The Gilmo Report

June 2, 2013

June 2, 2013

For a brief moment it appeared as if the market would return to business as usual by shrugging off another ugly break off the peak and moving back to higher highs, as has been the case throughout 2013. On Friday the market looked as if it were on the verge of another new high before the early morning rally gave way and began to deteriorate, slowly at first, but with a full-blown rush for the exits right into the closing bell. The sell-off was provided a ready alibi by alleged MSCI Index rebalancing, as money managers supposedly waited too long to unload holdings because they wanted to remain as invested as possible right up to the very end of the merry month of May, so far the best month of the year for the market. I’m not so sure I’m buying this alibi, or any others, including talk that the $15 billion hedge fund complex SAC Capital is getting set to shut down its business and liquidate now that its leader, the venerable “Stevie” Cohen, is under fire in the government’s ongoing insider trading investigation. The critical test for the market will be how well it can hold last week’s lows. The NASDAQ Composite, shown below, has not yet broken below its 3422 low of last week, but that may be something in the cards for this coming week.




The S&P 500 Index is leading the downside action, however, as it did in fact make a lower low on very heavy selling volume Friday, as we see in its daily chart below. Unless this undercut of last week’s lows results in an “undercut & rally” type of move that sees the index recover, the SPX is looking at a clear change of trend. But as I wrote in my mid-week report of this past Wednesday, the market was not entirely out of the woods following the prior week’s nasty outside reversal day off the peak after the Fed policy announcement of that day. Some leading stocks have been trying to hold the line, and there were some notable moves in individual stocks on Friday. However, the overall tone of the market’s price/volume action argues for further downside from here, and it may turn out that market pundits will have to revise their tired aphorism, “Sell in May and go away” to “Sell in June before it swoons.” Rising interest rates, diving commodities, and a month-long sell-off in bonds may be signaling a tidal shift as continued weak economic data does less to assure investors that QE will indeed remain QEternity than it does to prove that QE as an economic stimulant just doesn’t work. At some point, the market may begin to realize that the emperor indeed has no clothes, and that may be what sparks a move for the exits.




As the market made a run towards its highs on Thursday, two of the stocks I discussed in my Wednesday report based on their potential for further upside, Pharmacyclics (PCYC) and Three D Systems (DDD), both moved higher with PCYC flashing another pocket pivot buy point on Thursday.




DDD came through with a pocket pivot buy point on Thursday, and this was something I was looking for per my Wednesday report. The stock reversed on Friday, however, to give back most of its Thursday gains. DDD is a volatile stock by nature, but it should at least hold the 20-day moving average just above 46 to remain viable, in my view.





Splunk (SPLK) endured a sharp pullback after announcing earnings Thursday after the close, recovering from a gap-down move on Friday to close up on the day and actually log a pocket pivot buy point along its 10-day moving average. If the general market gets into further trouble this week it will be interesting to see if SPLK can hold above the 10-day line on any pullback.




The doughnut sector sprung to life on the back of Krispy Kreme Doughnuts (KKD) and its huge-volume buyable gap-up move on Friday after it handily beat earnings estimates. If one was on top of this early in the day on Friday it could have been bought, but is somewhat extended at this point.





Michael Kors Holdings (KORS), which broke out on Wednesday in what would normally be considered a very buyable price move, skidded back down towards its breakout point. Watch out for a base failure to occur here if this cannot hold the 10-day moving average on a pullback. If the market is able to shrug off current weakness, some of these stocks exhibiting strength over recent days might become buyable on pullbacks, but that remains to be seen.




Tesla Motors (TSLA) continues to pull back, but as I wrote in my Wednesday report, the juice is out of this one and it needs to pull back and go through a base-building process if it is to remain viable over the longer-term. At this point only a big pocket pivot move off the 10-day line would get me active in TSLA on the long side again.




I wrote in my Wednesday report that I would be looking to short LinkedIn (LNKD) into a rally that carried up towards the 170-171 resistance level, and the stock was able to move right into that zone on Friday where it became shortable again. If LNKD breaks through the 164-165 low my next downside price target is around the 148-150 level.




Apple (AAPL) has continued to edge up, albeit on light buying volume. Two of the past four days, however, have seen higher down volume vs. up volume as AAPL has pushed to higher highs here. I would still be looking for a breach of the 50-day moving average as confirmation of a potential new down leg in the stock. If the market continues to weaken, it may even be possible to short the stock here, using Friday’s high at 457.10 as a quick upside stop.




I wrote last weekend that I would be looking for a rally up to the 25 price level and the 200-day moving average in Facebook (FB) to short into, and that occurred on Friday. FB ran out of gas right at the line, which is your upside stop with a downside target of 19-20.


GR060213-FB (CRM) has now turned into a late-stage, failed-base type of short-sale set-up following its failed breakout. CRM was briefly playable on the long side, after its “bottom-fishing” pocket pivot in early May, but once the cup breakout failed and blew through the 50-day line, it morphed into a short-sale target. CRM is potentially shortable near the 50-day moving average, and it is within range here using the line as your upside guide for a stop. After a previous bounce off the 200-day line, we might look for a breach of the line to set up a move down to the prior low of 39.75.




In this report I’ve shown a few of the strong long-side ideas I’ve discussed in previous reports, but only because I want to remain open to the possibility of buying some of these stocks on pullbacks if the market is once again able to stabilize and recover as it has previously in 2013. However, the index action over the past two weeks strikes me as qualitatively and quantitatively different from prior breaks off the peak in 2013, and so while I don’t want to take on a rigidly bullish or bearish point of view, I am certainly more open to the short side of this market as I see situations develop. FB set up very nicely as a short-sale target on Friday’s rally into its 200-day moving average while LNKD pushed right into the 170-171 short-sale target zone I outlined in Wednesday’s report. AAPL has benefitted in the short term from supposedly positive product news as it hints at the development of “wearables,” but my longer-term view of AAPL is that it will eventually move back below the $400 price level. At this point it is simply a matter of waiting and watching for the proper short-sale point to develop. Meanwhile, while we have seen stocks like KORS and DDD, for example, act strongly lately, I remain open to any of these situations morphing into late-stage failed-base set-ups should the market get into a deeper correction than we’ve seen so far in 2013. In my view, this is a time for caution, and Friday’s action must be taken for what it is – a second, high-volume negative reversal day within the past eight trading days that could be signaling a change of trend for the market. Stay tuned.


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 LNKD, though positions are subject to change at any time and without notice.


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