The Gilmo Report

March 31, 2013

March 30, 2013

The weekend headlines proclaim that the S&P 500’s all-time closing high achieved on Thursday, the last trading day of the first quarter, confirms a “return to normal” for the markets. Meanwhile, even a revision of fourth quarter 2012 GDP growth to 0.4% speaks of a return to normal that is not quite as normal as it might seem. Despite what is far and away the most massive program of monetary and fiscal stimulus (e.g., QEternity combined with massive budget deficits) in the history of mankind since 2009, the economy still cannot muster much more than a revised, government-massaged number that annualizes to 1.6% GDP growth. Meanwhile, there are a number of other statistics that are far from “normal,” including real median household incomes, the number of Americans on food stamps, etc. What is normal, in my view, is that the market is more dependent on QE than it is economic growth or any idea that we are returning to economic “normalcy.” The big picture, shown on a weekly chart of the S&P 500 Index, below, shows that we are now in the 19th week of a rally that began off the November 2012 lows and in terms of “coherent” uptrends this duration is similar to rallies seen from November 2011 to April 2012 and from June to September 2012. Notice also that on a weekly chart the sharp sell-off seen last month, in February, is hardly discernible.




I might also point out that while the S&P 500 made an all-time closing high on Thursday, it did not exceed its intra-day high of 2007, so it might be considered that the market has now reached the top of its massive secular bear market range that began with the “dot-com” bubble-market top in early 2000, as the long-term chart of the S&P 500 shows, below. In 2007 the market did move to a new all-time high, which at the time was hailed as a sign that things had returned to normal and that the market was “back.” That new high, however, was followed by an even sharper and deeper bear market break in 2008 that far exceeded the magnitude of what was previously known as the “brutal” bear market of 2000-2003. You might notice that the bull phase from 2003 to 2007 took about 4.5 years to recover back up to the old highs, while the current bull phase off the 2009 lows has taken four years to recover back up to the highs of this 13-year “secular” bear market range. Meanwhile, the NASDAQ Composite Index has made the highest high since the bear market lows of October 2002, but at a close of 3267.50 on Thursday, remains far, far below its “dot-com” bubble market and all-time high of 5132 reached 13 years ago in March of 2000.




While gold has shown signs of making an attempt at a low over recent weeks, it remains in what is now a 19-month consolidation, as can be seen in the long-term weekly chart of the gold spot price, below. Contrary to popular belief, the movement in precious metals is not dependent on QE, since the uptrend in the yellow metal began in earnest in 2002, well before the “birth” of QE in early 2009. Gold’s consolidation over the past 19 months correlates relatively well with the U.S. dollar’s sideways movement over the same period. More recently the dollar has benefitted from the Euro’s woes in the short-term, which has likely led to the underperformance of gold. The question for those interested in owning gold is whether the Fed’s current “all-in” posture and plans to fully monetize (e.g., printing money) Treasury debt offerings will eventually be resolved in a “soft landing” as the Fed tries to ease off the QE gas pedal without upsetting the markets, or whether it will result in hyperinflation which would likely be very positive for the prices of precious metals and other commodities. In my view, the critical clue may come in the form of a breakout by gold from its current range, and as I discussed in my report of this past Wednesday, March 27th, this is something we need to keep a close eye on.




LinkedIn (LNKD) was my best-performing holding in the first quarter, and members may recall that I felt that for those willing to incur the risk, holding the stock into its January earnings announcement was a viable proposition. The stock came through with a big earnings beat, setting off a buyable gap-up move following earnings and a subsequent move that carried up to 184.15 two weeks ago. The stock pulled down this past week, which would be the first week in any new base that might form from here. Note that in the weekly chart, below, we can see that upside volume has steadily declined as the stock has moved higher, which in my view sets the stock up for a pullback and a new base-building process as it indicates a decline in demand for the stock as it has moved higher. At this point I would be watching for a pullback to the 10-week moving average, currently at 160.45, as a potential buy point. LNKD has had a sharp move since its original buy point closer to the 117 price level in early January, and so would be entitled to take a rest here. The stock could also simply move tight sideways in a relatively “flat” base or flag formation as the 10-week line continues to catch up to the stock.



Chart courtesy of HGS Investor software, ©2013, used by permission.


An example of the 10-week moving average catching up to a stock’s price following a big upside move can be seen in the weekly chart of Netflix (NFLX), below. In hindsight, NFLX’s gap-up move to 149.17 the day following its after-hours earnings announcement in January was a buyable gap-up given that the stock has moved some 20% higher since then. Currently NFLX’s 10-week line is moving through the 181.42 price point, serving as a reference point for support on pullbacks, while it appears to be finding some resistance in the mid-190’s. This corresponds to the downside “breakout” point from a head and shoulders topping formation it formed in late 2011, as we can see on the left side of the chart. Notice also that each time the weekly range has moved into this price area it has resulted in stalling action on the weekly bars this past week and then three and six weeks ago on the chart. The stock was able to close relatively tight over the past three days. So unlike the last two times it moved into the mid-190’s it is trying to hold up rather than pull back down to the lows of its current range in the mid- to high-170’s. This may indicate that this past Wednesday’s pocket pivot buy point remains buyable on the premise that the stock will eventually break out of its current six-week flag formation as an earnings-turnaround situation.



Chart courtesy of HGS Investor software, ©2013, used by permission.


Last weekend I discussed the weekly chart of Splunk (SPLK), shown below as it was moving in a series of very tight weekly closes that also showed longer “tails” on the weekly price bars indicating support on the intra-week pullbacks. This week SPLK managed to break out of this short handle to all-time highs. SPLK did appear to run into some resistance around the 40 level earlier in the week but managed to close right at that price level by week’s end. Volume increased for the week, which is somewhat impressive given that it was a shorter four-day trading week. I’m still a bit unsure whether this breakout can necessarily lead to an immediate and pronounced move higher since it is coming off of a very short handle considering that the prior cup formation is over 34% deep. Usually a stock coming up from a cup of that type of depth needs a little more time to consolidate the prior gains and form a longer handle as it sets up to move higher, but SPLK could prove to be an exception to the rule given that it is a new issue, having come public a little less than a year ago, and a thinner stock with a smaller float. For now, the breakout is in play and buyable as long as it can hold above the 38-39 price area.




Meanwhile Celgene (CELG) and Santarus (SNTS) continue in their uptrends as the bio-tech party was led by big moves in Amgen (AMGN), Biogen Idec (BIIB), and Gilead Sciences (GILD) (last discussed in my March 3rd report after a continuation pocket pivot), all not shown, this past week. AMGN’s move over the past nine days as it streaks over the $100 price level reminds me a lot of CELG’s move in January as it made its own run for the $100 price level in early January. Both CELG and SNTS are acting well, but no new buy points have emerged recently, despite strong action in CELG as it moved to an all-time high on Thursday.





Charts courtesy of HGS Investor software, ©2013, used by permission.


The party in bio-techs this past week bled over into other stocks like Regeneron Pharmaceuticals (REGN), a stock that failed and broke down after showing some positive action in January. Back then a number of bio-techs were showing signs of weakness as they pushed below their 50-day moving averages, including AMGN and BIIB which have since recovered and moved higher. REGN is likewise trying to recover here as it starts to lift off of its 10-week moving average after moving tight sideways along the 10-week line over the prior four weeks. Thursday’s action on the daily chart, not shown here, actually constituted a pocket pivot buy point despite the large down-volume bar on March 15th. However, that day the stock actually closed nearly flat after the stock moved below the 50-day moving average on an intra-day basis, hence the higher volume indicates supporting action. Thus, if we adjust for this, we can interpret Thursday’s action as a pocket pivot buy point within the constructive context of the stock’s tight price action over the prior four weeks. Like AMGN and BIIB, REGN may also recover and move to new highs, hence I consider Thursday’s move to be actionable, using the 50-day line as your selling guide.




Commvault Systems (CVLT) appears to be pulling back constructively following its huge-volume breakout of three weeks ago, as we can see on its weekly chart below. Given that the prior breakout level was in the 78-79 price area, as I’ve discussed in previous reports over the past two weeks, CVLT becomes potentially buyable as it pulls down into the 80-82 price area given that this is within 5% of the original breakout price. Despite moving in a steady uptrend over the past several months, CVLT has shown little tendency to follow through in a big way after each breakout and buyable gap-up it has flashed on the way up. After a while this has a tendency to wear investors in the stock out. However, stocks like CVLT can eventually build up a head of steam after a period of “slow” breakouts and begin to move up in a sharper upside trend just when they do finally wear investors out. CVLT is also holding very tight along its 10-day moving average on the daily chart, not shown here, which brings into play the possibility of a pocket pivot buy point along that moving average, currently at 82.26, just below the stock’s 82 close on Thursday.




I’ve been monitoring DigitalGlobe (DGI) for the past four weeks since it was able to move back above its 10-week line, as we see in the weekly chart below, although it is difficult to get a handle on the company’s fundamentals now that its merger with GeoEye is now complete. Earnings estimates for DGI go negative over the next two quarters, but this is due in large part to the effects of the merger. It is constructive that the stock did not break down entirely five weeks ago as it violated its 50-day moving average. We can also view the action of five weeks ago on the chart as showing some supporting action off the lows given that it closed up off of the intra-week lows and was followed by an above-average weekly volume move back above the 10-week moving average. Since then the stock has pulled back down towards the 10-week line with volume drying up as it forms a little cup-with-handle formation. Wednesday’s action on the daily chart, not shown, also constituted a pocket pivot buy point off of the 50-day moving average. That action might be considered buyable, using the 50-day line as your selling guide. A breakout from here would confirm its upside potential.




Three-D printers have come under pressure recently with Three-D Systems (DDD) and Stratasys (SSYS), but newer companies in the space are showing signs of life. Recent IPO Exone Company (XONE) announced a profit of seven cents a share on Thursday, an absolute earnings increase of 133% on $12.7 million in sales, up 368% from the same quarter a year ago. Next quarter’s estimates look for a loss of seven to ten cents, depending on which earnings forecasting service one refers to, but Thursday’s earnings were good enough to cause the stock to flash a pocket pivot buy point on a breakout from a big cup formation that has no handle on the weekly chart, not shown here. On the daily, below, we can see a breakout attempt from a short handle-like formation along the 10-day moving average which failed, but Thursday’s move resurrects the stock. XONE claims that their products represent a “disruptive force” in 3-D printing. While the stock is too young to have a 50-day moving average of price or volume, for that matter, one can only go on the basis of Thursday’s pocket pivot, using the 10-day line as a selling guide.



Charts courtesy of HGS Investor software, ©2013, used by permission.


Given that XONE’s products focus on the industrial side of the market, this may be where the real sweet spot is in 3-D printing, despite the hype of consumer 3-D printers that initially drove DDD’s move prior to its top in January. Proto Labs (PRLB), another player in the space that focuses more on “contract” 3-D printing for the industrial/design market joins XONE as the two stocks in the 3-D space that are acting well, even as the initial leaders, DDD and SSYS, have broken down and are at best trying to build entirely new bases. Like XONE, PRLB has been acting constructively despite failing and stopping us out following its buyable gap-up move on February 13th. PRLB came all the way back to fill that gap-up move and bounce off of its 10-week moving average, as we see on the weekly chart, below. Last week and this past week it found support along the 10-week line as it forms a constructive six-week base. PRLB looks primed to break out here, so I would keep an eye out for this, should it occur, although a pullback into its 10-day moving average on the daily chart, not shown, at 47.09 might be a decent spot to enter a position in anticipation of a potential breakout.




Sodastream International (SODA) is starting to show up on my radar screens as it exhibits tight closes along its 10-week moving average, as we see on the weekly chart below. SODA makes a product that allows consumers to make their own sodas at home, and recently it has signed licensing agreements with Oceanspray® and Cott’s beverages, among others, to utilize their concentrates in their machines. SODA ran up sharply from about 33 in November of last year to a high of 53.99 in late January and has since been in the process of building a nine-week base as it consolidates those sharp gains. SODA is an interesting stock given that most of its sales are in Europe, but recently has shown 60% revenue growth in the Americas which indicates that it is expanding its markets. As well, the company recently signed a deal to sell their soda machines at Walmart (WMT). As of March 15th short interest in the stock has ballooned to 8.15 million shares on a float of 20.41 million shares. With the stock holding along the 10-week line and closing tight 3 out of the past 4 weeks, I would watch for a pocket pivot buy point emerging here along the 50-day moving average on the daily chart, not shown, to squeeze the shorts.




Tight action is also seen in TripAdvisor (TRIP) as it has closed tight over the past three weeks, as we see in its weekly chart, below. On the daily chart, not shown, TRIP is moving tight along its 10-day moving average, setting up the potential for a pocket pivot buy point if and as the stock moves up off of the 10-day line. TRIP recently broke out of a big, funky-looking cup-with-handle four weeks ago, which represents a first-stage breakout from a “re-set” base after the stock corrected sharply from July to November of last year. TRIP is also a recent IPO, having come public in December of 2011. While the bigger travel sites like Expedia (EXPE) and (PCLN) base here, smaller travel sites like Homeaway (AWAY) are on the move, with TRIP growing earnings by 50% in the most recent quarter. TRIP’s ability to hold very tight here in a three-week formation is very constructive coming on the heels of its base-breakout four weeks ago. One could perhaps take a position here or wait for a pocket pivot buy point to emerge along the 10-day moving average.



Charts courtesy of HGS Investor software, ©2013, used by permission.


If  you’re “jonesing” for a short-sale play here, beaten-down mortgage-servicer Northstar Mortgage Holdings (NSM) has staged a textbook reaction rally back up to its 50-day moving average following a confirmed base-failure eight days ago on the daily chart, shown below. The expectation for the trade would be a move back down towards last week’s low that might impact with the 200-day moving average, currently moving up through the 30.48 price point, with the 40-week moving average on the weekly chart, not shown, running through the 31.28 price point. Your “hyper-stop” would be Thursday’s intra-day high at 37.70.




As we move into the third quarter of 2013 we can get a sense that the market is getting closer to the “long” end of its bull phase durations as measured by recent history, which I discussed at the outset of this current report. With the S&P 500 and the Dow moving up to the tops of more than decade-long “secular bear” ranges, are they poised to continue higher in a new, secular bull phase or are they getting closer to the end of the line with respect to their current rally phases? That is a tough question to answer, as only current, real-time price/volume action can confirm the market’s direction one way or another. Sure, the market’s rally might be “long in the tooth” here, but that does not mean that the upside trend cannot continue for several more months. What I’m looking for here are stocks showing decent bases that might have the potential to benefit from some rotation that leads to breakouts and decent price appreciation from current levels. And my screens over this long holiday weekend prove to me that such situations do exist, and it might be worthwhile to keep a close eye on some of the names I’ve discussed in this report that may be in the process of “setting up” for some upside action that helps to keep the current market rally broad and fresh.


Gil Morales

CEO, Gil Morales & Company, LLC
Managing Director & Principal, MoKa Investors, LLC
Managing Director & 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 positions in CELG, CVLT, SNTS, SODA, and SPLK, though positions are subject to change at any time and without notice.

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