The Gilmo Report

November 3, 2019

November 2, 2019

A news-laden week came to an end with the NASDAQ Composite Index joining the S&P 500 in all-time high price ground. Among what I call the Big Three market indexes, only the Dow has yet to make new highs of its own.

 

 

This latter half of the week was chock-full of economic data, starting with the ADP Employment report on Wednesday, which came in at 125,000 jobs vs. estimates of 100,000. There was also third-quarter GDP growth of 0.48%, annualizing at a “blistering” 1.9%. The big event of the day was of course the Fed, which lowered rates another 25 basis points as expected, while indicating that they were on hold for now.

Thursday saw the Chicago PMI surprise to the downside, coming in at 43.2, its lowest level in four years. On Friday, the Bureau of Labor Statistics’ monthly jobs number came in at 128,000 which exceeded estimates ranging from 75,000 to 105,000. The day was rounded out by the ISM Manufacturing Index, which showed a contraction of 48.3, but was not as bad as some had feared.

Financials seized upon the idea of a Fed on hold, and the Financial Select Sector SPDR Fund (XLF) spewed to a higher high on Friday. Volume was light, but the move reflects the idea that rates are not headed any lower.

 

 

Curiously, precious metals seemed to have a different idea. Despite what the President described as a “blowout” jobs number, both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) posted their third up days in a row following the Fed policy announcement on Wednesday.

The GLD has also posted three, five-day pocket pivots in a row over those same three days, the first occurring at the 10-dma and 20-dema, and the next two at the 50-dma on Thursday and Friday. This remains buyable, in my view, using any of the moving averages as a tight selling guide.

 

 

The iShares Silver Trust (SLV) is slightly different, having posted a pocket pivot two Fridays ago on strong volume at the 50-dma. It then posted two five-day pocket pivots at the 50-dma on Wednesday and Thursday. The SLV remains buyable, in my view, using the 50-dma as a tight selling guide.

In general, the continuation of Fed accommodation without any liquidity being taken out of the system remains favorable for precious metals. This may also figure into a continued rally for stocks, especially big-stocks, as alt-currency plays like precious metals.

 

 

From my perspective, this market remains largely a function of what I have referred to as the alt-currency phenomenon. With the Fed lowering rates three times now while expanding its balance sheet once again, the system remains flush with liquidity. This liquidity in turn needs a home and so finds its way into big-stocks that serve as alternative currencies by virtue of their established, money-making business enterprises.

An example is Caterpillar (CAT), which reported earnings last week and missed estimates while guiding lower and stating it expects end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty. That certainly doesn’t sound like a big growth situation to me, but it has sent the stock higher as money rushes in.

Certainly, I can’t see how growth stock investors would be attracted to a company that reported contracting and decelerating earnings growth of -7% on a sales contraction of -6%. What is clear is that somebody or something is attracted to it, and their buying pushed CAT to a breakout on Friday on heavy volume, albeit one that is coming straight up from the lows of the pattern.

 

 

This alt-currency phenomenon is also what makes Apple (AAPL) so popular, in my view. Here you have a stock selling at roughly 17 times 2020 earnings while growing those earnings at 4% on 2% sales growth in the most recent quarter. For those who follow CAN SLIM® style fundamental rules, this doesn’t fit the bill, period.

But AAPL goes higher, and its movement helps to drive the NASDAQ Composite to new highs, no questions asked. In this position, and with those numbers, I don’t see much attractive about the stock right here, right now, on a fundamental basis. But that doesn’t keep money from piling into the stock as an alt-currency play.

 

 

I suppose if I were going to play the alt-currency thing, then perhaps the chart position of Alphabet (GOOG) is more attractive. Here we see the stock holding at its 10-dma after getting hit on earnings, but the post-earnings breakdown only brought it to the top of a prior base breakout point. This makes it buyable here using the 10-dma as a selling guide.

GOOG reported a -2% earnings contraction early in the week on a 20% sales increase, which in this market is considered buyable fundamentals. The idea of strong earnings as a driver of upside price movement has gone by the wayside and is a primary reason why systems like CAN SLIM®, which requires five quarters of earnings up 20% or more, are less effective.

Consider that the best-performing stock that I’ve reported on since early January has been Roku (ROKU), which has never had any profits to report and probably won’t when it is expected to report earnings this week. Also, remember that cloud stocks were huge performers early in the year and most had no profits to speak of. This is a phenomenon of a liquidity-driven market, and so technicals, specifically OWL technicals, become far more important.

 

 

I see little attractive in Amazon.com (AMZN), however, which seems not to find favor with the alt-currency crowd. It ran into its 200-dma on Friday and promptly reversed course on light volume. This makes it look more like a short here using the 200-dma as a covering guide.

However, if the alt-currency phenom persists, then watch for a move up through the 200-dma. If that occurs, then we could see AMZN make a move back toward its prior highs within the context of any continued market rally. In this market, what looks unattractive can often have the most surprising upside moves.

 

 

Investors also seem unsure of what to make of Facebook (FB). The company beat on earnings this past Wednesday and gapped up on Thursday, opening at 196.70. It then rallied a couple of points higher and finally turned tail to close 191.65. So that worked out more as a shortable gap-up move after earnings, but technically was still a stalling pocket pivot at the 10-dma.

FB is now back to the top of its prior price range. Volume was lighter but still above average as the stock fought off a mid-day sell-off on Friday to close positively. FB posted positive earnings and sales growth of 20% and 29%, respectively when it reported Wednesday, which at least sounds respectable vs. what we’ve seen in names like CAT or AAPL.

If FB can hold near-term support at its 10-dma at 188.36, then this could be a lower-risk entry spot right here, on the basis of Thursday’s stalling pocket pivot on huge volume, using the 10-dma as a tight selling guide. My general thinking is that if the market rally continues, then big-stock alt-currency plays may remain the stocks of choice, and if they have earnings and sales growth, so much the better – perhaps.

 

 

Netflix (NFLX) looks interesting here as it pulls into the 50-dma with volume drying up after it regained the 50-dma on Wednesday on a five-day pocket pivot. The closer to the 50-dma one can buy it, the better, while using the 50-dma as a tight selling guide. A breach of the 50-dma, however, would potentially turn NFLX back into a short-sale target at that point.

 

 

Tesla (TSLA) continues to drift lower following last week’s big buyable gap-up move. As I tweeted on Monday, I sold my position into the rise that day, and the stock has since continued to drop for five days in a row now as volume has receded sharply.

The best reference for a buyable pullback is the 10-dma, which is rising rapidly but remains below the $300 price level. Thus, it’s a matter of waiting for the 10-dma to catch up to the stock before one can determine where a lower-risk entry spot lies.

 

 

One phenomenon in this market that I believe adds weight to my alt-currency theory of money flows into stocks is the destruction we’ve seen in the IPO sector of the past few months. These names for the most part make no profits, and in fact lose money hand over fist. This includes something like Lyft (LYFT) which gapped up after earnings and then was promptly sold.

This resulted in a nicely shortable gap-up move, and one that was immediately profitable. It’s clear that no matter the hype, money that’s looking to buy stocks isn’t interested in companies that only lose money. One might look at this as potentially shortable on the move back up into the 50-dma on Friday. But we have Uber (UBER) expected to report earnings on Monday after the close, which could add a wrinkle to LYFT’s future action.

 

 

We also saw more carnage in Pinterest (PINS), which at one time was a leading stock breaking out. The company reported earnings Thursday after the close and gapped down to the $20 price level. Whatever is moving this market, its clear that recent IPOs are not it.

 

 

Applied Materials (AMAT) pulled into its 10-dma and the top of its prior base on Thursday, presenting a lower-risk entry. This is still in a buyable position using the 20-dema as a maximum selling guide.

 

 

Micron Technology (MU) also pulled into its 10-dma, 20-dema, and 50-dma on Thursday and found support at the moving-average confluence on slightly higher volume. For anyone looking to buy shares, that was the lower-risk entry spot. MU just missed a pocket pivot on Friday by one day, since the higher downside volume of October 18th occurred exactly ten days prior.

 

 

Advanced Micro Devices (AMD) has continued to spurt higher following the strong-volume support it showed at the 10-dma on Wednesday after earnings. It is now extended as it approaches its prior early-August highs, pending some sort of consolidation or pullback from here.

 

 

If you like to buy breakouts, then Guidewire Software (GWRE) is for you. My preference was to buy it in the base, at least on pullbacks to the 10-dma where it has held support, as lower-risk entries. However, on Friday, the stock posted a strong-volume breakout as it cleared to new highs.

As a breakout, this becomes buyable here using the 10-dma as a tight selling guide. I would emphasize that if buying breakouts, the traditional 7-8% standard stop-out policy is inefficient and statistically incorrect. There is nothing magical about 7-8% as a stop-loss point, and I prefer to use moving averages like the 10-dma or 20-dema as a matter of tighter risk-management.

 

 

When it comes to breakouts, instead of chasing them I prefer to hang loose and wait for an opportunistic pullback. Take the case of Keysight Technologies (KEYS), which broke out two weeks ago on strong volume. This was a smarter strategy. KEYS pulled right into its 20-dema on Thursday and held, then tested the 20-dema again on Friday and holding again.

In this position, the stock can be bought using the 20-dema as a tight selling guide. Otherwise, one could use the 50-dma as a wider selling guide, but again I do not recommend using a 7-8% stop-loss since statistically it is proven to be arbitrary, and nothing more.

 

 

Coupa Software (COUP) is back above the 50-dma after a low-volume reversal at the line on Thursday. As I wrote on Wednesday, the stock tends to break down and then slowly work its way back above the 50-dma, and it is doing it once again.

Friday’s move occurred on a five-day pocket pivot. Sellers don’t seem all that interested in coming after the stock again, and the question arises as to whether it will test its prior highs, as it does after each sharp breakdown to the lows of its pattern. Therefore, in this position, one could test this as a long here using the 50-dma as a tight selling guide.

 

 

From a textbook perspective, ServiceNow (NOW) looks like a short here as it stalls at the 50-dma and 200-dma on higher volume. There is also an undercut & rally situation at play here since the stock has recently rallied above two prior lows in the pattern.

NOW held support at the 20-dema on Friday as volume picked up, qualifying the move as a five-day pocket pivot at the 20-dema. If the general market keeps rallying, I would not be surprised to see NOW clear its 50-dma and 200-dma.

Otherwise one can test it as a short near the two moving averages but be ready to flip the other way if it fails to reverse. My guess is that market context will likely figure heavily into whether NOW can clear the 50-dma/200-dma confluence or whether it fails in textbook short-sale fashion right here.

 

 

DocuSign (DOCU) continues to base along its 10-dma. The stock posted a five-day pocket pivot on Friday as it again found support at the 10-dma. This remains buyable on pullbacks to the 10-dma, with the proviso that a breach of the 10-dma could trigger the stock as a short if it occurs. One can also view the stock as buyable here, using the 10-dma as a tight selling guide.

 

 

Among my focus list of Chinese names, Alibaba (BABA) reported earnings on Friday morning and started to the upside before reversing to close down on heavy volume. While the breakout attempt fell short, it still held above four moving averages on its chart, all of which serve as near-term support. If the stock can settle down along the 10-dma, which is the highest of the four, then it could become buyable there using the line as a tight selling guide.

 

 

Momo (MOMO) held support at its 200-dma on Wednesday and Thursday as volume remained low, and then posted a higher-volume pocket pivot on Friday.  One could therefore view this as buyable using the 50-dma as a very tight selling guide, or the 200-dma as a wider selling guide.

 

 

In the land of payments stocks, the action is looking more bullish than bearish. I’m interested in two names that I was previously campaigning as shorts several weeks ago.  Global Payments (GPN) reported earnings Thursday before the open and gapped up. It opened at 169.35, rallied as high as 174.11 and near its early-September highs, and then stalled badly to close at 169.18.

This could have been scalped as a short near those September highs, and successfully so. But GPN found its feet on Friday as it undercut the 168.53 intraday low of the prior buyable gap-up (BGU) day and rallied to close at 172.35. This can be watched for further lower-risk entries on pullbacks closer to the BGU low at 168.53.

 

 

PayPal (PYPL) is also interesting here as it consolidates last week’s bottom-fishing buyable gap-up (BFBGU) along its 50-dma and the BFBGU low of 103.19. PYPL tested that low and the confluence of the 10-dma and 20-dema on Thursday and held. It then rallied back above the 50-dma on Friday as volume declined.

In this position one can test this as a long using the 50-dma as a very tight selling guide. Otherwise, the 103.19 intraday low of the BFBGU day two Thursdays ago would serve as a slightly wider stop, less than 3% below where PYPL closed on Friday. If it busts the 10-dma and 20-dema, however, then it could return to short-sale status at that point.

 

 

 (SNAP) looks like a textbook short here as it stalls at the 50-dma. The 50-dma would then serve as a tight covering guide. Note that SNAP is still in an active undercut & rally (U&R) set-up here after rallying through the prior 13.42 low two Thursdays ago on the bounce off the 200-dma.

 

 

For those of you who like U&Rs deep, down and dirty, Twitter (TWTR) certainly fits the bill. As I noted last week, an undercut & rally move could develop along the 29.41 and 29.42 lows in the pattern from March and February, respectively, as we can see on its weekly chart.

We did see that occur on Friday, and TWTR was able to hold above the 29.41 price level on Friday on a small pullback. Technically, this can be played as a U&R using the 29.41 price level as a tight selling guide.

 

 

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

The 360-degree approach to the current market environment in my view proves its utility. This market defies labels, and a 360-degree approach does not try to impose labels on the market. When it comes to individual stocks, some set-ups are bullish, while others are bearish. All one needs to do is cast aside any rigid bias and look to play things as they lie.

However, on an intraday basis, things are not always so clear, as volatility is a real factor to contend with. Stocks can slosh all over the place, looking one way early in the day and then looking entirely different by the close. Also, moves can progress in one direction bullishly or bearishly over a few days, and then develop into valid set-ups that send them in the oppose direction, so it’s still a tricky market.

My focus remains on potential high-velocity moves in stocks once earnings are reported. Earnings season has already resulted in numerous moves that have been playable for high-velocity, high time-value trades in either direction. This coming week will see more earnings reports, and I will post my Earnings Watch List to the Gilmo Live Blog this weekend. I will also discuss some other stock ideas in my weekend video report.

With respect to the broader market, my thinking here is that if this rally continues, and does not fail any time soon, it will become a big-stock alt-currency situation. That is why I started this report with discussions of big-stock NASDAQ names that would potentially lead such a rally and where investors can focus.

But there is always the possibility of a mass, cash-is-trash move in a broad number of stocks based on the fact that the Fed has kept the QE spigot wide open, and that is what I’m on the alert for right here, right now. Two out of three big-stock indexes are at all-time highs – previously, this is where we’ve seen rallies peter out, so is it different this time? 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 no positions, though positions are subject to change at any time and without notice.

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.