The Gilmo Report

June 23, 2013

June 23, 2013

The wheels came off the market on Thursday as a steep gap-down and downward slide on Thursday pummeled stocks and took the S&P 500 Index, shown below on a daily chart, well below its 50-day moving average before it was able to find support within the v-shaped cup structure that it built back in April. For the most part, the market has wiped out all of May’s gains and is now in a de facto downtrend. The S&P 500 is leading the way with what is so far a 5% correction, while all of the other major market indexes are down 4%, including the NASDAQ Composite, which is also below its 50-day moving average. The first clue that something was amiss was the low-volume move to a higher high on Tuesday, but Thursday’s break to a lower low puts the market in an ugly-looking state of affairs.




Triple-witching options expiration give the market the impression of big-volume support, but given the severe and sudden breaks in a broad swath of leading stocks, a cautious stance is called for. If one tries to buy into this madness, then tight stops should be implemented. I would also say that Friday’s weak bounce, which still saw the NASDAQ Composite finish down while the S&P 500 closed to the upside, does have some “logic” behind it if we look at the proxy for the Russell 2000, the iShares Russell 2000 ETF (IWM), shown below on a daily chart. The Russell 2000 was able to find support at its prior early-May breakout point at around the 95 price level on the IWM. In my view, we are likely shifting to a more bearish market environment and it is a now a matter of watching how any bounce from here plays out as I believe the short side will now come more into focus.




Meanwhile, bonds continued to get crushed, as the daily chart of the iShares Barclay’s 20-year Treasury ETF (TLT) shows below, with bond investors experiencing far more pain than stockholders.




In my view, one can rationalize about the fact that “QE is here to stay” all they want, because ultimately the action of individual stocks tells you all you need to know. Stocks like Fleetcor Technologies (FLT), which were acting quite orderly earlier in the week, suddenly broke to the downside. FLT found support on Friday at its 50-day moving average, and I suppose one could try and buy such a pullback, but this strikes me as a risky proposition unless the general market is able to re-establish its uptrend.




Three-D Systems (DDD) also held its 50-day moving average as it undercut the lows of its prior sideways range within what is more or less a “high handle” in a cup-with-handle formation. Stocks that closed in the upper part of their price ranges on Friday and which also found support at a logical area like the 50-day strike me as potential “bounce trades” that have to be watched closely.




Something like Stratasys (SSYS), which was actually trying to rally on Thursday on news that it was buying consumer 3-D printer maker MarketBot, looked less constructive on Friday as it closed at the lower end of its daily price range and barely held its 50-day moving average.




LED-lighting maker Cree (CREE), which had broken out on Tuesday on a pocket pivot move, gave up on that breakout attempt but was able to hold the lows of its prior three-weeks-tight formation at around the 60 price level. However, it closed at the lows of its price range on Friday, albeit somewhat above its 50-day moving average. In many ways the current environment has struck me as an “ugly duckling” type of market where just as things look as ugly as they possibly can get, they bounce and turn back to the upside, so I am watching some of these pullbacks in the better stocks as potential opportunistic trades or “scoops.”




The one bright spot amidst all the carnage was Invensense (INVN), which dropped below the 14.05 intra-day low of its buyable gap-up day of last week, but was able to hold its 10-day moving average with a surprising pocket pivot buy point. Some analysts are downplaying the potential for INVN to gain Apple (AAPL) as a customer this year, but the action of the stock remains positive. However, in the face of a continued weak general market I would look for the stock to move sideways as confirmation of its viability, since a weak general market may serve as a headwind for the stock.




Our old friend Splunk (SPLK) also flashed a pocket pivot along its 10-day and 50-day moving averages Friday, perhaps implying a bounce from here should the general market stage some sort of oversold rally this week. Again, I would emphasize that buying into something like this in anticipation of an oversold market rally requires the use of tight stops.




I found it quite interesting that Angie’s List (ANGI), which I first discussed in my report of June 9th after it flashed an initial pocket pivot coming up off the lows of its base and the 10-day moving average, flashed another one on Thursday in the face of the massive market sell-off. It remains above its 10-day line and in fact made a new all-time closing high on Friday.




In the face of a severely weak general market, Tesla Motors (TSLA) is also pulling back here, but continues to find support at its 20-day exponential moving average. TSLA has in fact never violated its 10-day moving average since breaking out on March 29th.  This is useful to know in the event that the stock does violate the 10-day line over the coming days, as this likely would indicate that it needs more time to build a new base. If that doesn’t happen, I’m continuing to watch for a potential pocket pivot coming up through the 10-day moving average from here.




After two pocket pivots around its 50-day moving average, LinkedIn (LNKD) failed as it violated the 50-day line on Friday. Based on this, LNKD is off the table as a buy idea, but it does morph back into a short-sale target. If we see it bounce back up into its 50-day moving average at 177.79 in the event of a general market oversold bounce this coming week, that might make it shortable, in my view, so watch for that.




Among my short-sale ideas, Celgene (CELG) came down to test its early June low down around 111.50. From here I’d short the stock on any rally coming up to the 10-day line at 117.65. In a continued and deeper market correction, I’d look for the stock to eventually move down towards its 200-day moving average, currently down around 97.35.




Lennar Corp. (LEN) blew apart with the rest of the housing sector, which included such luminary leaders as Lumber Liquidators (LL), not shown. LEN undercut a low from way back in November before rallying on Friday, and with earnings coming out this Tuesday this was a logical area to take profits if one was working a short position in the stock. So much for the “housing recovery.”




Facebook (FB) actually flashed a pocket pivot off of its 10-day moving average on Friday, but this comes from a weak position below its 50- and 200-day moving averages. This could imply that the stock will rally further up towards the 200-day line at 25.36 where it might become shortable in a continued market correction. Notice how the 50-day line, the blue moving average, is moving towards the 200-day line in what looks like an impending “black cross.”




As I surmised in my report of this past Wednesday, June 19th, Regeneron Pharmaceuticals (REGN) undercut the prior June low in its pattern and came right down into its short flag formation from the latter half of April. The bio-tech sector, a formerly leading area of the market, remains very weak here and should be avoided, at the very least. If we get into a bear market, however, many of these stocks should offer ripe short-sale set-ups as they begin to break down in wholesale fashion.




Apple (AAPL) continued to move lower on Thursday and Friday, and has now well undercut its prior May low. This could set up a reaction bounce up that could carry as far as the 430 area and which I would view as potentially shortable. If the general market stages some sort of oversold bounce this week, AAPL will likely bounce with it, but as far as I’m concerned such bounces are simply opportunities to short the stock until and unless it can convincingly regain its 50-day moving average.




If anything, this market demonstrates just how quickly things can come unraveled, and just how quickly leading stocks which were acting just fine can suddenly break to the downside, causing profits to dissipate much, much faster on the downside than they were created on the upside. This is the danger of a market that is highly dependent on quantitative easing, and the breakdown this week in everything from stocks to bonds to commodities is evidence of this simple market fact. The breakdown in gold looks bad to me, and I would not be surprised to see the yellow metal test the $1,000 level, the only place where I see significant long-term support.


While huge amounts of liquidity in the system can drive bubble rallies that seem to defy logic, they also create dangerous vacuums underneath the market when the issue of tapering back from QE is raised by Fed heads, as we saw this week. Fed Chief Ben Bernanke, during his press conference on Wednesday, appeared to emphasize that QE was a long way from ending, but the market obviously isn’t buying it. The question also arises as to whether QE is effective in bolstering the economy, and the market may be starting to discount the fact that the Fed, outside of having created a massive asset price bubble, is simply pushing on a string at this point. In my view, the market will discount the end of QE well before it happens, thus we have to pay attention to the price/volume action of the general market and leading stocks. Bottom line, this market stinks. Rapid-fire traders might be able to make some money buying into stocks at logical areas of support, as I outlined in the examples of DDD, FLT, SPLK, etc. further above. This might occur in the event of a big oversold bounce in the market this week, something that investors have become accustomed to in the face of bouts of market weakness so far in 2013.


For trend-followers, this has been a frustrating market, as much of the movement in the market in 2013 has been erratic at times, and even a sharp upside jaunt such as we saw in May eventually goes down in flames so that those who sit too long see their profits dissipate and turn into losses. Even Investor’s Business Daily has gotten whipped around in June as it switches back and forth from “market in uptrend” to “market in correction” within a few days’ time. Frankly, I would like to see a big bad bear market come in here and clean out all the excesses of the past several years of QE manipulation and distortion so that we can once again rely on the normal forces of supply/demand for stocks and other assets. In my view, when interest rates have been artificially kept near 0% for so long, distortions and bubbles develop to the point where there is no way to engineer an “orderly” exit from QE, and this past week provided some evidence of how this may play out. Meanwhile, I’m watching for some sort of oversold bounce to take hold in the markets this week, although I admit the probability of the market simply continuing lower cannot be discounted. Any oversold bounce, however, may provide rallies in broken down names, particularly late-stage base-failure type situations that become shortable into rallies. Perhaps by the time I write my Wednesday report this coming week we’ll have a better handle on this. Stay alert, stay nimble, and 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 no positions, though positions are subject to change at any time and without notice.


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