The Gilmo Report

May 20, 2012

May 20, 2012


Perhaps the biggest event of the week was the widely anticipated and wildly hyped Facebook (FB) IPO, but the stock didn’t produce much in the way of fireworks after it priced at $38 and began trading a couple of hours after the open. FB’s IPO did provide a silo full of fodder for the pundits and commentators, but I have to admit that the most profound assessment of FB that I heard came from a friend’s young son who referred to it as “Fakebook.” The wisdom that emanates from the “mouths of babes” should never be underestimated, however, since without buying support from the underwriters on Friday, FB probably would have breached the $38 offering price level. When you get away from all the hype and hoopla, the anti-climactic action of FB on its first day of trading is not too surprising when one considers that the company’s earnings have been in a steady if not sharp deceleration over the past three quarters, sequentially declining from +83% to +17% to -9% even as the company realizes record revenues and membership. As if on cue Friday, the moment that FB began trading at 11:30 a.m. EST the market started to roll over, tagging the NASDAQ with its fourth distribution day in a row. After undercutting the 2900 level, the NASDAQ Composite Index, shown below, could not even muster a quick “undercut & rally” maneuver, instead making a bee-line for the 200-day moving day average, the next “logical” area of support, as selling volume reaches extreme levels. But we were on to this a while ago, so this week should not have caused too much pain for Gilmo members, who were, hopefully, on the sidelines or short this market, as we’ve been discussing in recent reports.

NASDAQ Gilmo Report Stock Chart

With the NASDAQ and the S&P 500 heading for their 200-day moving averages, a number of the short-sale targets I’ve discussed in recent reports are doing likewise, and so there is little that is fresh on the short side, except for (CRM), shown below on a daily chart. CRM announced earnings Thursday after the close and came in with 32% earnings growth on a hard number of 37 cents vs. analysts’ estimates of 34 cents. Interestingly, CRM’s closest cloud cousin, VMware (VMW) beat estimates by six cents with a hard number of 66 cents per share and earnings growth of 32% on April 19th, and like CRM it also gapped up as a result. But it didn’t take long for that earnings-related gap-up to fizzle and fade. VMW is a $98 stock, while CRM is a $145 stock, making their earnings performance somewhat comparable. If VMW failed on its earnings gap-up (rememberthat cloud networker FFIV, another of our recent short-sale targets also gapped up on earnings and failed), does this then leave CRM vulnerable to emulating its cloudy brethren and failing as well? I tend to think so. On the daily chart below, we can see that the gap-up and earnings related move takes the stock right up into logical resistance just under the 50-day moving average where I believe it is potentially shortable, using the 50-day line as guide for an upside stop. Optimally I’d like to short the stock closer to the 152 level, but that will likely depend on whether the market can muster some sort of bounce off the 200-day line. (CRM) Gilmo Report Stock Chart

Since I started off this report discussing “Fakebook,” it probably makes sense to discuss what is going on with Google (GOOG), the company with which FB will be engaged in mortal combat going forward. GOOG currently sells at 15 times forward estimates, compared to FB’s 78 times forward estimates. GOOG is a master at monetizing its Internet activities, while FB is seeking to find ways to monetize its massive membership base. GOOG grew earnings 25% in the most recent quarter, while FB grew earnings a negative 9%. But despite flashing a pocket pivot buy point three days ago when it announced that it was going to “soup up” its search engine, sending the stock back above its 50-day moving average, as we see on the daily chart below, GOOG wasn’t able to hold the line on Friday as it reversed on much heavier volume than was seen on Wednesday’s pocket pivot. I’ve been following GOOG’s action for a while since as a former “big-stock” NASDAQ leader it has been relatively weak, as we can see from the numerous high-volume breakdowns and gap-downs in its pattern. Like the NASDAQ Composite Index, GOOG appears headed for its 200-day moving average, a breach of which I would likely consider a potentially shortable event.

Google (GOOG) Gilmo Report Stock Chart

On the weekly chart, below, GOOG has the look of a big, giant, ugly punchbowl, perhaps even a “Punchbowl of Death” or POD type of formation. Over the past four months the stock has been a big laggard as it has not participated with the market rally. Besides looking at this as a POD type of formation, we can also look at the pattern over the past four months as a failed, improper cup-with-handle breakout when the stock tries to clear the 660 price level in March. On top of that, if you focus on just the past three months of pattern it has the look of a head and shoulders top, and this past week’s action is the failure off of the peak of the right shoulder. GOOG has been a non-performer for a long time now, and one has to wonder whether it will eventually shake loose from this formation and bust the 200-day (40-week on the weekly) moving average. The market values GOOG’s forward earnings stream at 15 times, which is fairly feeble, and based on the distinct lack of any strong upside weekly volume combined with the prominent and big downside volume spikes in the pattern over the past five months, the stock appears to be under systematic distribution. In my view we should watch for a breach of the 200-day/40-week line as a potentially shortable event, depending on where the general market is at the time.


While FB perhaps looks a little silly with its fizzling IPO, those who thought the market’s biggest big-stock leader, Apple (AAPL), was a “sure thing” likely feel a bit sillier. AAPL is now 17% below its all-time high of just a couple of months ago, and the stock likely has a lot of “trapped” longs who thought that $1,000-a-share was a given for the stock, along with the rest of crowd, and bought AAPL in the $620-$644 level. If nothing else, AAPL proves that the market always seeks to fool the crowd, and it has been quite successful in this regard because there wasn’t an analyst, pundit, or commentator out there who didn’t believe that you “had to own” AAPL. LOL, anyone? (PCLN), not shown, is in a similar fix, and it remains to be seen whether these biggest of the big-stock leaders in the prior bull rally can pull up out of their hairy nose-dives before they collide with their 200-day moving averages. While PCLN never got going Friday on the upside, those who see AAPL as “cheap” (andgetting a lot cheaper at 11-times forward earnings estimates) tried to rally up to the 540 level but closed unchanged on a heavy-volume churning day. The problem with AAPL’s pattern is that there are no discernible levels of support on the way down, save for the 200-day moving average, so it remains to be seen whether the stock can pull up and out of this nose-dive.

Apple (AAPL) Gilmo Report Stock Chart

AAPL’s troubles mirror the markets, and this makes sense given its current status as the “market stock of choice.” Maybe we are at a short-term low in the stock, and with the 200-day moving average looming ahead for the general market indexes, a technical bounce and “reaction rally” is overdue. But this is a dangerous assumption, as four straight days of distribution on the NASDAQ Composite and five straight days on the S&P 500 Index are a very rare event, likely indicating a mass move for the exits and a rush for liquidity as problems for the market and the global financial system mount.

What is going on in Europe is one thing, but there is also a looming debt problem in China, where the real-estate sector is highly-leveraged. Playing the short side of this market, I have mostly operated on a day-trading basis, choosing to hold very little overnight since the one thing I feel short-sellers must acutely watch out for is the potential for an overnight futures jack based on the announcement of some sort of QE coming out of some government somewhere on the planet. Consider that in the most recent Fed minutes it was revealed that more “Fed heads” are leaning towards the implementation of more QE in the form of asset purchases, although nothing specific has been forthcoming from the Fed so far. With the indexes screaming towards their 200-day moving averages and the situation in Europe continuing to deteriorate, it would not surprise me to see a bounce off the 200-day moving average coincide with some sort of Fed hint or indication of some sort of QE. What is gold telling us in this regard?


In my view there is no way to solve the global debt crisis, from Europe to the U.S. to even China now, without printing more money. And the action in gold and silver over the past two days as they have decoupled from the stock market and leaped higher indicates that the scent of a QE announcement or indication is possibly in the air. Whether it is able to stop the death-dive in stocks outside of a temporary (andhopefully shortable!) bounce is a question that we can only let the market answer on its own. And for now that’s all we need to do, since we are not long, nor looking to get long, this market, given the current state of affairs.

We have seen some nice profits in short-sale target stocks I have discussed in recent reports. Members who are shorting some of these stocks should review my previous reports for downside price targets and profit objectives, as most of these appear headed for their 200-day moving average, which is often a first-stage profit objective for failing stocks as they initially roll over and break off of their peaks. Bottom line: This market is what we “rough-around-the-edges” traders like to call “fugly,” and it is not likely to get any sort of appearance-improving face-lift or cosmetic surgery any time soon without the intervention of central banks.

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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