The Gilmo Report

June 20, 2012

June 20, 2012


The market reacted to the Fed’s policy announcement today with what the pundits described as “disappointment” by tanking immediately and then slopping around all day before closing constructively, as the daily chart of the NASDAQ Composite Index shows below. The primary complaint was that the Fed didn’t announce that it was doing anything or enough to “help the economy.” In my view, the Fed, just like the market, knows that the Fed is pushing on a string when it comes to QE as economic stimulus. But I don’t think QE is the driver of the market’s recent action. Gold got smacked around a little bit today but is still holding above the 1600 level as Fed Chief Bernanke reminded reporters at his press conference that there remain plenty of liquidity tricks up the Fed’s sleeve for certain.
But with all this liquidity already in the system, companies, which unlike governments have taken steps to deleverage and pare down costs, are quite lean and mean so that a change in U.S. economic policy could provide an inflection point that leads to a continued market rally – a “Romney Rally” that is not unlike the “Reagan Rally” of April to November 1980, as I discussed in my report of June 10th. And so with no explicit QE3 announcement from the Fed, the market ignored the news and held tight on uneventfully low volume levels.

NASDAQ Gilmo Report Stock Chart

As I wrote over the weekend, I don’t think one has to go much beyond the initial group of stocks I’ve discussed in recent reports as long ideas. Apple (AAPL), which in a sense almost serves like a NASDAQ Index ETF of sorts, remains in the midst of a possible second-stage base, but continues to act constructively. So far this week the stock has managed to push back above its 50-day moving average despite failing to produce enough volume for a bona fide pocket pivot buy point. That may be coming, but only time will tell for sure. Whenever I see the market start to sell off, as I did today, I keep one eye on AAPL as the market barometer stock that it is, and as long as it continues to hold its 50-day moving average my tendency is to remain constructive on the market. The way that the market and big-stock leaders like AAPL were able to remain resilient in the face of a so-called Fed “disappointment” and a sell-the-news trading session provides some evidence that it is not QE the market is looking for here. In my opinion, it is the potential for an improving tone on governmental economic policy that a new administration could usher in. And with the Fed clearly signaling that it is ready to provide a backstop with more liquidity if necessary, the market found its feet intra-day.

Apple (AAPL) Gilmo Report Stock Chart

I got to play talking head today on Fox Business News and took a short “victory lap” on my Facebook (FB) bottom-fishing call of last Monday, which really wasn’t a bottom-fishing call so much as it was an invocation of historical precedent with eBay (EBAY) from October 1998 as my precedent, as I discussed in my report of June 6th. Over the weekend I pointed out the pocket pivot type move that I considered buyable, and so far this week the stock is back up to the 32 level. FB is finding a pinch of resistance around the 32-33 level from the left side of the nicely rounded cup pattern it has now formed, and so today spent its time holding very tight sideways with volume drying up, as the daily chart below shows. So far this is highly constructive action, in my view, and I continue to believe that if this market rally can continue, social-networking names with Facebook (FB) as one of the main “go-to” stocks in the space, then the group should come on strongly. So far there is no evidence to suggest otherwise. Friday’s buyable pocket pivot move, as I saw it, was buyable Monday morning, but at this point we are simply sitting and waiting for the next buy signal in the stock. For now FB remains a hold.

Facebook (FB) Gilmo Report Stock Chart

LinkedIn (LNKD) provides some additional confirmation of strength in the social-networking group as it began rallying in earnest with FB off of its recent market correction lows, as we see in its daily chart below. Today LNKD gapped down to its 50-day moving average at 102.80 but sellers failed to materialize and the stock drifted back up to close down a mere seven cents. Thus we can conclude that LNKD’s action as it holds above the 50-day moving average is constructive, and it may be setting up for another run at the recent highs in the 115 price area. My view is that the stock can be bought small here, depending on how you define “small” based on your own risk preferences, with the idea that it should hold the 50-day moving average. One could use also use the 10-day line at 99.07 as a selling guide if one wanted to give it a little more room on the downside. This week’s action builds on the constructive action I discussed in my weekend report of June 17th. LNKD’s coincident move with FB off of last week’s lows implies that institutions are buying both stocks as they take what I see as “must-have” weightings in social-networking.

LinkedIn (LNKD) Gilmo Report Stock Chart

Mellanox Technologies (MLNX) continues to act powerfully, flashing a big buyable gap-up move as it cleared to new highs on Monday, as we see on its daily chart below. Monday’s move was also a clean breakout into new high price ground, so in my view the stock can be bought on the basis of that and the buyable gap-up on Monday. The stock did see some volume selling today, but since it is nearly straight up from the 60 price level where the first buyable gap-up in the pattern occurred, it is entitled to a little bit of a pullback. Notice, however, that MLNX came up off the lows and held the intra-day low of Monday’s gap-up day at 68.29. For now I would look for the stock to hold that level, give or take a couple of percent given that it trades a relatively light 649,000 shares a day and thus tends to be more volatile. MLNX is my primary and favorite long in what I refer to as the “new cloud” group of names that have emerged in the wake of the cloud leaders from 2010-2011, but which now languish, such as RAX, VMW, FFIV, CRM, etc.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Equinix (EQIX) got hit with some selling volume yesterday, although it wasn’t clear to me what the issue was exactly, unless it was the company’s investor conference held today that got investors scared and selling the stock out yesterday. The move took the stock right down to the top of its prior base and breakout point through the 170 price area, as we can see on its daily chart below. A one-day sell-off on news is generally not a reason to unload a stock, particularly if it can hold the breakout level, which it did both yesterday and today. In fact, the stock picked up above-average volume support off the lows of the day and pushed back into positive territory on the day before closing just above mid-range. In my view this is still fine and potentially buyable as long as it can hold the top of the prior base and the 170 level, roughly. I favor MLNX as a “new cloud” play, but EQIX is acting consistently with its character which is to be a bit on the volatile side. When it corrects it tends to do so rather sharply, but despite all the gyrations the stock remains 3% off of Monday’s all-time high. It is technically buyable here using the 170 price level or 6-7% on the downside as your stop.

Equinix (EQIX) Gilmo Report Stock Chart

Don’t look now but Chipotle Mexican Grill (CMG), a long-time “big-stock” market leader in this market, flashed a pocket pivot buy point on Monday, as we can just barely discern on the daily chart below. While volume four days ago spiked to above-average, it was Monday’s volume and price move that qualifies as a pocket pivot move as volume was just enough to be higher than any down-volume day in the pattern over the prior ten days. Like several other big-stock leaders such as PCLN, ISRG, AMZN, and AAPL, CMG is trying to round out and come up the right side of what is so far a 10-week base that has the look of a shallow, tight-bottomed, saucer on a weekly chart, which I don’t show here. CMG managed to close up on the day today as volume picked up just slightly and the stock held well above its 50-day moving average. CMG represents another big-stock leader that is acting well as it base-builds which I consider a positive development for the market currently.

Chipotle Mexican Grill (CMG) Gilmo Report Stock Chart

Below are some notes from my personal trading diary regarding long ideas discussed in all reports over the past month:

Cerner (CERN) – stock broke out on Monday and today pulled right back to the top of its prior base. This is potentially buyable on this pullback, using a standard 6-7% downside stop. Today’s action, however, would appear to indicate that the stock is not the strongest situation in the market currently.

Monster Beverage (MNST) – stock has continued to act well and imperviously to the general market action over the past month, which of course makes the stock vulnerable to some value-oriented analysts’ downgrade, which the stock got whacked with yesterday. However, it has still not violated the 10-day moving average, so if one is long this stock there is as of yet no sell signal, although I would tend to want to use the 20-day moving average as my own selling guide for the stock if I were long MNST, which I am not.

Nationstar Mortgage Holdings (NSM) – was first discussed over the weekend in the June 17th report, and in a little v-shaped formation on its daily chart. The stock is holding at its 10-day moving average after dropping below it last week, so I would keep an eye out for a pocket pivot type of move off the 10-day line on volume that exceeds 2,026,570 shares, the highest down-volume in the pattern over the prior 10 days.

Questcor Pharmaceuticals (QCOR) – extended from its recent breakout through the 47 price level, roughly, so would look to buy under 50 or better on a constructive pullback.

SXC Health Solutions (SXCI) – Stock tried to clear to new highs yesterday but reversed on heavy volume. Today it found support at the top of its prior range at the 94-95 price level. Should try and hold the 10-day line at 94.62, which it did more than a good job of today. The stock is in potentially buyable range here, using a 6-7% maximum downside stop. Group (WWWW) – way extended now. Stock did flash a continuation pocket pivot buy point as it came up off the 10-day moving average on Monday. This has held up very well and today closed up 4 cents despite an uneven market day.

The bottom line for me is that I consider Friday’s action to be a marginal follow-through, and so the long side is where I choose to take action as the short side goes into hibernation, as I discussed over the weekend. That decision has been met with reinforcement as my long positions have moved higher over the past several days. Thus the trend is your friend until proven otherwise, and for now the trend remains up. One does not have to be in deep here, but long positions are working, more stock are coming into buyable positions as leadership expands, and big stocks are acting well as they base-build – for now that is all I need to know.

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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.