The Gilmo Report

June 27, 2012

June 27, 2012


There are some who believe the market is now back in a correction after spending a few glorious days in a “confirmed uptrend,” and they certainly can’t be faulted for making such an observation given the action of the general market indexes. As we see on the NASDAQ Composite Index daily chart, below, the index did gap down and break support at around the 2885 level on Monday, but in my view there were two things at work that kept me from getting too bearish too quickly, and they were a) the action of my own stocks, which continued to move higher or hold up well in the face of a broad market decline, and b) the fact that Monday’s sell-off occurred on relatively light volume. The Monday ugliness of course got the crowd leaning the wrong way, and the past two days have seen the index rally off of Monday’s lows with volume picking up each day. The big news that allegedly has the potential to move the markets in a big way is tomorrow’s Supreme Court decision on what is pejoratively and popularly known as “Obamacare,” and the “Euro-summit” announcement, whatever that is. Investors could have been expected to be somewhat cautious in today’s trading based on these looming market-moving news events, but the indexes held well up in positive ground on the day. In my view, it will take a severe news event to knock the market down from here, but for now I’ll focus on the action of individual stocks I’m trafficking in.

NASDAQ Gilmo Report Stock Chart (AMZN) is taking its time about building a cup-with-handle formation, and despite the fact that so many consider the stock to be wildly overvalued it doesn’t seem to come under much selling pressure these days. In fact, the balance of buying and volume tipped slightly in favor of the bulls yesterday when the stock flashed a pocket pivot buy point within the handle of this cup-with-handle type of formation it is currently working on, as we see on the daily chart below. As a big-stock NASDAQ name, AMZN’s action is constructive for the market as a whole, in my view, as is the action in other big-stock NASDAQ names like Intuitive Surgical (ISRG) and (PCLN), which just look to me like they want to go about building bases here. Apple (AAPL) also looks to be doing the same thing and these shakes below and above its 50-day moving average may likely just be part of the base-building process. As well, AAPL still remains an obvious market name that everyone owns, so it may need to spend more time base-building as it underperforms some of the better, relatively smaller new leaders that have emerged in recent weeks. (AMZN) Gilmo Report Stock Chart

I’ve been watching Coinstar (CSTR) as it has acted constructively lately in the midst of the general market mayhem. Despite being a favorite target of short-sellers who, at last count, were short about 8.7 million CSTR shares against a float of 30 million shares, it managed to log a pocket pivot buy point yesterday, and today followed that up with another pocket pivot as it broke out of its short handle, as we see on the daily chart below. Fundamentally CSTR logged a 202% earnings increase in the most recent quarter as both earnings and sales growth are starting to reaccelerate. With their recent roll-out of Rubi, a kiosk-based system for selling Seattle’s Best Coffee, and the potential of broad expansion with this new direct-to-retail kiosk-based type of system, I think the stock has some serious potential going forward in a market rally phase. Certainly, the technical action of the stock off the June lows is indicative of this, and CSTR might be on to something with their kiosk concept. I would suggest reading the following article on the company, which does a quite reasonable job of laying out their potential areas of expansion: I think the stock is a buy right here, using a standard 6-7% downside stop, on the basis of two pocket pivots in a row off the 10-day moving average. If the market gets into trouble, of course, the stock may likely continue moving sideways, but this is enough evidence here to get me interested.

Coinstar (CSTR) Gilmo Report Stock Chart

Facebook (FB) continues to act fine as it lets its 10-day moving average catch up to it while it works off a little overhead resistance in the 32-33 price area, which looks “logical” on the daily chart below. Today the 40-day restriction on research recommendations from its underwriters was lifted, leading to a slew of new ratings on the stock, only one of which was a “sell,” as the rest fell into the various shades of buy and hold that characterize analyst double-speak. Allegedly, at the start of the trading day, the word was that investors were “disappointed” with the analysts’ “lukewarm” ratings. But of course we all must have a good chuckle since history indicates analysts are not the most accurate when it comes to “rating” stocks, and their language is couched in the “CYA” lingo of due diligence that is the foundation of Modern Portfolio Theory as it is practiced in the institutional investment realm. In the objective world of price and volume the stock is entitled to take a break after running up 31% from its 25.52 low of nearly a month ago. This gives the stock time to let its 10-day moving average catch up as we see in the daily chart below, setting up the possibility of another buy point in the stock if it can post a pocket pivot type of move off of the 10-day line. Simple enough, because other than that I still consider FB to be little more than a hold as I wait for the next high-probability buy point to emerge. Watch for a pocket pivot off the 10-day line from here as the moving average catches up to the stock as a new buy point.

Facebook (FB) Gilmo Report Stock Chart

As I’ve discussed in recent reports, I believe social-networking and social-media will be one area where institutional investors will have no choice but to have at least some weighting in, and the “go-to” names are FB and LinkedIn (LNKD), shown below on a daily chart. LNKD continues to move along its 50-day moving average after Friday’s pocket pivot buy point off the 50-day moving average. Remember that while LNKD did benefit from some late-day buying as a result of Russell Index rebalancing, the stock was already trading enough volume early in the day to qualify as a pocket pivot buy point. While its validity remains to be fully proven, it is still holding along the 50-day moving average and today “met up” with the 10-day moving average at the intra-day lows as the 10-day line moves up through the 50-day. Where this goes from here is going to be a function of whether the market can snap out of this current “correction,” but so far only a clear break of the 50-day moving average would be a selling signal. LNKD is another example, however, of how if I’m watching my stocks here then there is so far nothing to act on as I see it. What I would like to see as something to act on would be the stock clearing through the 107-108 level on the upside on strong volume, so that is something to watch for.

LinkedIn (LNKD Gilmo Report Stock Chart

Mellanox Technologies (MLNX) rode several new product announcements as well as a major endorsement from Intel (INTC) as it streaked to new highs last week, but this week the stock is spending a little time consolidating those prior gains as it moves along its 10-day moving average. In my view the story remains sounds here, and as one of the first stocks to push to new highs after the early June lows were put in, it is a first-mover type of leader in this otherwise indecisive market. It is also somewhat volatile given that it trades about 713,000 shares a day, but the good news is that MLNX is slowly showing increased average daily trading volume from 441,000 eight weeks ago to 713,000 today. That is constructive as it may be a clue that the stock is starting to “mature” as institutional investors take notice of the stock. Steady increases in average daily trading volume are one sign of this. MLNX has managed to hold above the new-high breakout point at 67.20, as I’ve highlighted on the chart, and volume is drying up here as it settles back and digests the strong gains since early June. This is actually buyable here with the idea that it should continue to hold the breakout, give or take 2-3%, in my view.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Some notes from my trading diary regarding recent names discussed in the reports as long ideas:

Cerner (CERN) – see my comments over the weekend in the June 24th report. Better avoided for now, was my conclusion.

Chipotle Mexican Grill (CMG) – broke its 50-day moving average on volume today, which is a sell signal.

Monster Beverage (MNST) – the stock violated its 10-day moving average this last week, as I indicated in my June 24th report over the weekend so it should have been sold as discussed.

Nationstar Mortgage Holdings (NSM) – today’s upside move on above-average volume could be considered a breakout from a three-week flag formation, validating Friday’s action as a pocket pivot buy point off the 10-day moving average, as we can see on the daily chart below:


Questcor Pharmaceuticals (QCOR) – remains extended, but would see any dip below the 50 level as potentially buyable depending on the circumstances under which it occurs. .

SXC Health Solutions (SXCI) – as with CERN, this one is probably best avoided for now per my discussion in the June 24th weekend report. Group (WWWW) – the stock is extended and pulling back towards its 10-day moving average on light volume with nothing actionable unless a constructive pullback to the 17 price area occurred.

General wisdom dictates that one should not buy stocks while the market is in a “correction,” but I would argue that buying tools such as pocket pivots give one the ability to begin building positions early, before a possible market turn. Thus when I tend to think that the downside is getting a bit too obvious here with all the negative news flow, one can be bold and take measured positions, based on one’s own risk-tolerance, in stocks that have strong fundamental themes and which are showing constructive pocket pivots within a constructive base, such as CSTR this week and MLNX earlier in June, for example. Since I don’t see where one makes any significant progress on the short side, and few proper short-sale set-ups are to be found currently, I’m more inclined to think that this current market “correction” resolves to the upside. I could be wrong and maybe the market sells off sharply from here, but that seems too easy a call to make, and thus one of the reasons I am skeptical of the short side currently. The long side may not pan out, which is fine, but first I need to see my stocks tell me to sell before I act.

The market could continue to move sideways here as a third alternative, but I would be looking for an Obama loss in the November election as a strong catalyst for a market rally if and as the market senses the pending removal of this administration. Call it a Romney Rally, or call it whatever you like, but I think that once this correction is over we could see a rally on this basis beginning sometime between now and November, similar to the Reagan Rally of 1980 (see my June 10th report) and mostly right now I want to stay open to that possibility. If I see some decent short-sale set-ups show up in my screens, and the general market weakens substantially, I am ready to move with the market if necessary. But right now I see no compelling evidence to move to the short side of this market despite the fact that it is in a “correction.” With big news coming out tomorrow, I suppose anything can happen, but what exactly will happen is anybody’s guess.

If Obamacare is overturned, the market may rally sharply, and if it is not, then the status quo remains and it is up to the November elections to decide the fate of the “bill that nobody read” in the legislative process, so it is not clear that the market would sell off in this case. Thus the simplest approach is to remain focused on the action of your stocks, and little else. 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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