsuite (N). Everything related to the cloud was off and running at the bell on Thursday.

This worked out for me as I was holding a couple of cloud names overnight, one of which was ServiceNow (NOW) which I had bought in an after-hours pullback below 70 on Wednesday after the close. As I wrote in my Wednesday mid-week report, “I would watch this carefully tomorrow morning since it could undercut the prior 69.63 low of July 19th to set up an undercut and rally move. I’ve actually taken a small position in the after-hours to test this thesis, but would plan on working it more aggressively under the proper conditions tomorrow.”

As it turned out, I didn’t get much of a chance to work that position more aggressively. Instead of opening down, NOW opened to the upside at 75.40, more than five points above where I bought it in the after-hours on Wednesday. I sold into the jack, which got over 78 on an intraday basis. The stock then traded down as low as 73.44 on Friday, but held just above the 10-day line to close a little better than mid-range for the day. Volume came in well above average, giving it the feel of supporting action off the lows.

I would like to see the stock drift a little further into the 10-day line at 72.74 with volume drying up as a possible lower-risk entry. Otherwise, if you like the stock right here, then the 10-day line would serve as a reasonably tight selling guide.

 

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NOW is one cloud stock that is considered a viable buyout candidate, as is its cousin Workday (WDAY). WDAY was actually quite buyable earlier in the weekend per my discussion of the stock in last weekend’s report. It then moved to the upside and on Thursday gapped to a higher high on a base breakout attempt.

That attempt didn’t last as the stock reversed off of the highs to close near its intraday lows. On Friday WDAY came right back into the 10-day moving average and the top of the prior base, where it became buyable again. It then made a new 2016 closing high on about average volume. I consider WDAY to remain buyable on any subsequent pullbacks to the 10-day line at 80.31. This price level roughly coincides with the top of the prior base.

 

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Salesforce.com (CRM) was another cloud name that started to rally on Thursday, but by Friday was pulling back into the confluence of its 20-day and 50-day moving averages. As I wrote in my Wednesday mid-week report,” A small undercut of these lows that also just barely undercuts the 20-day and 50-day moving averages could set up a buyable pullback.”

You might note on the daily chart below that this is precisely what happened on Friday. CRM then rallied off the two lines to close in the upper half of its daily trading range. The slightly higher volume gives it the appearance of some supporting action at the line. When it comes to cloud stock buyouts, CRM might be seen as more of an acquirer rather than a company that would be acquired. After all, it has been revealed that CRM was also in a bidding war with Microsoft (MSFT) for LinkedIn (LNKD) before MSFT finally won.

So if CRM is going to rally, it will probably have to do so on its own merits. This is one reason why I prefer NOW or WDAY since they have the additional kicker of being perhaps more likely buyout candidates. That doesn’t preclude CRM from being bought out should a much bigger fish swim by and decide to take a bite! Meanwhile, the stock is best bought on these pullbacks to the confluence of the 20-day and 50-day moving averages.

 

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Splunk (SPLK) is less related to names like N or WDAY or NOW in terms of its business line, but as a cloud-related name it has been bandied about as a possible buyout candidate as well. Bigger cloud-related names like Amazon.com (AMZN) and Adobe Systems (ADBE) have been rumored to be potential suitors. Per my discussion of the stock in my Wednesday mid-week report, the stock was buyable right at the 10-day line on the basis of a small voodoo pullback. That would have worked out well as the stock broke out on Thursday on a pocket pivot move to higher highs.

Buyers then got a second chance when the stock pulled in hard on Friday, testing the top of the prior Thursday breakout point. It then rallied back to a higher high by the close on a second consecutive pocket pivot. I don’t know how many more chances SPLK will give us to buy the stock. However, should another pullback down towards the 60 price level occur soon, that might present yet another entry opportunity to watch for.

 

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As a cloud stock that is perhaps more likely to acquire than be acquired, Adobe Systems (ADBE) got only a marginal boost from the ORCL buyout of N. The stock remains within a buyable range as it holds tight along the confluence of the 10-day, 20-day, and 50-day moving averages. My preference would be to use pullbacks to the 50-day line at 97.16 as more opportunistic, lower-risk entries. ADBE is not expected to announce earnings until September 15th.

 

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Citrix Systems (CTXS) had a big shakeout after earnings on Wednesday, as I discussed in my report of that day. It has been able to move higher since Wednesday’s shakeout move, but I would continue to look for any kind of pullback to the 10-day line at 87.19 as a more opportunistic entry, should that occur.

 

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As we progress through earnings season, I tend to be more interested in names that have already reported and which therefore allow me to avoid the whole earnings roulette issue. Great examples of the types of opportunities that can arise after earnings were seen in GRUB, MBLY, and NOW, for example.

Silicon Motion (SIMO) announced earnings last week and got smacked right through its 20-day moving average two Fridays ago. I watched the stock closely during the day, and it did in fact post a 620 buy signal as it rallied off the intraday lows and retook the 20-day line. In the first half of this past week, the stock rallied a little further up to its 10-day moving average, but on Thursday and Friday backed down for a retest of the 20-day line. Volume dried up to -35% below average on Friday, just enough to qualify as a voodoo pullback.

SIMO has been showing a sharp acceleration in earnings and sales over the past three quarters. Earnings growth has gone from 4% to 42% and 69% as sales growth has ballooned from 20% to 40% and 61%, all in sequence. Next quarter’s estimates call for 58% earnings growth.

Since SIMO was extended prior to its earnings report, a sell-the-news pullback is probably not all that abnormal. The key point here is that the stock needs to hold the 20-day line on this current retest. Therefore, buying it here and using the 20-day line at 51.44 or Friday’s intraday low at 50.93 as a selling guide is a feasible way to test the retest, so to speak, on the long side.

 

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Below are Notes from my Trading Journal regarding other long ideas discussed in recent reports. Most of these have earnings coming up in the next few days so should be watched for anything actionable that might develop following their respective earnings reports:

Acacia Communications (ACIA) – posted a new closing high on Friday. This thing has been a monster since I first discussed it in late June/early July. Not in a buyable position currently. According to the NASDAQ website, earnings are expected out on August 11th.

Activision Blizzard (ATVI) – pulling into its 50-day moving average and the top of its prior base ahead of earnings which are expected to be announced this coming Thursday, August 4th. Would wait to see what transpires after earnings.

Alibaba (BABA) – pulled into its 20-day moving average on Friday as selling volume picked up slightly but remained below average. This comes after Wednesday’s action which saw the stock pull down into its 10-day line. Thus it has moved lower over the past two trading days. Technically this would be an even lower-risk entry here at the 20-day line, using the line as a “last stand” selling guide. Earnings are expected out on August 10th.

Atlassian Corp. PLC (TEAM) – getting even more extended as it attempts to regain the 30 price level and its prior post-IPO highs of late 2015.  Earnings are expected this Thursday, August 4th.

Barracuda Networks (CUDA) – stock is still way extended but the 10-day line has caught up to the stock over the past several trading days and is now your reference point for a lower-risk entry on a pullback to the line at 21.31. The 20-day line at 19.92 would serve as the reference point for a more opportunistic entry on a more severe pullback, should that occur. As always, my preference is to look for the more opportunistic entry.

CyberArk Software – holding tight for the past three trading days after posting a higher high on Tuesday of this past week. Extended from any lower-risk entry points, but the 10-day moving average down at 54.60 would serve as your first reference point for a lower-risk entry on any pullback. Earnings are expected to be announced on August 9th.

Electronic Arts (EA) – like its cousin ATVI, EA has pulled back to its 50-day moving average. Unlike ATVI, however, it has not been able to hold above the top of its prior base breakout, and has fallen back into the base. Earnings are expected to be announced this Tuesday, August 2nd. No need to do anything until then.

Imperva (IMPV) – stock posted a pocket pivot off the 10-day moving average on Thursday and held tight at the line on Friday on some slight supporting volume.  Earnings are expected to be announced this coming Thursday, August 4th.

Nvidia (NVDA) – continues to make new all-time highs as it remains extended. Earnings are expected to be announced this coming Thursday, August 4th.

Palo Alto Networks (PANW) – found support at the 20-day moving average on Friday after dipping below its 50-day moving average in sympathy to a big gap-down in fellow cyber-security name Fortinet (FTNT). This looks buyable here using the 20-day line at 128.41 as a tight selling guide. Earnings are not expected until September 14th.

Square (SQ) – earnings are expected this coming Wednesday, August 3rd, after the close.

Tesla Motors (TSLA) – pushed to a higher high on Friday on below-average volume. Not in a buyable position currently with earnings expected to be announced this coming Wednesday, August 3rd.

Twilio (TWLO) – stock was good for a nice trade earlier in the week off the 10-day moving average. On Friday the stock closed back below the 10-day line as volume picked up. Would let this settle down, looking for a pullback to the 20-day line at 38.60 as the most opportunistic entry level. Earnings are expected to be announced on August 8th.

Weibo (WB) – undercut its Monday low on Friday and rallied off the 20-day moving average on a nice little undercut & rally type of move. Volume increased in a show of supporting action off the line, and the test of the line early in the day on Friday offered a nice, lower-risk entry opportunity. Earnings are expected to be announced on August 16th.

Yirendai Ltd. (YRD) – stock became even more extended on Friday with a nice 9.85% move to all-time highs. If anyone is long this closer to the 15-16 level where it was last buyable, you probably have enough cushion to sit through earnings, which are expected on August 9th. However, handle this as you see fit!

Zayo Group Holdings (ZAYO) – getting knocked back further and right on top of its prior base breakout level. Technically this would off a last stand lower-risk entry opportunity using the 50-day moving average at 27.96 as a nearby selling guide. Volume has been drying up over the past two days, and came in at -47% below average on Friday.

Zendesk (ZEN) – jacked up and off of its 20-day moving average on Thursday as the group rallied on news of ORCL buying out smaller cloud name Netsuite (N). It is expected to announce earnings on August 2nd, but posted a pocket pivot move to new highs on Friday ahead of Tuesday’s report.

This market has offered a lot of crazy but actionable movement in individual stocks this past week. This requires that one maintain an alert, opportunistic awareness of what is going on in real-time after leading stocks (or not-so-leading stocks) announce earnings. Opportunities can often arise where you least expect them, as I consider the case to be with GRUB on Thursday.

With the indexes in an extended state, and with earnings season perhaps a little more than half-way over with, more opportunities like this may present themselves. And, of course, once earnings roulette is out of the way, things ease up quite a bit, making such opportunities that much more attractive if they subsequently set up in more coherent fashion.

So this is what we look for in this market in our search for actionable opportunities. Certainly, if we were to get some sort of significant general market pullback, the potential for extreme opportunism in buying pullbacks grows. In the meantime, to paraphrase the old financial services pyramid marketing guru A.L. Williams (assuming you’re old enough to remember the guy) used to say, all you can do is all you can do, and all you can do is enough! And in this market, all you can do is to just watch the stocks and operate accordingly. Carry on.

 

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 positions in SPLK, 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, 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.