The Gilmo Report

May 5, 2013

May 5, 2013

A lukewarm jobs report on Friday provided the market with just the right temperature of porridge to feast on. U3 unemployment dropped from 7.57% to 7.51% thanks to definitional exclusion of those who have “dropped out of the workforce” for more than three months, while U6 unemployment ticked up from 13.8% to 13.9%. This was good enough to prove to the market that the economy is not falling apart. At the same time, it proved being weak enough, given that total hours worked dropped more than enough to negate the alleged increase in jobs, to keep the Fed working the QE pump as it continues to expand its balance sheet beyond the current $3.4 trillion. This sent the market gapping higher on Friday, as we can see on the daily chart of the NASDAQ Composite Index, below. This took the index above the top of its rising trend channel line as it traded in a relatively tight range on volume that came in just a hair lighter than Thursday’s volume.




The S&P 500 and Dow Jones Industrials Indexes also moved up sharply right at the opening, a gap-up move for all practical purposes, and also traded in a narrow range all day, although their charts have the appearance of a continuous move higher that closes near the peak of the daily trading range. This gives the daily chart of the S&P 500 Index, shown below, the look of a clean breakout from a short cup-with-handle type of formation. The Dow Jones Industrials also flirted with the 15,000 level, briefly rising above that much hyped level before backing off a bit going into the close.




The idea of a jobs report that was neither too hot nor too cold but “just right” for QE continuity is confirmed, in my view, by the fact that gold, as represented by the SPDR Gold Shares (GLD), held tight on the day.




Had the jobs report been viewed as a sign of an imminently improving economy that has now regained the necessary robustness to enable its thriving existence independent of any QE life support system, gold would have certainly taken a tumble. With the European Central Bank lowering rates on Thursday, a move that sparked a low-volume rally on Thursday, and Japan’s previously announced Kamikaze QE, the global fiat money-printing party shows no signs of abating.


The NASDAQ Advance-Decline line, shown below, joined the NYSE Advance-Decline line in new high territory this week. This confirms that money continues to move into stocks in broad fashion, even if the action in individual stocks can be erratic. The homebuilders, which have remained a leading group with many of these names making new highs over the past week, are an example of stocks that are so choppy and volatile that their uptrends are nearly impossible to play. Meanwhile, solar energy stocks together constitute the #1 industry group currently, and all of them are making “junk-off-the-bottom” types of moves. Thus it seems to me that if one is going to make progress in this market one has to think somewhat outside of the box and be willing to trade technical patterns that may not always line up perfectly with the fundamentals. Witness Seagate Technology (STX), not shown, which gapped up on Thursday as it broke out of a cup-with-handle to initiate a two-day, 10% price move after announcing earnings growth of -52% and sales growth of -21% while next quarter’s estimates call for -50% earnings growth! Go figure.




Meanwhile, LinkedIn (LNKD) comes in with 200% earnings growth but lowers guidance a bit as they seek to invest in the expansion of their business, and it gets slaughtered on Friday, as we can see on its daily chart below. LNKD was trading higher on Thursday going into earnings, pushing just above the $200 “century mark” as volume was increasing, but the 200 level quickly turned into a massive wall of resistance as the stock came crashing down below its 50-day  moving average. Next quarter’s estimates still call for 94% earnings growth, but this is apparently not good enough for the market. Perhaps if LNKD had announced -50% earnings growth on a -25% sales growth number the stock would have gapped up 10% to 220! And yes, I am being facetious here. The bottom line here is that a massive-volume gap-down off the peak is an instant sell signal, in my view. And if you hesitated, you got treated to another 12 points of downside by the close. A move below Friday’s intra-day low of 173.72 constitutes the ultimate sell signal for LNKD, sealing its status as a failed leader.




And speaking of failed leaders, Apple (AAPL) is beginning to show some signs of fatigue on this latest bounce off of its 52-week lows and back above its 50-day moving average, as we can see on its daily chart, below. AAPL founds its feet after some trepidation following last week’s earnings announcement, but notice how volume has rapidly dried up and the stock appears to have stalled a bit on Friday even in the face of a strong market index rally. This leads me to wonder whether the stock isn’t a short at current price levels since it doesn’t seem to display the kind of volume thrust that I might be looking for in a “junk-off-the-bottom” rally. But its bounce over the past week-and-a-half has helped to fuel the NASDAQ’s move to a 12-year high as its weighting in the index has increased to 7%. On Tuesday AAPL priced the largest debt offering ever held by a non-financial company as investors snapped up $17 billion worth of AAPL bonds. It is interesting that with its massive cash hoard AAPL still finds it cheaper to borrow money, which is perhaps a sign of the times as well as a sign of AAPL’s shift from a nimble, entrepreneurial growth company to a mature market elephant. Perhaps a short-sale is justified here using Friday’s high of 453.23 as a quick upside stop.




Among other big-stock NASDAQ names we can see that Google (GOOG) has managed to hold its trendline breakout of two weeks ago (see April 21st report) as it moves to a new, all-time high on volume that was 10% above average. I see this as another buy point in the stock, although it could back-and-fill a bit as it forms a small handle.


GR050513-GOOG (AMZN) is rallying up into resistance in the 260 price zone after breaking down last week. This might become shortable here up to the 50-day line at 263.47 should the market rally falter or simply pull back as AMZN remains in a weakened state of affairs.




Three-D Systems (DDD), which flashed a “bottom-fishing” pocket pivot on Tuesday, as I discussed in my report of this past Wednesday, pushed over 10% from there before finding some resistance at around the $42 level. Staples (SPLS) announced that they would be carrying the company’s consumer 3-D printers. Buy pullbacks to 38-39 from here, with the requisite stop.




Proto Labs (PRLB), another 3-D play, broke out on Friday from a V-shaped formation, but the bizarre volatility of this stock lately makes it difficult to play, not to mention the fact that despite Friday’s breakout it still has a D+ accumulation/distribution rating!



LED-lighting play Cree (CREE) stubbornly held the top of its prior price range and broke out to new highs on a 27% increase in volume. I would look to buy the stock on weakness down to the 55-56 level, as a breakout from a four-week base might not be sufficient to launch a significant price move from here.




In my Wednesday report I was going to mention how Regeneron Pharmaceuticals (REGN), was showing “ants” and holding tight along its 10-day moving average. But I was a day late as the stock launched higher following news of delays for rival Allergan’s (AGN) macular degeneration drug on Wednesday. And to think this all started with a pocket pivot buy point (see March 31st report) within the base in late March.




Facebook (FB) finally founds its feet after some wild price swings in after-hours trading Wednesday after it announced earnings. The net effect of Thursday’s sharp upside move followed by a roughly 50% retracement and pullback on Friday was a weekly move back above the 10-week moving average, as we see on FB’s weekly chart, below. FB is an interesting situation, as I see it, given that it seems to be trying to round out the lows of a possible cup base despite having a 47 Relative Strength and 0% earnings growth in this last quarter. Earnings came in a penny below estimates, but mobile ad revenue growth beat expectations, and this is the wild card with respect to FB’s ability to generate future growth. FB is expected to earn 78 cents a share for all of 2014, which puts it in the realm of your standard internet stock with respect to annual earnings. The pattern has a couple of upside volume spikes in the pattern, so my view is that if it can hold the 27-28 price area it has a reasonable chance of working.




I’ve been watching the price/volume action of Trulia (TRLA), a company that matches home buyers and renters with sellers and landlords as well as mortgage professionals, and I found the weekly chart to be of interest as it popped through my screens this weekend. TRLA has been a money loser so far, but is expected to turn the corner in 2013 with 16 cents in annual earnings while 2014 is expected to show a 381% improvement to 77 cents a share. The stock was looking a little sickly earlier in the week as it plummeted through and violated its 50-day moving average. But following its earnings announcement on Tuesday after the close, the stock gapped up back above the 50-day line on Wednesday. It then paused on Thursday and proceeded to break out of an oddly-shaped cup-with-handle formation on Friday. This resulted in a massive-volume weekly upside reversal on a volume spike that represents the highest weekly volume since the stock came public last September. Given the volatility of this stock, I would prefer to buy a pullback from here down to 33-34.




Speaking of huge weekly upside volume spikes, I was interested to see oil and gas fracking sand supplier U.S. Silica Holdings (SLCA) flash some big weekly support volume off its lows after it announced earnings on Tuesday of this past week. Earnings growth came in at 0% this most recent quarter, resulting in a quick sell-off on Tuesday before the stock rallied to close nearer to the peak of its price range. SLCA is expected to resume earnings growth with a sequential acceleration over the next several quarters of 11%, 25%, 33%, and 40%, according to most analysts’ estimates. SLCA remains below both its 50-day and 10-week moving averages, but I think it needs to be watched closely for a possible “bottom-fishing” pocket pivot move on any attempt to regain its 50-day moving average. I may be all wet here, but in this market it seems that a lot of stocks get left for dead by investors, only to suddenly rise again and streak to higher highs. Thus wherever we can find clues to potential bottoming action in individual stocks, then we should at least place them on our buy watch lists.




I want to circle back to Netflix (NFLX), which has now spent the past eight days going nowhere following its big buyable gap-up move after announcing earnings last week, as we see in its daily chart, below. This has given the stock’s 10-day moving average a chance to catch up to the stock, setting up a potential area of support as we see volume dry up in the extreme. NFLX was unable to move on Friday despite the big index rally, so I would keep a strict stop at its gap-up day’s intra-day low at 209.51. According to IBD, NFLX has formed a “short-stroke” pattern, but in practice this pattern is usually nothing more or less than a buyable gap-up move where the stock has hung out and moved tight sideways for a few days to a week following the BGU. Also, using a 7-8% downside stop on a “short-stroke” pattern is less efficient than using the rules of a BGU where the intra-day low of the gap-up day is within 2-4% of its current price, thus providing a tighter, more well-defined downside stop. Right now NFLX is about 2% above the 209.51 buy area, thus in a very low-risk buy area should it fail.




Despite the market’s continued uptrend, this still remains a difficult market on an individual stock basis, as holders of LNKD learned this past week. On the other hand, it has its moments of glory as holders REGN experienced this week. But “streakers” like REGN are far and few between, and most of the sharpest upside action has been seen in stocks coming up off their lows, such as the homebuilders, or in stocks like Russian internet leader Yandex (YNDX), not shown, which jacked 30% higher after announcing earnings last week. TRLA also exhibited this type of action this past week, and we’ve also seen the once left-for-dead Qihoo 360 Technology (QIHU) march right back up to its 52-week highs after it violated its 50-day moving average in March, as we see in its daily chart, below. Interestingly, QIHU also flashed a “bottom-fishing” pocket pivot on April 17th as it came back up through its 50-day moving average. Now it looks like it is setting up to break out to new highs after flashing some “ants,” indicating that the stock has been up 12 out of the past 15 days in a row or better, and moving tight sideways here. In this manner, “bottom-fishing” pocket pivots are proving to be a useful tool in this odd market, and REGN or DDD are good examples of this phenomenon. Thus I believe investors should be open to testing them on the long side when they are detected.




Referencing the daily chart of the NASDAQ Composite Index shown at the beginning of this report, some may note that the NASDAQ’s gap-up move on Friday has the appearance of churning in a narrow range, and candlestick chart fans might also notice that this has the potential to set up an “evening star” formation should the indexes gap down on Monday. Should this occur it might be considered bearish action, but given the extended state of the indexes after a sharp and “improbable” run-up over the past two weeks, it might just lead to another buyable pullback. QE appears to be the overriding force in this market, and I believe it accounts for some of the rotational action we see where once left-for-dead stocks suddenly leap back to life. And so I advocate looking for more “bottom-fishing” pocket pivots as a trading tool that might provide an edge in this otherwise difficult market. Otherwise, unless further evidence to the contrary emerges, the markets remain in an uptrend for now, and long investors should look to be resourceful and opportunistic in their approach whenever possible.


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 a position in FB, though positions are subject to change at any time and without notice.


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