The Gilmo Report

March 14, 2012

March 14, 2012


The market’s quick little dip last week turned out to be short-lived as the action proved to be a “shakeout,” at least in the short term, as the NASDAQ Composite Index, shown below on a daily chart, has risen above the 3,000 level for the first time since December 2000. As I wrote over the weekend in my report of March 11th, there was not any real deterioration in any of the leadership on last week’s gap-down shakeout and subsequent low-volume drift back up to the highs, so I saw no reason for alarm, necessarily. Sellers hit the market for a day or two, at which point they were cleared out of the way, at least to the point where the market was able to rally back up to the highs. Right at the peak, on Monday, the sellers had their chance to hit the “double top,” but no selling was to be seen anywhere, even with an upcoming Fed meeting on Tuesday. Today most of the leadership took a rest, something it was certainly entitled to do after five days straight up from last Tuesday’s gap-down sell-off. As far as I’m concerned, they can rest a little more if they need it.

NASDAQ Composite Index Gilmo Report Chart

The bursting of the bond bubble, as we see in the daily chart of the iShares Barclays 20+ Year Treasury ETF (TLT), below, gathered momentum over the past two days along with the sell-off in precious metals, but these were breakdowns that were signaling the Fed’s non-commitment on QE3 well before the actual announcement yesterday. If anything, the market believes the Fed is headed the other way, and stocks rallied sharply on the growth proposition while bonds got whacked and the precious metals continued to become further unglued as they extended further to the downside. This tends to suggest the start of a potential asset shift out of bonds and into stocks, so while the market could rest here for a few days I would not expect to see stocks sell off hard, but we can leave that up to the market to decide. In the meantime, most leaders act reasonably well in a continued market uptrend. That’s all we know for sure and all we need to know in the present.

iShares Barclays 20+ Year Treasury ETF (TLT) Gilmo Report Chart

Apple, Inc. (AAPL) is a fantastic example of a leading stock that is extremely simple to handle using the Seven-Week Rule while ignoring the silly debates over whether this price/volume action or that price/volume action constitutes a “climax top,” “railroad tracks,” or any other label that is quite useless from a practical perspective. I’ve received many questions about a climax tops or railroad tracks in AAPL over the past month or so, but as I see it, there is no reason to even think about this. As I’ve been discussing in recent reports, AAPL is a very simple situation in that it quite clearly obeys the 10-day moving average and has yet to violate this key short-term moving average. Based on the Seven-Week Rule, AAPL has now followed the 10-day line for the past thirteen weeks without ever violating it. Therefore, one can hold the stock for as long as it keeps running with the idea that it will be sold on the first violation of the 10-day moving average, end of story. With analysts putting out a $960 price target on AAPL, it is getting a bit frothy here, which I’m sure will bring in more questions about whether today was a “climax top,” but even that is not a reason to sell, necessarily, if the stock continues to hold the 10-day line.

Apple, Inc. (AAPL) Gilmo Report Chart

LinkedIn, Inc. (LNKD) continues higher after last week’s pocket pivot buy point, and yesterday issued another pocket pivot volume signature that took it right up into where I would expect resistance to be at the 95 price level, roughly. As we see in the daily chart below, LNKD picked up some heavy volume today, but it did not break down, as it held above yesterday’s intra-day low. LNKD is still a stock that graduates of the “University of I Am Smarter than the Market” love to hate, and short interest in the stock remains high. Thus I tend to think shorts will come in and hit the stock as it pushes up into logical resistance at the 95 level. Coming straight up off the lows of last week, however, the stock is entitled to take a breather here and perhaps go sideways for a few days as it digests that move. On the basis of last week’s pocket pivot, I would expect the stock to hold the 86-87 level on any pullback.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

Invensense, Inc. (INVN) continues to act well as it pushed into all-time high price ground yesterday before succumbing to some profit-taking as it pushed up over $20 a share. Given the sharp move from the 50-day moving average and the $15 price level, INVN is entitled to rest as it digests this sharp move. Keep in mind that a move by INVN from 15 to almost 21 is as if AAPL had rallied 200 points in the same time period, so we have to give the stock some room here. Considering that it was entitled to some sort of pullback here, it is not surprising that today’s pullback was as volatile as the prior six-day catapult maneuver off the 50-day moving average. INVN held above the breakout level, roughly in the mid-18 price range as I see it, on today’s pullback with volume declining. The stock also closed well up off of its lows, indicating that some support was to be found off the 18.50 level, which was its exact intra-day low today. As I wrote over the weekend, the stock is a strong leader, and so far this week it has continued its uptrend in spite of today’s pullback. I would be opportunistic on pullbacks into the mid-18 level as the stock digests its recent strong gains.

Invensense, Inc. (INVN) Gilmo Report Chart

Salix Pharmaceuticals (SLXP), which I last discussed in my report of March 4th, a few days after it logged a big pocket pivot buy point coming up through its 50-day and 10-day moving averages, finally put in a clean new-high breakout yesterday on heavy volume, as we see in the daily chart below. The extreme volume was due to a completed $600 million secondary offering of convertible bonds, but in any case is more than enough to qualify yesterday’s action as a very buyable new-high breakout, in my view, using the standard downside stop of 6-7% maximum for standard new-high base breakouts. I would expect SLXP to continue directly higher from here on this breakout, thus I cannot see the stock really pulliing back any further than the 50-day moving average which is down around 48.29, less than 5% from the 50.60-50.70 breakout level. SLXP did try to sell down today, but it held the 50 price level intra-day and by the close was down a mere 13 cents on lighter, but above-average volume. This is potentially buyable right here.

Salix Pharmaceuticals (SLXP) Gilmo Report Chart

There isn’t very much right now that I consider terribly actionable. Leading stocks have moved up and most took a breather today, but in most cases they are extended from low-risk entry points, such as Alexion Pharmaceuticals (ALXN), shown below on a daily chart. You may recall from my report of this past weekend, March 11th, I said the stock was potentially buyable within the well-formed three-weeks-tight (3WT) flag on the weekly chart that I showed in that report. As I wrote, the stock was simply buyable within the 3WT on the basis of the pocket pivot buy point of two Friday’s ago. On Monday ALXLN chose to make me look smart by doing just that as it launched to all-time price highs on a big volume increase. Today the stock paused from its extended position, and based on the lack of selling volume remains well-entrenched in a very constructive uptrend that continues to see the stock propelled to new highs on heavier buying volume each time. Nothing to do here but sit.

Alexion Pharmaceuticals (ALXN) Gilmo Report Chart

Members can review my most recent reports since my views on most leading stocks discussed in those reports are still in force. Like I said, I don’t see a lot that is actionable here at the present time, and so this report is limited to discsussions of what I see as relevant in the here and now. If you own a leading stock that I’ve discussed previously and it continues to act well but is not actionable in terms of any new entry points, I won’t have anything new to say anyways. One thing new that members might want to keep an eye on is Tangoe, Inc. (TNGO), a small stock that impressed me yesterday after announcing an impending 8-million-share secondary stock offering and then holding very tight on the day, as we see on its daily chart below. Keep an eye on this stock as its approaches the day it will price and release into the market this secondary offering. TNGO provides what is known as Communications Lifecycle Management (CLM) software that enables companies to manage and monitor their “communications asset.” The stock is a recent IPO with earnings growing at triple-digits, and after coming public at $10 last August, the stock has remained above that offering price for all of two weeks since its debut.

Tangoe, Inc. (TNGO) Gilmo Report Chart

While TNGO is one to watch as it prices its upcoming secondary offering, members should also keep an eye on (ZNGA) which got tagged by sellers after announcing that it would seek to unload insider shares in an orderly secondary offering instead of allowing its IPO lock-up to expire and letting insiders just dump any shares they want to cash in on in the open market. This is intended, allegedly, to prevent the sell-off that LNKD experienced after its IPO lock-up expired a couple of weeks ago. Sellers did not come rushing into ZNGA yesterday, but the fact that a secondary offering is in the works did nothing to inspire buyers. Nevertheless, ZNGA’s IPO lock-up expiration has been something hanging over the stock’s head, so to speak, so it will be worth monitoring the stock as the secondary is priced and released into the market to see how the stock acts. I’m watching closely for new buy point to show up once this secondary is out of the way, and my guess is that if ZNGA is indeed a viable long situation as a primary social-networking play then the secondary should be absorbed well and then clear the way for the stock to move higher, similar to INVN last week. (ZNGA) Gilmo Report Chart

My general take is that leading stocks can rest here as yesterday’s big upside move may send every bear on the planet into hibernation. The market’s uptrend remains intact, and I tend to see the potential for further upside for stocks based on the idea that the asset shift out of bonds and stocks is sustainable. If it isn’t, the market will let us know soon enough, but for now there is little else to do than to ride the trend while it remains our friend.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 a position in ALXN, INVN, LNKD, and SLXP, though positions are subject to change at any time and without notice.

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