The Gilmo Report

November 30, 2011

November 30, 2011

The always random QE factor came into play today as the Fed stepped in and, along with five other central banks around the world announced what amounts to yet another twist on quantitative easing, offering dollars at lower rates to foreign banks, all designed to provide freshly-minted liquidity to a European financial community that is literally gasping for air. Because the Fed and its cohorts chose to act now, instead of waiting for Europe to step forth with a solution to their haggling, it gives some sense as to the urgency of the situation. The question is how effective this new round of dollar-swap QE is in providing a final solution, and whether this new source of liquidity will keep stocks buoyant and crash-free. The answer, of course, is found by simply moving with the evidence at hand, which is of course the price/volume of the market and individual stocks. The daily chart of the NASDAQ Composite Index, below, tells us that all we can know for sure right now is that we are in day three of a rally attempt, as I would not call today a less common third-day follow-through given the heavy news influence. If anything, today’s action proves that this market remains a wild, volatile environment where net overall progress is difficult.

NASDAQ Composite Index Gilmo Report Chart

Despite its recent weakness, gold, as represented by a daily chart of its proxy, the SPDR Gold Shares ETF (GLD), below, held up and in fact never violated its 50-day moving average. The first close below the line seven trading days ago never saw its intra-day low at 162.07 breached, hence the GLD never issued a technical violation of its 50-day moving average. As I discussed in my last report, that would have caused me to sell my current positions in precious metals ETFs, and given today’s action in the precious metals we can see how sticking to my original plan and only selling on a true 50-day moving average violation keeps me in my DGP and AGQ positions. Today’s action sent the GLD on a big gap-up up and away froms its 50-day moving average, but volume remained lacking, as we see on the chart. The bottom line for gold is that it remains in a relatively constructive consolidation here as it continues to build what is starting to look like a cup-with-handle base formation, and I might consider looking to buy the GLD on any constructive pullback to the 50-day moving average, should that occur. Otherwise, I’m still waiting for a second buy signal to show up somewhere to add to my original positioins in DGP and AGQ..

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

Despite today’s huge market rally, it was somewhat interesting to see some of the bigger NASDAQ names lagging, like (AMZN), shown below on a daily chart. On a day when the NASDAQ Composite was up 4.17% AMZN was up 2.07%. Apple, Inc. (AAPL) did a little better at up 2.41%, but AMZN remains on my short-sale target list, along with (CRM) as I monitor their current rallies. With the market rallying sharply it has been best to step aside and let these stocks rally up into perhaps more optimal short-sale zones. For example, we can see that AMZN continues to run into resistance along the intra-day highs over the past seven trading days, which taken together form an ascending overhead trend line of resistance, as I’ve outlined on the chart. Today’s action saw AMZN stall and close just below mid-range on heavier, above-average volume. If this rally turns out to be a suck-’em-in affair, keep AMZN on your watch list as a potential short-sale target stock. Its relative weakness distinguishes it as a strong shorting candidate should the market weaken again. (AMZN) Gilmo Report Chart (CRM) also remains on my watch list as it rallies back up towards last week’s gap-down “falling window,” where potential resistance comes into play at the 120 price level. If you were trying to short CRM around the 110 level with the idea that this would hold as upside resistance, that theory was disproven on Monday when the stock gapped back up to the 110 level, held, and then proceeded to move higher today. As it rallies, however, it must be watched carefully as a weak push up into the highlighted short-sale target zone on the daily chart, below, could be a spot to short the stock aggressively. In my view the massive-volume gap-down last week is the initial short across the bow that indicates money is starting to flow out of the stock, and so this rally has to be looked at as a potentially shortable one if the general market runs into any trouble after a sharp, mad upside move over the past three days that includes two upside gap-ups which are also evident in CRM’s chart. (CRM) Gilmo Report Chart

The other two short-sale target stocks I discussed in my report over the weekend, (October 27th), AAPL and BIDU, have also rallied with the market this week, but both are not as weak as AMZN or CRM, so I prefer to focus on those as potential short-sale target stocks. Of course, right now we cannot know where this rally is going. Another big up day on strong volume and we could have a fourth-day or later follow-through which may just end up keeping us in this big “chop zone” that has dominated the market’s action since early August. The other option is that the indexes continue higher on “QE cruise control” but if that is the case then staying with precious metals is a very good way to play any such rally. Things may be less promising with individual stocks since on the long side I don’t see anything I’m in a big hurry to own outside of my original positions in the precious metals. For now, barring a follow-through day, I am more inclined to wait and watch in case this rally weakens and some of these short-sale target stocks are in a decent spot to short. Other than that there isn’t a lot to do here but let the situation develop. What the Fed is doing here speaks to the severity of the situation, and we know that QE2 did not have much of an effect on economic growth or stocks, and likewise with the more recent “Operation Twist.” Where will this latest round of QE take us? I don’t know, but show me a trend somewhere, anywhere, and I’ll play it. What we have now is just the muck and mud of the “chop zone,” so all we can do is wait and watch for now to see if and when a playable trend emerges here.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 AGQ and DGP , though positions are subject to change at any time and without notice.

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