The Gilmo Report

May 27, 2012

May 27, 2012


The market situation has not changed since my last report as the major market indexes, represented by the NASDAQ Composite Index daily chart below, all remain in a short rally attempt off the lows of two Fridays ago. Volume declined sharply on Friday as traders allegedly “headed off to the Hamptons,” a standard pre-holiday bromide that I have trouble comprehending given that I spend all of my trading time on the beach in Southern California. In any case, one can take the bullish stance here by proclaiming the market to be in a five-day rally attempt with the possibility of a follow-through at any time, or one can take a bearish stance and say that the market is simply working its way through an inverted “bear flag” in preparation for the thus-far elusive test of the 200-day moving average as resistance looms above at the NASDAQ’s 2900 level. In my view the first small leg off the peak has likely run its course, and we remain in the position of looking to see where this market heads from here. Obviously, troubles in Europe combined with a weakening global economy are the headline “drivers’ for the NASDAQ’s 9% and the S&P 500’s 7% declines off of their respective recent highs. Europe’s troubles spread from Greece to now Spain, which Friday after the close announced that it was nationalizing its third largest bank, Bankia, an ironic announcement when one realizes that Bankia went public in an IPO a mere ten months ago!

NASDAQ Gilmo Report Stock Chart

How the world has changed. When I made my first million in the markets I used to steal the Mexican-American golfing legend Lee Trevino’s joke line that “I used to be Mexican, but since I became a millionaire I’m now Spanish!” These days, from a fiscal point of view, one might prefer to be Mexican than Spanish as our neighbor to the south embraces free markets, sound money, and economic growth while the Land of the Conquistadors, Spain, becomes the Land of the Liquidators and melts into the sunset of fiscal irresponsibility along with their Greek cohorts. But then the mass of fiscal disasters masquerading as sovereign nations these days gives rise to a number of updated versions of such ethno-sovereign financial humor, the most recent inspired by Facebook (FB) co-founder Eduardo Savarin, who might justifiably joke that “I used to be American, but since I became a billionaire I’m now Singaporean!” as he renounces his U.S. citizenship in favor of the more fiscally-sound and relatively tax-free island nation of Singapore.

Ethno-sovereign humor aside, what bothers the markets these days is the billowing mass of thunderhead clouds on the horizon that is the global sovereign debt crisis. Each new wave of crisis in Europe has been headed off by another proverbial kicking of the can down the road. But as the holes in the dike multiply, one has to wonder how many fingers government figureheads and officials in these debt-challenged countries have left. Obviously, the markets will provide the first warning shot, and so far with the NASDAQ Composite and S&P 500 Indexes down 9% and 7%, respectively, the bottom line is that all of these current issues have only amounted to what is, objectively, nothing more than a normal intermediate-term correction – so far – and further downside is certainly not out of the question.

In the meantime, the market’s decline has provided some short-term, short-sale profits in stocks like CF Industries (CF), Valeant Pharmaceuticals (VRX), and now F5 Networks (FFIV) which hit its downside price objective when it slammed into its 200-day moving average this past Thursday. Those were successful, tactical short-sale trades based on the initial, and often shortable, breakdown as the stock first falls through its 50-day moving average. As I see it, everything is right where it should be in the midst of a 7-9% intermediate-correction, and it is now a matter of seeing whether we are set up to try and follow through to the upside or whether the market is ready to roll over again. (CRM), which I first discussed as a short-sale target in my report of May 6th, just before it made a bee-line for its 200-day moving average, is representative of how these late-stage base-failure/POD formations initially start out. CRM smashed through its 50-day moving average after failing on an attempt to make higher highs in mid-April, approached its 200-day moving average, and then gapped up and rallied back up into its 50-day moving average after surprising on earnings. So far the stock has not been able to get back above the 50-day moving average, so I tend to want to use any move up into 150-153 as an opportunity to short the stock into a rally. Right now CRM is, to some extent, mimicking the action of the general market indexes, and so if the market starts to roll over again my tendency is to come after CRM right here on the short side. Of course, it is not clear yet whether this rally is on the verge of failing or whether the past three days represent a consolidation of the prior gap-up and rally into the 50-day line. The stock could spend a few more days diddling around the 50-day line, so keep this on your short-sale target list with the idea of getting aggressive if the market starts to roll over again. (CRM) Gilmo Report Stock Chart

LinkedIn (LNKD), is in a similar position to CRM, as we see on its daily chart below, but is more of a “punchbowl of death” (POD) type of set-up. The stock has come under pressure as a result of the silly “Fakebook” (FB) IPO and subsequent price movement straight downward, but is finding support at around the 95 price level which I’ve highlighted on the chart. LNKD looks to me like it may need to bounce off of this level and up into the 50-day line at 103.40, maybe a bit further up to the 20-day moving average at 107.04, one or more times, as I discussed in my report of this past Wednesday. One of the problems I have with LNKD, from a fundamental perspective, is the decline in profitability for the company as measured by its return-on-equity (ROE). Last year LNKD sported a whopping 96.4% ROE, while this year that has dropped precipitously to 11%. FB looks better with a 28.4% ROE, but that hasn’t saved it from diving over 20% from its IPO offering price. On a weekly chart, not shown, LNKD did get some support off the 95 low this week, an obvious area of support. However, I would still look to short this into any rally that carries up to the 103-107 price area. As always, with all shorts, use a maximum 3-5% upside stop to keep yourself out of trouble.

LinkedIn (LNKD) Gilmo Report Stock Chart

Last weekend I discussed the big, ugly POD-like pattern that Google (GOOG) has been forming for some time as a continuous market under-performer in 2012, and I stated that I would look to short the stock on a weak rally up to the 50-day moving average at around 520, or a high-volume breach of the 200-day moving average. While GOOG was not able to get as high as the 520 level on any of its rally attempts over the past week, it did bust through its 200-day line on the downside this past Friday with volume picking up, as we see on the daily chart below. From here I would look to short the stock up to the 600 price level, more or less, a move of less than 2% from GOOG’s close on Friday, using a tight stop at Friday’s intra-day high. Along with CRM and LNKD, GOOG is one of a small handful of short-sale targets I’m looking at right now with the idea of coming in on the short side with these if the market starts to roll over. All three qualify as former big-stock leaders, and as of this weekend all three are showing initial technical weakness as they potentially begin to break down. How these pan out, however, will likely depend on where the general market goes from here, so the situation remains fluid.

Google (GOOG) Gilmo Report Stock Chart

While “Fakebook” (FB) has stolen most of the stock market headlines recently, Apple (AAPL) remains in the background as everyone wonders what happened to the allegedly bullet-proof big-stock behemoth that now sells at an incredibly “cheap” 12 times forward earnings estimates. After undercutting its previous 555 low AAPL spent the past week climbing back above its 65-day exponential moving average as it tries to build a new base in what is so far a seven-week pullback. If the market were to turn around and start a new rally phase I might expect AAPL to come out of what could be considered a second-stage base, but this is not clear either. Among AAPL’s biggest institutional sponsors, Fidelity Contrafund, which has a 10.6% position in AAPL, has finally reported selling not quite 10% of its position in the most recently reported period, dropping its position to 13,709,400 shares from its previous 14,662,000-share AAPL position. Fidelity Magellan also cut about 18% of its 1,788,000-share position in AAPL out as it still holds a 6.7% position in the stock. The big “axes” in the stock appear to be leaving, representing a potential tidal shift of institutional sponsorship in AAPL that should be telling.

Apple (AAPL) Gilmo Report Stock Chart

If we did see the market spew out a follow-through day in the coming days, the biggest question is what there is to buy in such an event. Stocks that build bases are far and few between currently, which in my mind argues for the potentiality of further correction or at least choppy sideways movement in the major market indexes. As well, the potential for some big money-printing announcement out of Europe also throws in a big wild card, and is one reason why I have mostly limited my short-sale operations to 2-3 day “hit-and-run” trades or, in some cases, day-trades. I suppose if I had to come in and buy something I would look for stocks like Mellanox Technologies (MLNX), not shown, which I discussed in my report of this past Wednesday as holding up in a very tight flag type of formation, or maybe Monster Beverage (MNST), shown below on a daily chart, which flashed a pocket pivot from a slightly v-shaped formation this past Thursday. Friday’s pullback in MNST was probably necessary to correct this pocket pivot occurring from a slightly wedging, v-shaped position.

Monster Beverage (MNST) Gilmo Report Stock Chart

While any combination of news events could send the market spinning in either direction, the bottom line is that for now the trend remains down as the market correction remains in full force until and if the market is able to produce an upside follow-through day. Right now I’m not trying to lean one way or the other as I play light and keep my list of ideas on both the short and long side quite limited given the position of the general market indexes. Even if we are starting a longer-term bear market phase we are still in the very early stages and whatever short-sale opportunities that do arise are likely to be short-term affairs such as we’ve seen in the sharp breaks to their 200-day moving averages in short-sale target stocks like FFIV, CF, and VRX, for example. CRM and LNKD may be next, for all we know, and so I am alert to these names as potential short-sale targets as they could become the next pieces of rotting fruit to fall from the tree.

Meanwhile, cash is king while short-selling remains a viable possibility for those brave enough to venture into such tricky waters. The position of the major market indexes dictates, however, that the easy pickings on the short side have come and gone, and only a new leg down will provide our current short-sale targets with the impetus to move lower and give us a shot at another round of quick short-sale profits. As the nursery-school rhyme goes, “Jack be nimble, Jack be quick, Jack jump over the candlestick!” I say be ready for anything as the thunderclouds that are the European debt crisis again billow up on the horizon in an ominous way.

My expectation is that we will see another round of money-printing as well as another round of QE from the Fed at some point, and so I would keep an eye on gold here as it is not clear to me that such maneuvers would necessarily be beneficial for stocks. Thus I will end this report with a controversial call: Watch gold here, and if one is so inclined, buy the GLD using the 148.84 low of this past Wednesday as a quick downside stop. If we look at a weekly chart at spot gold, below, we can see three clear selling waves as the yellow metal tests its previous lows on either side of the $1550-an-ounce level, as I’ve highlighted on the chart. In my view, if gold is going to rally up off these lows, this is where it is going to have to happen, and so this presents us with an interesting risk-reward opportunity in that a long position in gold here has a quick exit point if the metal cannot hold this current area of support. Sentiment is now extremely bearish for precious metals, and historically the best time to buy precious metals is when everybody hates them. As well, the metal has reached oversold levels not seen since prior lows in 2006 and 2008. On the basis of these three-waves-down in the weekly chart of gold I think this is a very viable trade here, although one could wait for a more positive buy signal to show up in gold such as a pocket pivot or trend-line breakout should it continue rallying up off of its lows. But those are a long way off, and my expectation is the current pulsation of crisis in Europe will be met by more money-printing, thus I tend to see further currency devaluation around the globe as a continuing long-term trend. If this is the case, then gold has the potential to be very buyable right here, and as long as I have a clearly definable and relatively near exit point I consider the risk/reward to be favorable for gold here on the long side. Meanwhile, I tend to favor silver less here since its industrial uses make it vulnerable to the perception that floundering global economies will reduce demand for industrial metals like silver as well as copper, for example. Thus gold is my QE/money-printing vehicle of choice here if the news flow confirms that the can will continue to be kicked down the road in Europe.


Of course, I could be wrong, but that is what stops are for. I should note that I am scheduled to appear on Fox Business News’ Stuart Varney & Company show this Tuesday at 7:20 a.m. Pacific, 10:20 a.m. Eastern. So far, I have not been informed as to what topic Stuart & Company will want me to address, but I’m betting that it will be related to the European crisis (morekicking of the can down the road), the potential for a global economic recession (themarket is already telling you what we can expect with big declines in European markets), or precious metals (buyablehere, in my view, with a decent risk/reward set-up).

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC


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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.