The Gilmo Report

July 4, 2012

July 4, 2012


In keeping with the spirit of July the 4th, the market completed a four-day fireworks show of its own on Tuesday as the NASDAQ Composite Index, shown below on a daily chart, launched to higher highs and plowed right through 2950 resistance. Considering that Tuesday was a short 3 ½-hour trading session, volume was actually fairly decent, giving the day a robust upside tone. This rally has likely caught many by surprise, given the forlorn look of the market early last Thursday following the Supreme Court’s odd Obamacare decision. But as I discussed in my report of this past weekend, the market might see this as a negative for President Obama’s re-election hopes and this in turn might spark a “Romney Rally” similar to the “Reagan Rally” going into the November election back in 1980, as I first discussed in my report of June 10th. With the jobs number coming out on Friday, more bad economic data is expected. Is this bad for stocks? Not if my Romney Rally theory is correct, since a bad jobs number could be seen as another negative for the incumbent President as the market discounts the future, not the present. This is not about politics, this is about making money in stocks, and so far the stocks act well, so let the stocks do the talking.

NASDAQ Gilmo Report Stock Chart

And the way stocks, including big-stock NASDAQ leaders, are talking isn’t hard to figure out. With “big-NAZ” names flashing pocket pivot buy points last Friday, as I discussed in my report of this past weekend, the message was clear: the market wants to move higher. So far it has, and the charge has been led by big-stock NASDAQ leaders like Apple (AAPL), shown below on a daily chart. AAPL’s pocket pivot buy point as it came up through the 50-day moving average three days ago has resulted in a strong three-day move to higher highs as the stock attempts to continue its move up the right side of a potential new base. This looks fine, and for now, following the buy point of three days ago, AAPL is a hold. AAPL will release earnings on July 24th after the close, so as that date approaches one will have to decide how much AAPL they will want to hold through the earnings announcement. In January, AAPL had a big buyable gap-up on earnings, and that led to a big price move from there, so one would have been fine just buying the stock around 440 or so on the buyable gap-up after earnings came out in January. Stay tuned on this as July 24th approaches.

Apple (AAPL) Gilmo Report Stock Chart

Most stocks will be announcing earnings towards the middle to end of July, and the later a stock is in its “life cycle” the more risk there is on an earnings announcement, in my view. Mellanox Technologies (MLNX), however, is a strongly performing newer situation so far, and so when it is expected to announces earnings in mid-July one might have a decent enough profit cushion in the stock to try and hold a partial position, at the very least, into the announcement. So far there has been no reason to sell the stock if one was initiating a position back closer to the 60 price level when the stock was first flashing pocket pivot buy points. Since then the stock has broken out to all-time highs, pulled back to the “breakout zone” as I’ve highlighted on the daily chart below, and then launched to even fresher all-time highs on Tuesday. MLNX got a little help from an analyst’s upgrade and new price target of $85 a share. I suppose this may be a rare case where I agree with the analyst! For now MLNX is a hold, in my opinion.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Coinstar (CSTR) also plowed to all-time highs on Tuesday as well, clearing the top of the upside trend channel it has formed since mid-June, as we can see on its daily chart below. Since the channel breakout is occurring concurrently with a new-high base breakout, I think the stock is more likely to accelerate to the upside from here. Theoretically, CSTR is still within range of the 67 area base breakout, although extended from the 65-66 level where the recent pocket pivot buy point in the stock first materialized (see June 27th report). I think one could add a little to a position established on the pocket pivots last week. CSTR seems to have decent potential given its unique business concept as I’ve discussed in previous reports. As long as the price/volume action in the stock confirms its potential, it is worth having a position in, in my view. I’d like to see pullbacks from here contained to the 67-68 level, which is roughly the top of the base as I interpret it.

Coinstar (CSTR) Gilmo Report Stock Chart

LinkedIn (LNKD) is wedging its way out of the handle portion of a very short cup-with-handle formation, as we see on its daily chart below. LNKD announces earnings in several weeks’ time, and some are predicting a 50% drop on the announcement! I wish I had that crystal ball, but all I know for sure right now is that the stock is trading light volume as it moves to higher highs here. Earnings are still a month away, but I would like to see the stock exhibit some strength before then. So far, outside of the pocket pivot buy point coming up through the 50-day moving average eight days ago, LNKD hasn’t shown any heavy buying interest, but then it also hasn’t shown any heavy selling interest either. The 50-day moving average for now remains your selling guide as there remain no new buy points since the previous pocket pivot signal.

LinkedIn (LNKD) Gilmo Report Stock Chart

And while LNKD goes up on light volume, Facebook (FB) goes down on light volume as it drifts lower to try and form a handle to its own mini-cup-with-handle formation. The daily chart of FB, below, shows volume drying up as it pulls down towards the 30 price level, finding some support on Tuesday as it rallied slightly. FB comes out with earnings at the end of the month, and what the crowd seems to know is that it will confirm that FB’s subscriber base growth is slowing rapidly while usage by existing members declines. FB is a unique situation. As a relatively more mature company in terms of revenues and market cap when it came public, it stands at a major crossroads as it seeks to re-invent itself to some extent. I still consider the situation with FB to be fluid and dynamic, and not necessarily prone to failure – anything could happen. The best guide, of course, will be the stock’s price/volume action, and I think that FB might be a buy if it can flash a pocket pivot buy signal by coming up through its 10-day moving average, currently at 31.83 on volume that exceeds 28,599,500 shares, the highest volume over the prior 10 trading days.

Facebook (FB) Gilmo Report Stock Chart

When I first discussed NationStar Mortgage Holdings (NSM) in my report of June 17th, I mentioned that the stock was just a little bit too thin for my blood. Some of my best ideas are often some that I don’t ever use myself, but I hope someone out there was able to make some hay with NSM as a result of the flag breakout it had last week, as I discussed in my June 27th report to buy the flag breakout. There’s really nothing to do here but admire the sharp upside move after the flag breakout – a very pretty chart to be sure! In any case, the rocket launch after the breakout is worthy of a July 4th fireworks show, and certainly in keeping with any pretensions of a holiday theme in this report.

NationStar Mortgage Holdings (NSM) Gilmo Report Stock Chart

Seattle Genetics (SGEN) is an interesting new bio-tech name that has caught my attention on the basis of its price/volume action. SGEN is still losing money but they do have a hot new drug, Adcetris, which is used to treat Hodgkin’s Lymphoma and anaplastic large cell lymphoma. Apparently something is going on here as the stock has recently broken out of an 11-month base, the last four months of which you can see in the daily chart below. It did so with a steady upside burst of buying volume that took the stock straight up. It has now spent the last 12 trading days forming a short, well-contained flag formation. On Monday the stock flashed a pocket pivot buy point after reversing to the upside following the analyst’s downgrade. Volume picked up sharply, sealing the market’s verdict on the analyst’s downgrade when the stock closed at a new all-time high and very close to the peak of the daily price range. SGEN pulled back slightly on Tuesday but held its ground reasonably well. This is a very risky bio-tech play, but it apparently has a strong revenue and pipeline story behind it, and the whole world is short the stock. As of June 15th SGEN had 30.62 million shares sold short vs. a float of 91 million. So if you want an aggressive long set-up with short-squeeze potential SGEN may be potentially playable here, but handle it with care and use a 6-7% stop max.

Seattle Genetics (SGEN) Gilmo Report Stock Chart

A short day-and-a-half since the weekend has changed the situation without changing the situation, since I still like the stocks I’ve been discussing in recent reports. That hasn’t changed. What has changed is that these stocks are higher in price than they were over the weekend, and the market looks even healthier than it did over the weekend. With the jobs number coming out on Friday, I don’t think one has too much to fear if one’s stocks are up reasonably well over the past few days and there is something of a profit cushion. Therefore it is more a matter of sitting more and thinking less, until further notice.

On an administrative note, Gilmo members can catch my Fox Business News appearance on the Stuart Varney & Company show Tuesday at:

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