The Gilmo Report

March 2, 2014

March 1, 2014

The market has trended higher in a shallow, grinding channel over the past ten trading days, as we can see on the daily candlestick chart of the NASDAQ Composite Index, below. The index stalled and churned on Friday on very heavy trading volume as a number of leading stocks finally took some selling heat. As I discussed at the outset of my Wednesday report of February 26th, when the uptrend becomes obvious to all and leading stocks that I was buying well before the powers-that-be declared the uptrend to be “confirmed” yet again are all up sharply, it is probably time for the market to catch its breath. Not that this wasn’t a good week for investors. Screaming upside moves in a number of leading stocks in the first half of the week made for what was the best week of the year, from my perspective, but as I’ve discussed in previous reports, the action of leading stocks will tell you what is going on well before the indexes.

On Friday, my buy watch list of leading stocks, which had been pushing higher in unison since the lows of early February, was all red, even as the Dow was pushing up over 130 points on an intraday basis. With conglomerates and utilities leading on Friday, there was a little bit of a defensive flavor to the action. A nice pullback here, however, might be the pause that refreshes unless we start to see a more concerted breakdown. This would be outside of the fact that stocks that run up 20% in 2-3 days are entitled to some corrective action as they pull back and digest recent gains.

 

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The NYSE-based indexes led on Friday with both the Dow, not shown, and the S&P 500 Index, shown below on a daily candlestick chart, moving to new highs on increased volume. Note, however, that the S&P 500 was also stalling and churning around as it formed a “spinning top” on heavier volume. As we see some of the strongest leading stocks take a pause, I would consider it constructive to see some other potential leaders start to pick up the slack. Barring that, the market and leading stocks may pull back in orderly fashion such that they may provide opportunistic buy points as they come into logical areas of support. In such a scenario, the 20-day exponential moving average on my daily charts becomes a key moving average to watch.

 

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Economic data continues to come in a bit soft, and Fed Chair Janet Yellen, in her Senate testimony, stated that continued weak economic numbers will likely force the Fed to slow down on their tapering. My view is that QE is not going to go away quickly, and to some extent the Fed remains stuck as the economic recovery over the past five years remains ridiculously below the pace of prior recoveries. Meanwhile, neither Democrats nor Republicans appear willing to make the hard decisions that will eventually wean the country off of its need to perpetually increase the amount of debt it carries and continues to issue to feed its profligate spending habits. Thus the trend in commodities, such as gold as represented by the daily candlestick chart of the SPDR Gold Shares (GLD), below, remains up, despite a pullback this week that looks like a normal consolidation of the prior upside move throughout the first half of February. As I wrote this past week, as long as the GLD can hold the 200-day moving average, the trend remains intact.

 

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Three of the former “Four Horsemen” continue to act well with Facebook (FB) and Netflix (NFLX), both not shown on charts, hover around their 10-day moving averages, while Tesla Motors (TSLA) has become this week’s thoroughbred following Tuesday’s big gap-up move, as we can see on its daily chart, below. In my view, TSLA is a “big stock,” and as such it remains a name that I am focused on, despite the fact that I view the spike as something to lighten up on given the announcement of a $1.6 billion convertible bond offering on Wednesday after the close. The usual pattern on a convertible bond offering is to see institutions such as hedge funds arbitrage by shorting the underlying and buying the convertible offering. The upside gaps on both Thursday and Friday morning seemed to me to be setting this up, so I viewed it as a short-term spot to lighten up on the stock with the idea of buying back on a pullback.

Let me make it clear that this is how I operate based on my general methodology of selling leading stocks into sharp upside price moves after taking a huge (as much as 100% of equity or more) position BEFORE the move. So far TSLA is pulling back here as it looks primed to undercut the $240 level, which I tend to view as a buy zone between there and the $228 intraday low of Tuesday’s buyable gap-up day. TSLA may need to form a little flag formation here as volume continues to settle down. So far I still view this recent breakout through the $200 price level and the prior five-month base as an initial move in what I believe has the potential to pan out into something much more significant, based on my discussion of the stock last weekend (see February 23rd report). Meanwhile, as of the February 14th reporting date, short interest in TSLA remains near all-time highs at 28,923,212 shares sold short. TSLA shorts remain stubborn, and it wouldn’t surprise me if this current move to even fresher, new-high price ground doesn’t bring in more shorts who are convinced the stock is “overvalued,” and have been all the way up. I will be quite interested to see the February month-end short interest numbers when they are reported in a few days.

 

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I wrote in my Wednesday report of this past week that LNKD was a fluid situation that could just as easily morph back into a short-sale target as it could set up along the 50-day and 200-day moving averages and try to move higher in a continued market uptrend. The stock signaled its intentions on Friday, however, by failing at the 50-day/200-day moving average confluence and breaking down on above-average selling. I’ve actually found LNKD to be a wonderful short-term trading vehicle this past week as it rallied up and off of the “Wyckoffian” low around the $190 price level and then ran smack into resistance at the big moving averages before becoming shortable again on Friday. It appears that the fourth horseman continues to have trouble finding its head as the other three ride to new price highs. The stock is now in “no-man’s land” and I see no set-up either long or short here that I would be willing to play, at least for now.

 

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Three of my favorite leading stocks, Yelp (YELP), Tableau Software (DATA), and Michael Kors Holdings (KORS) have all found resistance at the $100 “century mark” price level, as we can see on their daily charts shown below. YELP was hit with some selling on Friday as it reversed off of the $100 price level, as was DATA. While YELP was able to hold above its 10-day moving average, DATA successfully tested the 20-day line. KORS acted the best as it still finds resistance along the $100 century mark but selling volume on Friday was light. These stocks are all consolidating prior strong upside moves, and may need to continue doing so for a little while longer. If the general market starts to pull back off the peak, then we would want to see constructive pullbacks in these stocks that could set up opportunistic buy opportunities at logical areas of support. As I wrote above, in most cases the 20-day exponential moving average, the green line on my daily charts, becomes a key reference point for such pullbacks.

 

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In my Wednesday report of this past week I noted at the time that Workday (WDAY) was selling down to its 10-day moving average in after-hours trading following its earnings report that afternoon. I indicated that a slight down opening the next day could set up a continuation pocket pivot buy point off the 10-day line similar to FB’s the prior week when it sold off after-hours following its announcement that it would be buying WhatsApp for $16 billion. As it turned out, WDAY recovered by the next morning and was gapping up to the 105-106 price level on huge volume, setting up a buyable gap-up move. That move carried all the way up to the $116 price level before the stock ran into some heavy selling volume on Friday that resulted in an outside price reversal before the stock rallied off the intraday lows to close roughly mid-range on the day, as we can see on its daily chart below. The intraday low of Thursday’s BGU is 105.28, so in a sense Friday’s pullback to just below that level at 104.44 brought the stock back into buy range, although the big-volume reversal did look quite intimidating at the time. At that point, however, one could use the 102.26 level as a stop since that would have been the point at which Thursday’s gap would have been “filled” at the bottom of the “rising window” and hence provide a potential area of support. My guess is that WDAY will need to put in some sideways work here as it settles down, but pullbacks to the 105.28 BGU intraday low could present buying opportunities.

 

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Retailmenot (SALE), which had been acting very well through Thursday of this week as it continued to streak higher, got whacked on heavy volume Friday on a big sell-off that took it right back to the top of its prior base, as we can see on the daily chart, below. I didn’t see any news or analyst rating changes that might have caused the sharp sell-off, although earlier in the week on Tuesday competitor Coupons.com announced a 10 million share IPO which could be seen as siphoning off some of the hype and demand surrounding SALE’s recent strong price move. SALE came off of its IPO lock-up on January 15th and did not experience any heavy selling at that time. With the stock price up above 45, Friday’s volume might have been due to insiders finally deciding to cash in some shares. Right now I can’t say for certain what caused the selling, but with the stock coming right back to the top of its base, however, this is the type of pullback to keep an eye on as it might provide a buying opportunity. My view is that this might slide down further towards Friday’s intraday low below the $40 price level, and members should watch for selling volume to dry up here.

 

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iRobot (IRBT) also got hit with some selling volume on Friday, but like SALE this brought the stock right back to the top of its prior base. The run-up off the 200-day moving average that began in early February was a sharp one, so the stock is entitled to pull back, and as I’ve written in previous reports, I would love to see a sharp pullback down towards the top of the base as a possible buying opportunity. Volume was above average on Friday but the stock did manage to close off its lows right under the $42 price level and just above its 20-day moving average, the green line on the daily chart, below. I would like to see the stock continue to drift in slightly as selling volume dries up here, as the closer to the $40 price level I can buy the stock the better, with the idea that the stock should roughly hold that price level on this pullback.

 

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Splunk (SPLK), which I discussed in several reports back in January as it was flashing pocket pivot buy points, finally gave us something of an “ugly face” on Friday as it staged a massive-volume outside reversal to the downside, as we can see on its daily chart, below. This looks like at least a short-term top for the stock. It had been running for a while as it gained about 47% from its first pocket pivot at around 72 within its base in early January (see January 2nd report) up to Friday’s peak at 106.15. If you still own the stock from the original pocket pivots within the base, then one could see how the stock acts here as it was still able to close above its 10-day moving average on Friday, although the big-volume outside reversal doesn’t look too good, I have to admit.

 

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With the strongly performing leading stocks starting to look like they want to take a break, I start hunting for areas where we might see previously basing leaders start to re-emerge. The solar energy group remains the #1 ranked group in this market despite the fact that almost all of the leaders in this group have still been working their way through bases in recent weeks and months. Chinese solar company JKS Holding Company (JKS) made a bid for leadership status as it flashed a bottom-fishing pocket pivot on Friday. As we can see on the daily chart, below, this pocket pivot came right up and off of the 10-day/20-day/50-day moving average confluence, and is potentially buyable using that confluence as your selling guide. The trick here is that JKS announces earnings Monday before the close, so there is also a possibility of a buyable gap-up move after earnings if the report is strong. Estimates call for 93 cents a share, based on IQ Capital estimates, while First Call® is looking for 71 cents a share. JKS is a big turnaround story as it has moved to profitability over the past two quarters with earnings up 126% and 317% on 54 cents and 1.37 per share, respectively. Sales have accelerated over the past three quarters with growth of 11%, 48%, and 52%. JKS is expected to see huge earnings growth in 2014 as it returns to profitability and earns $2.52 a share vs. 2013’s mere 30 cents. I would not be averse to buying into a possible BGU on Monday, or, should the stock pull back on the announcement, using a constructive pullback to buy into the stock. We will see how this plays out Monday morning, so that should give everyone something to look forward to over the weekend!

 

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First Solar (FSLR) announced earnings this past Tuesday after the close and the stock gapped down hard right off the open on Wednesday, as we can see on the daily chart, below. FSLR’s earnings and sales growth is typically erratic, going from negative to positive and back again each time it reports. FSLR announced -56% earnings growth with -29% sales growth on Wednesday. This looks pretty ugly to me on its face, but the stock found support at its 200-day moving average. This came as trading volume surged and the stock made it almost all the way back to its 50-day moving average by the close. On Thursday the stock gapped up slightly and traded higher on strong volume. If you count Wednesday’s action where the stock bounced off the 200-day line on extremely heavy volume as an accumulation sort of day, then one could view that day’s down volume as more positive than negative. Accounting for this exception, one could then view Thursday’s move as a pocket pivot coming up through the 50-day line. By Friday the stock held tight as the whole three days’ worth of price action merely turned out to be a big shakeout.

 

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If we look at First Solar’s (FSLR) weekly chart, below, we can see how the action comes out looking like a massive supporting week off the 40-week and up through the 10-week moving averages, corresponding to the 200-day and 50-day moving averages on the daily chart, above. The stock also closed tight with last week’s action which included a pocket pivot as I discussed in my report of last weekend, February 23rd. This may actually be very buyable, particularly if there is a pullback closer to 56 or better next week. FSLR is expected to see a contraction in annual earnings down to $3.28 a share in 2014, but that picks up to $3.67 in 2015 before dipping again to $2.99 in 2016, according to analysts’ estimates.

 

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Meanwhile, Sunpower Corp. (SPWR) continues to work on its base after flashing a pocket pivot buy point not quite three weeks ago as it came up through the 50-day moving average, as we can see on the daily chart below. Recall that a number of leaders like WDAY, SPLK, YY, etc. all flashed pocket pivots within their bases back in late December/early January, noodled around a bit, and then took off to the upside. With solars still ranked #1 as a group, and a number of them showing positive action within their bases, there is a good chance, in my view, that they may start to break out together. Food for thought, backed up by the only thing we know for certain real-time, which is that SPWR has shown constructive action within its base and is now consolidating up at the top of its base as it pulls down to the 20-day moving average on below-average volume, putting the stock within buy range of the early February pocket pivot.

 

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Canadian Solar (CSIQ) is expected to come out with earnings this coming Wednesday before the open, and it flashed a pocket pivot/trendline breakout this past Wednesday, as I discussed in my report of that day and as we can see on the daily chart, below. Showing some naturally tentative action going into this week’s earnings report and perhaps encountering some resistance from the peak at the left side of the base, CSIQ pulled back on Friday on about average trading volume, which takes it right back to the top of its trendline breakout and the origination point of Wednesday’s pocket pivot. The resolution of this current base may simply have to wait until earnings are announced, but again the potential for a buyable gap-up or a buyable pullback following earnings is something to stay on the lookout for.

 

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The de facto leader of the solar group, SolarCity (SCTY) has continued to move higher following Tuesday’s pocket pivot breakout to new highs following the company’s pseudo-earnings announcement on Monday after the close. SCTY delayed the full earnings report until this Monday, March 3rd, after the close, but it appears that investors liked what they heard last Monday as that was enough to send the stock higher. Friday saw a little bit of a pullback but the stock held above its 10-day moving average and closed mid-range on the day. While Monday’s scheduled earnings announcement creates a little bit of uncertainty, the action so far is quite constructive. It may be that the earnings report will turn out to be a non-event, but at this stage I’d be looking for a constructive pullback towards the 80 price level or some sort of buyable gap-up as potential entry points following Monday’s report. Overall, and outside of SCTY which as just emerged from a base, the solar group is showing signs of setting up and may, I say may, be ready to move higher in the near or even immediate future.

 

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Casino names such as Las Vegas Sands (LVS) and Wynn Resort (WYNN), both not shown here, have recovered from their late January corrections and moved to new highs. I last discussed Melco Crown Entertainment (MPEL) back in early December along with LVS as both stocks were setting up and flashing pocket pivots. Since then, MPEL has moved higher and then corrected along with the market and LVS and WYNN before finding support along its 65-day exponential moving average and 50-day simple moving average, the black and blue lines on the chart. This formed a little double-bottom type of shakeout, before moving back above its 10-day and 20-day moving averages. MPEL has been moving tight sideways for a little over two weeks and is now holding tight along its 10-day and 20-day lines.

On Monday of this past week the stock flashed a nice and quiet pocket pivot buy signal right along the 10-day moving average which may be a key clue that the stock is ready to move higher and play catch up with its peers. MPEL came in with strong 95% earnings growth when it announced numbers two weeks ago, following 119% and 70% earnings growth over the prior two quarters, sequentially, and estimates for next quarter are looking for 62% earnings growth on a hard number of 39 cents a share. We’re also starting to get a little blue color on the indicators which, when combined with a pocket pivot within a tight, sideways price area, look very constructive to me. I say the stock can potentially be bought here with the idea that it will hold above the 50-day line, now at 41.13, on any pullback from Friday’s close.

 

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Silica Holdings (SLCA) dropped off of my buy watch list a while back when it violated its 50-day moving average and broke down a couple of months ago, but it jumped back onto my radar on Wednesday of this past week when it flashed a big upside reversal and bottom-fishing pocket pivot in a v-shaped position, as we can see on the daily chart, below. You can see the thick gray oversold bar showing up right along the ultimate lows of that sell-off, but since then the stock has found support at its 200-day moving average and trudged back above the 50-day moving average, with Wednesday’s pocket pivot move helping to provide confirming evidence that the stock is at least trying to firm up again after announcing -24% earnings growth for this most recent quarter. Obviously, the stock is more of a forward-looking situation given that reported negative earnings growth didn’t tank it.

Over the next four quarters SLCA is expected to show accelerating earnings growth of 3%, 16%, 24%, and 75%, and by 2016 is expected to see more than a doubling of annual earnings from $1.86 a share in 2014 to $4.10 a share in 2016. With the need for fracking sand still expected to grow, SLCA remains in the right place among stocks in and related to the proverbial investment “oil patch,” and I have noticed that a number of oil names have been moving as well. SLCA might back and fill here for a bit as it has some overhead from the left side of the pattern, but if one is interested in buying shares, a little pullback into the 31-32 price area might be an opportunistic spot to pick them up. Otherwise, the stock does remain within buying range of Wednesday’s pocket pivot.

 

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When it comes to oil stocks I find most of them to be of the trudging variety, so I prefer smaller names in the group, particularly if they have a fracking spin to their fundamental stories. One name that has been moving higher is recent IPO Diamondback Energy (FANG), shown below on a daily chart, which is currently extended from any buy points but is a “horizontal” driller working the Permian basin in Texas. The stock is moving along its 10-day moving average and I will likely be following it in future reports if and when it shows me a spot where it can be bought. Meanwhile, another horizontal driller (I prefer this term to “fracking”) that is just starting to show some life after rounding out the lows of a potential new base is a name I’ve discussed in previous reports last year, Bonanza Creek Energy (BCEI).

The company reported earnings Thursday after the close and flashed a big-volume buyable gap-up move on Friday as it comes off of its 10-day moving average and up the right side of its base, as we can see on the daily chart below FANG’s daily chart. There is some overhead on the left side of what is now a cup formation, so the stock could spend some time consolidating the sharp move off the early February lows. The intraday low of Thursday’s BGU is 48.63, and the stock closed less than 3% above that on Friday at 49.97. BCEI came in with strong earnings growth of 56% in this most recent quarter. Strong growth is expected over the next four years with annual earnings expected to hit $2.87 a share in 2014, $4.04 in 2015, $5.58 in 2016, and $6.26 in 2016. That’s very steady, strong annual growth, and given the stock’s relative smallness I think it may be able to gather some steam on the upside going forward.

 

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As some of the strongest leaders show some signs of selling off of their peaks, I would like to see some dormant names step up and take up the leadership slack, and among these are names in the solar and oil-related groups that I’ve discussed in this report. I do think the market is in a position to pull back here as part of an overall normal consolidative process, but it is not clear to me that the churning action in the indexes along the peak on Friday is a sign that we are in danger of an imminent market top. These fast-moving leaders are entitled to take a rest and consolidate recent gains – if they can do so in constructive fashion while we are able to find some new situations setting up for potential moves higher, then I think the long side remains the place to be. As the indexes move higher, the generic pundits will tell you that “risk is increasing,” which I consider to be a bunch of baloney. Risk is always present in the market, and your stocks can get hit at any point, whether the market is in full bull mode or in the midst of a correction. In my view there are only positive or negative set-ups, all of which carry the same risk of losing money and hence require the usual risk-management that goes along with sound trading and investing.

For names from recent reports that I didn’t discuss in this report please refer to those prior reports as in general my thoughts on those stocks remain the same. On an administrative note, I will be presenting again at the HGS Investor Conference to be held Saturday through Monday, March 29-31, in beautiful Palos Verdes, California. Usually my presentation takes place on Sunday, and for users of HGS Investor software the entire conference itself is a grand affair that I recommend attending in its entirety.

 

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.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.