The Gilmo Report

June 4, 2014

June 4, 2014

The indexes have held tight all week with little movement in either direction. Some might say the market is “waiting” to see how Friday’s jobs number comes out, but from my perspective one can just take the action at face value and focus on individual stocks. The NASDAQ Composite Index, shown below on a daily chart, illustrates the tight action we’ve seen over the past few days, and today the index more or less broke out of its tight five-day range. Volume, however, was lacking, which speaks somewhat to the lack of conviction here either way. With little in the way of sellers the market continues to push higher.




I have to admit, however, that it doesn’t seem like we’re in a roaring bull market when stocks like drugstore chain operator Walgreen Company (WAG) and insurance behemoth MetLife (MET) are where a lot of the action is, as we can see on the daily chart of WAG, below. You’d think WAG had announced they were getting into the medical marijuana business instead of a 4% increase in sales, but that was what drove a sharp 4% move in the stock today.




From my perspective it has been enough to focus on the handful of select names that I like, and all of them are more or less making some progress, although there isn’t much in the way of growth stock “runners” just yet. If the jobs number comes in like Goldilocks’ porridge, e.g., “just right,” maybe some of these names can gather momentum.

Palo Alto Networks (PANW), which remains my top candidate for a tech-related “runner” has held up well for the past four days following last week’s buyable gap-up move, as we can see on the daily chart, below. Volume was up today, albeit below average, as the stock logged what was at least a higher closing high since the BGU of last week. This of course remains buyable as long as it is within 2-3% of the BGU low at 72.86. PANW briefly dipped below that low on Monday, but recovered to close above it. Giving PANW an extra 2-3% on the downside below the BGU low at 72.86 seems to make sense given its somewhat volatile nature. That low also roughly coincides with the mid-point of PANW’s double-bottom base at 72.50. Thus the two buy points/buy signals can be used in tandem.




Cavium (CAVM) took its sweet time about getting going following its own buyable gap-up move of last week, but today pushed up and out of its five-day flag formation on a continuation pocket pivot, as we can see on the daily chart, below. If one bought the stock on the basis of the original BGU, this would be an add point. The stock needed to get going, as the longer a stock takes to move higher following a BGU the higher the chance it will fail. Most of the best BGU’s get going within six days of the gap day, and with today being the sixth day after last week’s BGU, CAVM decided to get up and off of its rear end and generate a nice continuation pocket pivot. CAVM also cleared to a new 52-week high.




News that the U.S. Commerce Department is going after Chinese solar imports sent Sunpower (SPWR) and other U.S. solar names gapping to the upside today, as we can see in the daily chart of SPWR, below. This would qualify as a buyable gap-up using the 33.27 intra-day low of today as your selling guide. Of course, it was far better to use the recent weakness in the stock to coming along the 50-day moving average as the stock pulled back on light volume to start the week. At this point I would look to enter on weakness given that after-hours SPWR has announced an offering of $400 million in senior convertible debt securities and the stock is trading around the 33.65 area as I write.




I bought shares of Facebook (FB) today on the pullback to the 10-day moving average in anticipation of a possible pocket pivot, but volume didn’t come through for me as we can see on the daily chart, below. Nevertheless, FB remains in position for a pocket pivot as it builds a little “handle” of sorts along the 10-day line. This looks fine as the stock simply continues to try and build the right side of a potential new base. If the market is going to go higher, then I would expect that FB, as the single big-stock social-networking name still left standing, would continue higher with it. If one chose to take a position here along the 10-day line in anticipation of a possible pocket pivot that is certainly possible, using either the 10-day, 20-day, or 50-day moving averages as your selling guides.




A lot is being made on financial cable TV about how the retail sector has been taking it on the chin lately, and for the most part this is true, names like WAG notwithstanding. One retailer that has looked to me like it is still setting up in a base is Kate Spade (KATE), shown below on a daily chart. KATE is a retail turnaround story formerly known as Fifth & Pacific. Fifth & Pacific unloaded all of its less profitable brands and stores to focus on their Kate Spade stores, which generate $1,266 per square foot in sales. As the company turns profitable once again, earnings growth will start to register in the triple- and quadruple-digits with annual earnings expected to hit $1.63 by 2017. Sponsorship has been increasing substantially in the stock, with 448 mutual funds owning the stock as of the end of March compared to 401 at the end of December 2013. KATE had a pocket pivot three weeks ago after announcing better-than-expected earnings. The stock has now finished off about three weeks’ worth of a handle in a cup-with-handle formation and acts like it wants to come out the handle soon. I am keeping an eye on this for any possible pocket pivot as the stock sits right on top of its 10-day moving average. The stock has remained above its 50-day moving average as it has built this handle area it is in currently. So if one did take a position here along the 10-day line in anticipation of a pocket pivot, the 50-day line provides a ready selling guide.




Members might have noticed my tweets yesterday on Sanchez Energy (SN) as it pulled back to test its 10-day moving average and the intra-day low of its buyable gap-up move of last week. As we can see on the daily chart, below, SN is a smaller, more dynamic oil name that is similar to two other oil names I’ve discussed previously, Bonanza Creek Energy (BCEI) and Diamondback Energy (FANG). FANG, not shown, is just emerging from a six-week base, while BCEI has moved higher following a buyable gap-up move that occurred at the same time as SN’s BGU a couple of weeks ago. BCEI has been quite extended from the intraday low of its BGU day, which is why I haven’t discussed it, while SN has now tested that BGU low twice. The closer to the 10-day line that I can buy this the better and this is why I tweeted about it yesterday when it was spinning around the 10-day line. Most oil names trade a little sloppily, however, and SN is no exception. But with the growth in the oil & gas industry slated to expand rapidly over the next few years, there is a possibility of one of these having a decent price run. SN hasn’t had a big price run yet, which is why I favor this name currently.




I get asked what I think about JD.Com (JD), which some consider to be the “ of China.” Hype is nice, I suppose, but the reality is that the stock just came public nine days ago, as we can see on the daily chart, and there are no reference points with which to generate any kind of discernible buy point. However, given that the stock has now been trading for nine days, after tomorrow it will have a 10-day moving average. With JD trading tight along the 24-25 price area, the 10-day line will provide a reference for a possible pocket pivot, so that is something to keep an eye on. As with any other IPO, I do not buy these things on the first day of trading as I consider that a fool’s game, preferring instead to give them time to set up and provide me with some reasonable reference points for possible buy signals. With the 10-day line about to appear after tomorrow, we will have what we need to generate our first potential buy point which could only come in the form of a pocket pivot. Keep an eye out for this.




With respect to other names I’ve discussed in recent reports but which were not discussed in this report, members should refer to my report of this past weekend where I reviewed and updated each name with my current notes from my trading diary. Some additional, updated notes on selected stocks:

ALXN – the stock had another small pocket pivot today, but from a point just slightly above its 10-day moving average. Still in play on the basis of the pocket pivot of two weeks ago as discussed in my May 25th report.

CELG – the stock had another pocket pivot today coming up through the 200-day moving average. Strength in the beaten-down bio-techs may bode well for the general market.

ENBL – nothing going on with this name that interests me. I have taken this off my buy watch list for now.

GMCR – still hanging tight along its 10-day moving average. Keep watching for a possible pocket pivot developing along the 10-day line, but as I’ve discussed before, keep in mind that GMCR is more of an “old merchandise” name.

Today’s ADP employment report came in at 179,000 new jobs vs. expectations of 200,000, continuing the relatively weak trend in economic numbers as of late. Along with today’s big 5.7% increase in labor costs combined with declining productivity, things are getting tougher for businesses. Friday’s Bureau of Labor Statistics jobs number may or may not have a big impact on the market direction, since it already seems obvious that the economy is muddling along, at best. With weak economic data the order of the day, the Fed cannot increase its taper, and with interest rates still extremely low easy-money (or would it be more accurate to say, “free money?”) monetary policy will continue to dominate the Fed’s approach.

Meanwhile, until the rally is derailed I’m content to focus on a small handful of stocks, and so far the market has provided positive feedback in this regard as these names act well. There is no need to start buying every stock in the market, and I prefer a simpler approach here that focuses on a few names with the idea of finding something that can generate a very profitable price move in a continued market rally phase. As I wrote over the weekend, where are the TSLAs of May 2013, the YELPs of June 2013, or the FEYEs of January 2014? In my view our chances of catching something similar to these blasts from the recent past are better if we focus on the “new merchandise” set-ups that are out there, and objectively I would have to say that there are a few, including names like PANW, CAVM, KATE, SN, and possibly JD. Obviously, the market could fail at any time, but barring any evidence that this is actually happening in real-time, one can only go with the flow, especially when it is possible to make progress by doing so. 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 had a position In CAVM, FB, PANW, and SPWR, though positions are subject to change at any time and without notice.

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