The Gilmo Report

May 8, 2013

May 8, 2013

The market remains in what I like to refer to as “grinder mode” as it just continues to grind higher, whether that occurs on heavier volume or lighter volume, which doesn’t seem to matter much. As the NASDAQ Composite Index, shown below, pushes higher, individual stocks have been all over the place, which continues to make the market somewhat treacherous on a stock-by-stock basis. However, some opportunities do arise, and with the Russell 2000 small-cap index joining the other indexes in new high ground the market is firing on all cylinders, at least on an index basis. The indexes are getting a lot of help from so-called “junk-off-the-bottom” type names, but in a QE environment it is not necessarily a sign that something is not quite right with the market, e.g., that “the dogs are barking.” Thus it is a matter of making some adjustments and getting in sync with the type of stocks the market is favoring, and for this it seems more prudent to rely more on technical evidence rather than fundamental evidence, a point I’ll get into more detail about a little later, and to remain resourceful when it comes to buying pullbacks.




Apple (AAPL) continues to march higher as it picks up buy recommendations from analysts who are now more comfortable calling a bottom in the stock. Most of the price targets I’ve seen issued by the so-called “sell-side” community put the stock somewhere in the low- to mid-500 range, which would bring the stock somewhere up into or near its 200-day moving average, as we can see on the daily chart below. AAPL has provided useful assistance to the NASDAQ in its move to 12-year highs.




Google (GOOG) has followed through on its buyable cup breakout, as I discussed over the weekend, without bothering to form any kind of handle in the process. GOOG is basically coming up off the bottom of its formation in rapid fashion, a pattern that is not uncommon in this market. Volume has only been about average since the trendline breakout (see April 21st report), but this has not prevented GOOG from moving higher.




Netflix (NFLX) is failing to follow through on its buyable gap-up move of two weeks ago, and as I wrote in my report of March 1st, when a stock takes more than six days following a buyable gap-up the odds of it failing increase. Thus we now see NFLX moving below the 109.51 intra-day low of the gap-up day which I view as a stop-out for any long positions in the stock.




In contrast, Illumina (ILMN) provides a good example of how a buyable gap-up should act in the ensuing days following such a buy signal. ILMN, as we can see on its daily chart below, spent only three days moving tight sideways following the BGU before moving higher. In general, this is how you want to see a strong BGU act.




Over the weekend I closed out my March 5th report with a chart of Qihu 360 Technology (QIHU) and pointed out how the stock appeared on the verge of a breakout. The stock did just that on Monday morning, and despite a rather ugly-looking weekly chart, moved to new highs today.




Amazingly, Three-D Systems (DDD), which I first discussed in my May 1st report, announced a $250 million secondary stock offering with an additional 1.3 million shares being offered by insiders last night. But after selling off at the open the stock was able to recover from a point just above the 10-day line for a near pocket pivot. It might be close enough to buy using the 10-day line as a near guide for a stop.




Workday (WDAY) remains a very volatile stock, and this week’s breakout looked suspicious to me given that it occurred on relatively light volume that was only 16% above average as the stock jacked up to all-time highs on Monday. This pullback to the 10-day line, however, helps to correct that move. So the stock may be buyable here along the 10-day line with the idea that it should continue to hold at or above it.




Trulia (TRLA), which I discussed over the weekend, gapped down in sympathy to a not-so-exciting earnings report from industry cohort Zillow (Z), not shown, yesterday in the after-hours. The move came on heavy volume, but the stock managed to hold the 50-day moving average. Given the stock’s character, one has to wonder whether this is an opportunistic buy opportunity, using a violation of the 50-day line as a sell signal.




U.S. Silica Holdings (SLCA), which I discussed over the weekend, is still trying to work on its potential base low, pulling back to its 10-day moving average on a slight increase on volume that was still below average. What I’m still watching for here is a pocket pivot type of move back above the 50-day moving average. For now the stock is still trying to round out its base.




Nationstar Mortgage Holdings (NSM) illustrates the type of action I’m looking for in SLCA, as it issued a “bottom-fishing” pocket pivot buy point on Monday. Last Thursday’s action was also a similar pocket pivot type of move, but the long daily ranges serve to make these buy points a volatile proposition to buy into, particularly going into earnings yesterday. However, NSM did manage to produce a buyable gap-up move on Tuesday following earnings, which is technically a buy signal using the 39.09 intra-day low on Tuesday as your selling guide.




Bottom-fishers seem to be flocking to LinkedIn (LNKD), now that it got slammed after announcing earnings last week, as evidenced by the above-average buying volume in the days since. So far the stock has avoided a 50-day moving average violation by holding above last Friday’s intra-day low. But I’m starting to look at this as a possible short-sale set-up if it is unable to hold this short rally back above the 50-day line.




Facebook (FB) has pulled back to its 50-day moving average as selling volume has diminished, which creates a low-risk entry point for the stock. This pullback roughly retraces 50% of the prior move up off of the 200-day moving average, and given the nature of this market to produce v-shaped recoveries, FB could make an attempt to do that right here.




This market seems to be characterized by moves in laggard stocks such as Whole Foods Market’s (WFM) buyable gap-up move following earnings today. It is amazing to see such a huge move in a stock reporting 19% earnings growth that is showing a decelerating trend on similar decelerating sales growth of 13%. One could use the 99.75 intra-day low of today as a downside stop on this BGU since I would not be surprised if something like this ends up working given the nature of this market.




After all, Fossil (FOSL) gapped up yesterday after announcing an 18% earnings increase on 15% sales growth yesterday. Next quarter’s estimates call for “sizzling” 10% earnings growth, but if FOSL can follow-through on yesterday’s buyable gap-up move with more upside today, why not WFM?




Of course, not all of these gap moves work out when they come up from the lower part of a base, as Commvault Systems (CVLT) illustrates, below. Thus caution must always be exercised. But once an intra-day low can be determined on any BGU, it does become technically viable using that level as a stop.




And then there are the ones that are somewhere in between, such as Santarus (SNTS), which had a buyable gap-up way back in early March, but which has not issued a single new buy point/signal since then until it announced earnings earlier this week. This resulted in a buyable gap-up move yesterday. But today the stock drifted back in a bit, closing all of one penny below Tuesday’s buyable gap-up intra-day low of 20.42. Is this BGU still buyable? On the last gap move in March, the stock did stall a bit, closing mid-range, and was able to move higher. Thus it’s likely a matter of watching to see how the stock stabilizes and whether it is able to move tight sideways again in anticipation of moving higher.




A name I’ve never discussed previously in my reports but which is hitting my screens is Sinclair Broadcasting Group (SBGI), shown below on a daily chart. SBGI has been forming a flag, with one quick spin-out occurring after earnings last week, but the stock found support and closed at the top of its daily trading range. The past five days have seen the stock trade excruciatingly tight along its 10-day moving average. This brings up the clear possibility of a pocket pivot buy point developing along the line. SBGI priced an 18 million share secondary offering on May 2nd at 27.25 a share, and so far the stock appears to have absorbed that extra supply quite handily. Watch this one for a possible pocket pivot off the 10-day line.




Somebody asked me whether I’m bullish or bearish on this market. On an index basis I would have to say I’m bullish, but on a stock-by-stock basis I would have to describe myself as more “froggish,” preferring to jump and move around and take short-term trades on long set-ups when I see them as well as short-sale set-ups. Not that short-sale set-ups are all that prevalent lately. However, LNKD was one such opportunity after it gapped down on earnings in the mid-180’s and proceeded to close below the 50-day moving average, giving one a chance to take some “points” out of the stock on the short side, to use a phrase from Jesse Livermore. Now the stock has to be watched for a potentially more concerted break below the 50-day moving average, perhaps eventually undercutting the 165 April 3rd low, if one references the chart I showed further above in this report.


Meanwhile, this market remains one of unlikely candidates on the long side, an example of which is QIHU, growing earnings at the “torrid” pace of 10% in the most recent quarter but still able to jack more than 10% over the past three days. In addition we have seen some buyable gap-ups in stocks like WFM and FOSL that have come on what would normally be considered tepid earnings and sales growth numbers, but which apparently surprise the market enough to generate huge upside gap moves. Thus it appears that one must think a little bit outside the box here and be willing to move on technical signals more without adhering to stellar earnings and sales growth requirements. In some environments, flexibility is necessary, and this may be one of them. Stay tuned.


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


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