The Gilmo Report

June 24, 2012

June 24, 2012


The market got spooked nicely on Thursday after an utterly ugly Philly Fed Index came out at -16.6 and existing home sales slipped 1.5% showing that the hoped-for “recovery” in housing remains a statistically contrived pipe dream. But we already know that things are bad and getting worse as the global economy is more than flat on its back, it is tilting over backwards like someone on a Teeter® inversion table. But economic data is a lagging indicator for stocks, and with the indexes climbing back above their 50-day moving averages, as we see in the example of the NASDAQ Composite Index’s daily chart below, a nice hairy pullback that looks like a failure at the 50-day moving average might be a short-term fake out, just as the breach of the 200-day moving average at the outset of June was seen as the market’s certain death-knell. In this market, it seems that one must be cognizant as to what is obvious to the crowd. What is obvious to the crowd, as I see it, is that a higher-volume failure at the 50-day moving average is trouble for the market, but to me there is more than meets the eye here. I’ve gone and placed a green 150-day exponential moving average on the chart, actually a commonly-used moving average, and we might notice that while it provided upside resistance for the NASDAQ throughout most of May and half of June, it also provided support for the index on Friday as Thursday’s selling pressure abated.

NASDAQ Gilmo Report Stock Chart

As well, while Thursday’s volume did increase compared to Wednesday, it was not huge in context with the other upside volume bars in the NASDAQ chart above. In my view the action this week showed that stock-picking will be critical in making upside progress on the long side, while I remain skeptical of the potential to make significant money on the short side. There still remains the possibility of a “solution” coming out of Europe in the form of a banking union or the issuance of Eurobonds, an announcement of QE3 from the Fed, and a U.S. Supreme Court decision striking down Obamacare as a catalyst for a big upside gap-up or streak. As well, despite the messy action on Thursday, I measure the market by my own ability to make progress, and by week’s end two out of three of my stock positions, stocks that I focused on in my Wednesday report of June 20th, closed at new highs. I did have a small position in Apple (AAPL) earlier in the week that was tossed in favor of putting money into better-acting positions. But notice on the weekly chart of AAPL that on a weekly basis the stock closed at a higher-high within its now-11-week base. As a big-stock barometer, AAPL isn’t displaying the same selling pressure that is seen in the general market indexes. I would still like to see some resolution here in the form of a pocket pivot type of move off the 10-week/50-day moving averages before getting too aggressive on AAPL.

Apple (AAPL) Gilmo Report Stock Chart

Where I have been the most aggressive, and what has remained by far my largest position, is in Facebook (FB), which shrugged off the market’s sell-off on Thursday by closing up .76% on the day as the indexes and other lesser stocks got shellacked. While FB isn’t moving up as fast as eBay (EBAY) did in 1998 (see my detailed discussion of the EBAY precedent in my June 6th report), it is making pretty decent progress up the right side of its “U-Turn” pattern in a difficult general market environment. Last weekend I pointed out the buyable pocket pivot coming up to the 30 price level, and on Friday FB issued another pocket pivot as it broke out of this nicely-rounded little cup formation on very strong volume. While FB did pick up about 10 million shares in the last 5-10 minutes of trading on Friday due to Russell Index rebalancing, it still was trading more than enough volume early in the day to qualify as a pocket pivot type of breakout. As a group concept, social-networking is quite viable, in my view, and the action in FB and other names in the group confirms this. If one is still building a position in FB on the basis of my discussions since June 6th, I think a little can potentially be added here with the idea that the 10-day moving line will catch up to meet the stock and provide a reference for support on the downside, otherwise I want to see the stock hold the 32 price level on any pullback.

Facebook (FB) Gilmo Report Stock Chart

LinkedIn (LNKD), which cleared its 50-day moving average on Monday of this past week, as I discussed in my Wednesday report, did not come under any selling pressure on Thursday as it dipped just a hair below the 50-day line, as we see in its daily chart below. On Friday it quickly regained the 50-day line and moved sharply higher, issuing a pocket pivot buy signal off the 50-day moving average. LNKD did benefit from a burst of about 1.3 million shares going into Friday’s close as a result of Russell Index rebalancing. But even if we eliminate that into our volume tally the stock still traded enough volume to qualify as a pocket pivot buy point. LNKD confirms the strength in social-networking, and as I’ve indicated in recent reports, institutional investors will have to have a weighting in the group. Thus FB and LNKD become the big-stock social-networking “go-to” names in this regard. And as stocks that closed at higher highs this week despite a nice market index “failure” at the 50-day moving average, they are displaying contrarian strength. This is telling investors these are the stocks to be in if the market rally is able to hold and continue higher. This pocket pivot in LNKD is potentially buyable, using a violation of the 50-day line as your selling guide.

LinkedIn (LNKD) Gilmo Report Stock Chart

Mellanox Technologies (MLNX) remains my favorite “new cloud” stock play, and it was showing constructive action long before last Friday’s minor follow-through. Since then the stock streaked some 25% from where we first picked up the stock as it pocket-pivoted up through the 60 price level. As a smaller stock trading about 670,000 shares a day, MLNX can be expected to be a bit more volatile, and this week’s action struck me as typical for a “hot little goodie” like MLNX. MLNX did not benefit from any late-session burst of Russell Index rebalancing buying, but still traded volume that was more than twice average as it found support at the 20-day moving average for a reversal type of pocket pivot buy point. This is a potentially buyable move here, with the idea that the stock will continue to hold the 20-day line on the downside. This is a strong name with strong forward potential given that Intel has chosen the company’s ConnectX-3 FDR InfiniBand adapted for use in its server products, and the big blue volume spikes in the daily chart below speak of institutional buying at these levels. If the market doesn’t hold up, I would look for MLNX to perhaps build a base-on-base formation, but right here this move is potentially buyable.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Equinix (EQIX) is another “new cloud” type of name that has acted well, albeit in volatile fashion. Personally, I prefer MLNX to EQIX, but I get a lot of questions about the stock given its tendency to swing wide. On the daily chart it appears that EQIX saw a lot of movement as a result of its investors’ conference on Wednesday, and the one constructive thing I see on the chart is the fact that selling pressure has settled down as volume dried up on Thursday and Friday. EQIX so far has been able to hold its 20-day moving average while also not technically violating its 10-day moving average, so net-net it is still acting okay given its character. On balance, all the stock is doing right now is holding the top of its prior six-week base at the 165-170 area. This strikes me as a low-risk pullback to buy into, with the idea that the stock will hold, at the very least, the 50-day moving average at around 161, about 3% below Friday’s close. EQIX benefits from a weak global economy as companies seek to cut costs by outsourcing their expanding data center needs, so the story seems viable, but given the stock’s volatile tendencies I would prefer to purchase shares on constructive pullbacks such as we see here currently.

Equinix (EQIX) Gilmo Report Stock Chart

Below are some notes from my personal trading dairy regarding long ideas discussed in recent reports, some of which are actionable here:

Cerner (CERN) – the stock is acting squirrely here, most likely due to the pending Supreme Court decision on Obamacare expected this coming week. I would avoid the name for now given the uneven action and the potential for news-related volatility.

Chipotle Mexican Grill (CMG) – after last week’s pocket pivot move up through the 50-day moving average, the stock continues to hold the 50-day moving average and is potentially buyable along the 50-day line with the idea that it will not violate the moving average.

Monster Beverage (MNST) – the stock violated its 10-day moving average this past week, so it should be sold and monitored for a possible new base to form.

Nationstar Mortgage Holdings (NSM) – this is not in a typical “three weeks tight” pattern given the wide weekly ranges – a 3WT should show relatively narrow weekly ranges that confirm the tightness of the pattern. However, we can dispense with the need to apply labels and simply operate on the idea that a pocket pivot buy point here off the 10-day moving average would be a potentially valid entry point for the stock. Friday’s action and strong volume, which technically qualifies as a pocket pivot buy point, was probably caused by Russell Index rebalancing. But if one is adventurous, one could potentially take a position here with the idea that the stock will not violate the 10-day line.

Questcor Pharmaceuticals (QCOR) – extended from its recent breakout through the 47 price level as it continues to move higher. On the weekly chart, QCOR has closed near the peak of the weekly range 3 weeks in a row, so it is exhibiting clear strength in an otherwise choppy market environment. I continue to look at any pullback under the 50 price level as potentially buyable.

SXC Health Solutions (SXCI) – this one acts a lot like CERN, but with the high-volume reversal off the peak above the $100 price level, I am not interested in purchasing shares of SXCI. In my view there are better names in the medical/bio-tech area to look at, such as QCOR. Group (WWWW) – the stock benefitted from Russell Index rebalancing on Friday to flash a pocket pivot buy point off the 10-day moving average, but it had already flashed a pocket pivot buy point off the 10-day line on Monday. In my view, it remains in buyable range if one were looking to add to a position initiated at lower levels in the 16-17 price area.

Friday’s action on the NASDAQ looks like high-volume support off the 150-day exponential moving average, as we saw in the NASDAQ Composite Index chart at the beginning of this report, but I would note that follow-up selling to an ugly Thursday did not really materialize on Friday as the market held the top of its prior trading range from June 6th to the 15th. I note, however, that the NASDAQ advance-decline line continues to make higher highs and higher lows, so breadth still remains relatively constructive. On the other hand, I don’t see the short side as something to jump in on here given the potential for positive news that could send the market gapping up your you-know-what if you choose to get bearish here. It is simply a matter of watching your stocks, and given that two out of three of my positions this week closed at higher-highs, I have to stick to watching my stocks and letting them tell me what to do without getting caught up in the noisy, uneven, news-oriented action of the general market indexes.

In this market environment it is all about stock-picking, and I believe I have focused on some of the best names currently, even thinking outside of the box to some extent with my FB call, which I hope has been of some assistance to Gilmo members, even if it was only to keep those wanting to short FB at the lows from getting their heads ripped off. In the meantime, my stocks will be the guides for any action taken as we move forward from Thursday’s “bearish breach and failure” of the 50-day moving average, and I believe this is the soundest approach to the market currently. Stay tuned.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC


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