The Gilmo Report

July 6, 2011

July 6, 2011

The NASDAQ Composite Index, shown below on a daily chart, made it seven straight up days Wednesday with no let-up in sight as the major market indexes moved further above their 50-day moving averages. With the market coming straight up off the bottom, essentially from where it found support in and around the 200-day moving average, trying to come in aggressively on the long side is likely to be a very dangerous endeavour. While we have seen some long ideas work out well over the past two days, the market is still in a position that appears somewhat precarious in that a normal pullback to the 50-day moving average would not be unexpected. Thus if one becomes too impatient and tries to plow into the market all at once here, one must take into account the additional risk of such a proposition. Bottom line, with the dog days of summer upon us, investors who prefer to avoid living dangerously should simply take things slowly. If one owns one or two positions, keep them sized appropriately and if they continue to act well then one could continue to pyramid and build positions along the way. This puts the market in the position of having to prove things out to you first, rather than the other way around.

NASDAQ Composite Index Gilmo Report Chart

The story of the week so far has been Netflix, Inc.’s (NFLX) announcement that it will be expanding into Latin America and the Caribbean. NFLX stock responded with a huge-volume buyable gap-up yesterday that is technically buyable using the 275.71 intra-day low of yesterday as a selling guide, as we see on the daily chart below. NFLX got hit with a downgrade to “neutral” this morning, but that did not keep the stock from pushing to all-time highs on top of yesterday’s big gap-up move. It appears that the 2.1 days’ worth of short interest, about 20% of the stock’s 48 million share float at current average daily volume of 4.7 million shares, are getting squeezed like grapes at a wine-making party, so that if the general market doesn’t get into trouble here NFLX may likely see the 300 level soon enough. I recently bought a new flat-panel 3-D HDTV, and it is very interesting to note that the remote has a red button on it with “Netflix” printed in white letters, allowing one-button access to streaming movies from NFLX, testimony to NFLX’s widespread acceptance as a source of streaming content.

Netflix, Inc.'s (NFLX) Gilmo Report Chart

Apple, Inc. (AAPL) has continued to rally straight up off its lows of 12 days ago as it managed to stage a trendline breakout yesterday, albeit on light volume, as we see on the daily chart below. Despite the strong action as AAPL has benefitted from recent news that patent claims against it have not gone anywhere, as well as news that it headed up a consortium of companies that has successfully bid for and purchased $4.9 billion worth of patents from Nortel, I would be wary of buying AAPL here. The stock has come straight up from the bottom (SUFB) from what is, on the daily chart, a very wide and loose pattern. To a certain extent AAPL’s chart reflects the choppiness of the NASDAQ Composite Index since February, but as an individual stock, it is not the type of action you want to see in a well-formed base formation. As well, the upside volume on this move off the 310 lows, roughly, has not see any sharply expanding volume relative to the downside volume on the left side of the “V” that acts as the counterpart to the past 2½ weeks of upside action on the right side.

Apple, Inc. (AAPL) Gilmo Report Chart

Rackspace Hosting, Inc. (RAX) broke out of an eight-week double-bottom base today on volume that was 72% above-average, one of the better-looking breakouts I’ve seen this week. RAX is another stock that has come straight up off its lows of mid-June, but in the context of a double-bottom formation this is a bit more legitimate. This is easy to buy given that the stock is only 83 cents past the 44.71 buy point at the peak of the mid-point in the “W” pattern. RAX is is one of several cloud-computing names that have raced to new highs, including VMW, which I discussed in my GoView.com month-end video review over the weekend, CRM, and TIBX, for example, and I’ve been asked whether this manic buying in cloud names has anything to do with the new cloud-computing ETF that was launched today, the First Trust ISE Cloud-Computing Index Fund (SKYY). RAX is one of the funds 40 primary holdings, as are CRM, VMW, NFLX, AMZN, TIBX, etc. (the full list of the fund’s holdings can be found at: http://seekingalpha.com/article/278267-new-cloud-computing-etf-tracks-40-cloud-companies) and when one looks at the V-shaped moves in these stocks, it is possible that the buying in these names is due to the launch of this ETF. Thus avoid stocks showing such v-shaped moves!

Rackspace Hosting, Inc. (RAX) Gilmo Report Chart

In my GoView.com month-end video review of this past weekend I mentioned the action in all the coffee stocks, including Coffee Holdings, Inc. (JVA), which had flashed a pocket pivot buy point within an ascending flag type of formation right off the 10-day moving average last Friday. This was actually buyable on Tuesday morning, resulting in a move of about 20% on an intra-day basis up to 21.23, as we see on the daily chart below. JVA does 47% of their business supplying Green Mountain Coffee Roasters (GMCR) with coffee beans, and the company posted strong 47% earnings growth in the most recent quarter with sales growth of 87%. After-tax quarterly margins are rather slim at 3.2%, but the stock’s move on Tuesday wasn’t. I would expect that the stock should try and form a base from here, and for now the only point of support underneath the stock that I see remains the 10-day moving average. Bottom line is that this is a micro-cap stock on a tear, and some of these can blow up after running up as sharply as this one has. Consider selling ½ the position and banking profits on this sharp run up over 20.

Coffee Holdings, Inc. (JVA) Gilmo Report Chart

This is a short holiday week, so my comments in my report of this past weekend as well as in my month-end video review, which can be accessed here: http://goview.com/?id=51d8ae53-c2ca-4fd0-a1b5-0bb73e0a4b36, are all still relevant. Some comments on gold and silver are in order here, however, given the strong move that the precious metals have had so far this week, mostly on what I see as more fears emanating out of Europe in the form of another downgrade of Portugal to “junk” status. While many like to try and bottom-fish the metals, my approach here would be to focus on any potential breakout in the GLD at the 151-152 level, as I’ve drawn on the daily chart below. Silver’s associated “breakout” level would probably be around 38, so I would watch for a similar move in SLV that occurs in tandem with the GLD breaking out at the same time. In essence, wait for a breakout through the top of this current consolidation in the GLD, since previous sustained uptrends in gold and silver have usually been marked by a clean breakout through an established consolidation or base. Ultimately, patience will be rewarded when it comes to playing the GLD and the SLV.

GLD Gilmo Report Chart

The market remains somewhat unusual, particularly when we consider that last week’s move in the major market indexes was the biggest one-week run since the week that ended on July 17, 2009. With the major market indexes and many stocks sticking straight up off their bottoms as they have run up along with the general market, frankly I’d like to see how the market handles a pullback to the 50-day moving average here. But the market doesn’t generally do what I want it to! J Stick to those stocks at proper buy points, keep positions and risk within reasonable levels, and let the market prove itself out as you try to make some semblance of sense out of the rapid run-up we’ve seen since mid-June. Stay tuned.

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 no positions, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.