The Gilmo Report

September 10, 2014

September 10, 2014

Last week’s turbulence escalated into something a little more turbulent yesterday when all the indexes were hit on increased volume, giving the indexes a bit of a wobbly look, as we can see on the daily chart of the NASDAQ Composite Index, below. Reports of a Fed that is inclined to raise interest sooner rather than later sent investors scurrying for the exits in the last couple of hours, and the market looked set to follow through on that selling early in the day today. However, selling pressure never really became a factor as the index found support at yesterday’s lows and rallied to close at the peak of its daily trading range. Volume was above average, which I view as indicative of supporting action, despite the fact that it was lighter than yesterday’s volume. Over the weekend I discussed the mixed nature of the market, and the need to be in the right stocks at the right time.

That seems to still be the case, as well as the inclination to sell or lighten up into strength and then take an opportunistic stance on pullbacks. A fair question would be how one determines, exactly, how to take an opportunistic approach as opposed to just running for the hills. Generally what I use as an “indicator” of sorts that tells me to gravitate towards opportunism on the long side when the market is pulling back are perhaps one or two short positions I will test to get a “visceral” feel for just how weak the market really is. When I get this sort of direct market feedback, I put it to good use by frequently just flipping to the long side into favored names that appear to be pulling back constructively. This method, which also requires keeping an even psychology without getting caught up in a rigidly bearish or bullish stance, has served me well so far in 2014.

 

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The S&P 500 Index, shown below on a daily chart, peeled off to the downside yesterday as well, but found support today on the pullback as it closed up on the day and well off of the intraday lows. This action, as with the NASDAQ, gave the impression that sellers lacked conviction as the market appears to be digesting and consolidating the prior sharp gains off of the early August lows. You still have to be in the right stocks, however, as a number of Chinese names like JD.com (JD), for example, were hit on heavy selling volume.

 

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Adding some excitement to the day, Palo Alto Networks (PANW) launched out of its otherwise choppy and shallow uptrend channel today on a huge buyable gap-up move, as we can see on the daily chart, below. At first I thought I’d test this out on the short side, but immediately I could feel that the stock had no selling interest in it, so using that market feedback I flipped and went long the stock. As I tweeted during the day, the stock felt to me like it wanted to press for the $100 century mark, and it closed at 98.75 after approaching the 100 price level. This gap-up move, while looking “way up there,” actually reminds me a bit of Apple (AAPL) in October 2004.

I include a daily chart of AAPL from that time period for your reference. While PANW has acted well recently, if not somewhat erratically at times, I had no interest in buying the stock going into earnings. Playing “earnings roulette” is not my preferred casino game, and as far as I’m concerned I don’t have to. I’m always more interested in buying a stock based on where and how fast I think it has a chance to go rather than where it’s been, and as the example of AAPL in 2004 (and TSLA in May of 2013) shows a very fast move can be triggered by a gap-up move that looks “way up there.” In any case, as long as the market doesn’t get into trouble again, I’m looking for PANW to clear the century mark relatively quickly here.

 

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Twitter (TWTR) looked like it was in trouble yesterday as it broke hard towards its 10-day moving average, but selling volume wasn’t all that intense. The look of the daily chart yesterday with two big red down days in the pattern looked a little intimidating but the stock came right back today with a big-volume gap-up move after an analyst upgraded the stock with a buy and a $65 price target. The two sharp downside days yesterday and six trading days ago on the chart may also serve to shakeout weak hands and set up a continued upside streak from here. Since the stock closed yesterday pretty much at the 10-day line, today’s gap-up move represents a price move directly off of the moving average, hence qualifies as a continuation pocket pivot that is buyable using the 10-day line as your selling guide.

After-hours, TWTR announced a $1.3 convertible unsecured senior note offering which has sent the stock down about a buck as I write after the close. In my view, this would bring the stock into a very buyable range as the debt offering is priced and completed, so I prefer to take an opportunistic stance here. Meanwhile, the big-stock social-networking names remain sound as both Facebook (FB) and LinkedIn (LNKD), not shown here on charts, continue to hold along their 10-day moving averages, which bodes well for the group, in my view.

 

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Tesla Motors (TSLA) held its 10-day moving average today on what looked like a coherent pullback, as we can see on the daily chart. As I tweeted yesterday, I was looking for the stock to pull off a constructive pullback to the 10-day moving average, and the stock accommodated that this morning. The company spent the day hanging out as it waited for the Nevada State Legislature to vote on the tax deal it is getting for locating its battery giga-factory in that state. I continue to view TSLA as a “battery/fuel cell” play as much as it is an electric car play. That, I believe, is what provides some dynamism to the stock and what may very well continue to confound the “valuation” shorts and recent graduates of the University of I-Am-Smarter-Than-The-Market who think it is wildly overpriced.

 

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SolarCity (SCTY) is something that I tend to look at as something of a cousin stock to TSLA and its battery giga-factory theme. If my thesis that TSLA represents more than just an electric auto stock, but also a battery/fuel cell play, then perhaps we can look at SCTY not as a solar stock, but as a “batter-charging” stock. As we can see on the daily chart, below, SCTY, flashed a pocket pivot along the confluence of its 10-day, 20-day, and 50-day moving averages five trading days ago. Since then it has backed-and-filled along the line as volume has dried up, and today’s pullback held the 50-day line. In my view the stock is buyable here on the basis of last week’s pocket pivot, using the 68.31 intraday low of the pocket pivot day as your nearby reference point for a stop. Otherwise, one could keep things even tighter by using the 50-day line at 69.96 as your stop, depending on one’s own risk tolerance and preference. Meanwhile we can let the market confirm or deny my theory.

 

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El Pollo Loco (LOCO) trades quite “loco” as those of us who watch it do the “LOCO-motion” (with apologies to the great rock group Grand Funk Railroad) during the trading day can attest to. The stock has been trying to clear the 37-38 price area but has been turned back as it gets hit with a wave of selling every time. But the stock is simply setting up along its 10-day moving average, as I see it, and remains in a buyable position. My best guess is that it is working off some overhead from the left side of the pattern and the trapped longs who let their greed suck them into the upside streak following the IPO on July 25th. Therefore a nice little voodoo-like volume dry-up here as the stock tucks in just a hair looks like it could provide a healthy short-term technical foundation for further upside from here.

Those who think LOCO doesn’t have the fundamental justification for a higher stock price should consider that earnings over the past two quarters have grown 1600% and 1700%, respectively, with next quarter’s estimates looking for a 500% increase on a hard number of 12 cents a share. I think what tends to give LOCO a reasonable fundamental foundation is the fact that it has the potential to open a lot more stores, and often that is the driver of growth for retail operations, including restaurants.

 

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Taser International (TASR) successfully tested its 10-day moving average today, although volume wasn’t large enough for a continuation pocket pivot. Nevertheless, sellers failed to materialize as the stock ran down to the 10-day line before bouncing and closing near the 18 price level, as we can see on the daily chart, below.  In this case using the low-volume pullback to the line, as I discussed in my report of this past weekend, was the right strategy in the face of this morning’s pullback.

 

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Salesforce.com (CRM) hasn’t flashed a pocket pivot buy point off of its 10-day moving average, but it does appear buyable on pullbacks to the 10-day line. CRM tested the line yesterday and today before turning back to the upside, as we can see on the daily chart, below. So far this looks okay, but not much upside thrust has been seen so far since CRM’s buyable gap-up move after earnings in late August. Not my favorite name here, but it continues to act okay as long as it can hold the 10-day line. I would continue to watch for possible pocket pivots off the 10-day line on any further pullbacks.

 

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GrubHub (GRUB) is still working off the 10 million shares of supply that hit the market after its big secondary offering was priced at 40.25 on last Thursday. The stock is still acting a bit on the sloppy side as it drops below its 10-day moving average, as we can see on the daily chart, below. The bottom line is that GRUB still has to work off the increased supply as a result of the secondary, and as volume dries up here one should be on the lookout for a possible pocket pivot buy point emerging here. I’ve tried buying the stock on pullbacks and at times it seems a little too easy to buy, so I haven’t stayed with any position in the stock. However, I think it could have potential once the secondary supply is properly digested and absorbed. GRUB was acting very well in the early part of August as it broke out of its IPO base before the secondary offering became the elephant that sat on the stock. Keep an eye on GRUB.

 

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As the market appears to consolidate and digest its prior sharp gains off of the early August lows, my main focus is in trying to use the pullback to position myself in what might be my next “runner,” so to speak – a stock that has strong upside carrying potential. Generally these names are going to be those that act well as the indexes pull back, and their identifying characteristic is often a “voodoo” volume signature along a key moving average, generally the 10, 20, or 50-day lines. I see a few stocks doing that on this current index pullback, and so these are the names that I am focused on right now should this market once again shrug off a few days of weakness and turn back to the highs. Otherwise I’m prepared to run a tight ship here and be ready to cut and run should the general market get into further trouble.

 

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 had positions in LOCO, PANW, SCTY, and TASR,, though positions are subject to change at any time and without notice.

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