The Gilmo Report

September 23, 2012

September 23, 2012

Quadruple-witching options expiration and quarterly S&P Index rebalancing was responsible for the massive trading volume spike on Friday, and the associated price action gave the market a look of high-volume stalling off the peak, as we see on the daily chart of the NASDAQ Composite Index below. On the surface this might look quite negative but within the context of options expiration and index rebalancing as well as the otherwise underlying constructive action in a number of leading stocks its significance is diminished. The bottom line is that the market remains in a five-day flag formation from which the indexes have yet to break out. Ultimately, the only actionable cues that are relevant for investors are those found in the price/volume action of individual stocks and the precious metals where we have been focusing our money, time, and effort. While the market is certainly extended from its breakout of a couple of weeks ago, sentiment presents a mixed picture. The Investor’s Intelligence survey of investment advisor sentiment currently shows 54.2% bulls vs. 24.5% bears while the American Association of Individual Investors shows a less optimistic picture with 37.5% bulls vs. 33.78% bears. This is an interesting divergence, but the bottom line is that sentiment is not rousingly bullish overall. Meanwhile, as long as our leading stocks continue to act well, I am quite content to let the indexes continue to track sideways.




When I talk about the constructive underlying action in leading stocks, the most obvious example on Friday was the buyable gap-up move seen in Michael Kors Holdings (KORS), as we see on its daily chart below. Thursday after the close KORS announced that they were raising their earnings guidance to a range of 0.38-0.40 cents from 0.33-0.35 cents and sales guidance to a range of $510-$520 miillion from its previous $492.93 million estimate. This sent the stock gapping higher early in the morning, to a high of 56.63. But about mid-morning it looked like it was starting to stall out as the stock dropped below the 55 price level before finding its feet and then launching to a close of 57.35. This sets the stage for Monday’s after-hours pricing of KORS’ 20-million-share stock offering and likely raises the range of the secondary’s pricing to 55-56, at worst. My view is that if the stock pulls back on a pricing that is below this past Friday’s or next Monday’s close, and the stock pulls back, it should be bought. One could also look at this as a “high-handle” breakout, and so the stock would be buyable in the 57-58 range on this basis. In any case, this is the third buy point in the pattern, including the initial buyable gap-up on September 14th.




At this stage of the sharp rally in precious metals that we’ve seen over the pat five weeks it is useful to focus on the weekly chart of gold to get a sense of where the metals are in their year-long consolidations. While silver has moved more than gold, we must remember that gold flashed its bottom-fishing pocket pivot buy point one trading day before silver, so I consider it the “leader” among the two metals. However, when gold moves, so does silver. And being two to three times more volatile, silver has outrun gold by more than 2 to 1 on the upside over the past month. Given the position of the SPDR Gold Shares (GLD) on its weekly chart, we can see that it has rallied up to the two prior peaks within its big base where we might expect some logical overhead resistance to come into play. This tends to argue for another week or two of sideways movement as the 10-week (50-day) moving average bullishly crossed to the upside of the 40-week (200-day) moving average. At this point, we must simply wait for the next buy point to show up on the daily charts of the GLD and the iShares Silver Trust (SLV) as their 10-day moving averages have finally caught up on the upside. In the meantime there is no evidence that indicates positions in the precious metals should be sold, and they remain a hold until further evidence proves otherwise.




LinkedIn (LNKD) continues to act well as it holds in all-time high price ground tightly along its 10-day moving average, as we see on the daily chart below. For a continuation pocket pivot to occur this Monday, the stock would need to move up off the 10-day line on volume that exceeds 2,940,600, the highest down-volume pattern over the last 10 trading days. However, that down-volume occurred exactly 10 days ago. This means that for a pocket pivot to occur on Tuesday or later, volume would only have to exceed 1,795,000, the down-volume that occurred on September 13th. This would then constitute the highest down-volume day in the pattern over the prior ten days. Thus the volume signature requirement would drop over a million shares from Monday to Tuesday. This I think puts LNKD in a good position to flash a pocket pivot sometime this week. LNKD owners or those interested in taking an initial position in LNKD should keep a close eye out for this.




The attempted resurrection of Facebook (FB) from the dead continues as the stock remains above its 50-day moving average. Following this past Wednesday’s bottom-fishing pocket pivot coming up through the 50-day moving average, the stock has spent the past two days holding tight sideways as volume declines. Short-sellers and buyers of FB put options that have swamped the stock in their certainty that the stock “deserves” to trade at single-digits are relying on insiders to unload the stock at every opportunity. However, on this bounce off the lows, buying volume has well exceeded selling volume. This argues for that fact that sellers aren’t that interested in abandoning ship just yet, and the large spikes in upside volume are likely clues that some institutional investors not in the stock are starting to take an interest in FB shares. The stock remains potentially buyable here with the idea that it should hold the 50-day line at 22.13.




We last discussed Solarwinds (SWI) in late August as we were looking for a pocket pivot buy point which finally occurred on the first trading day of September, as we see on the daily chart below. That was the last buy point in SWI, which is now holding tight along its 10-day moving average. SWI’s price bar on Friday shows up as red on my chart because I color-code price bars based on their opening price vs. their closing price. Since SWI closed lower than its gap-up opening on Friday, the bar is color-coded red although SWI did in fact close slightly up on the day, all of nine cents. Notice how volume spiked as the stock moved up off the 10-day moving average, producing a continuation pocket pivot. However, the volume spike illustrates what I was talking about at the outset of this report, namely that S&P index rebalancing created a number of “go nowhere” pocket pivot buy points, and SWI is one of these. However, I still believe that the stock can be bought right here using a violation of the 10-day line as a quick stop out if the stock fails here.




Regeneron Pharmaceuticals (REGN) continues to hold above its recent breakout point through the 141.96 peak in the handle of its prior cup-with-handle base, as we see on its daily chart below. REGN has tested this breakout once before, and is currently in the process of retesting that pullback once again. The last two volume spikes in the stock were downside-volume spikes, which may look troublesome for the stock. However, I think that given the overall move in the stock, nearly 50% from the lows of its base below the $110 price level, some bouts of selling are to be expected. The critical aspect here is that REGN should 1) hold the prior breakout point on any continued pullback and 2) at the very least find support at the rising blue 50-day moving average on the chart, currently running up through the 138.63 price area. If one is looking to buy into this pullback, both the 141.96 level and the 50-day line provide relatively simple downside stop-out points. REGN has a very impressive pipeline of drugs, and has achieved stellar profitability in the last two quarters as sales growth has rocketed 107% and 182% from -8% three quarters ago. Fundamentally the stock is hitting on all cylinders, and so I tend to view this pullback as a buying opportunity using the prescribed levels mentioned above as my quick stop-out points, a mere 2-4% below Friday’s close.




I’m not sure what to make of the massive short interest in Seattle Genetics (SGEN) that not only remains in the stock but which has increased about 40% over the past reported period ended August 31st. Technically the stock has pulled back to a big pocket pivot breakout type of move it had on the first trading day of September that led to an ensuing 10%-plus upside move before approaching the $30 price level and turning back to the downside. The stock has pulled all the way back to the $27 price level from which the original pocket pivot breakout launched, and no appreciable selling volume has shown up in the pattern, as we see in the daily chart below. Meanwhile, short-interest in the stock has gone from 24.5 days, or about 20.8 million shares, to 33.9 days, the equivalent of 28.8 million shares vs. a float of 118 million shares. SGEN remains an unprofitable bio-tech, and the growing short interest seems to be implying that a lot of traders are expecting something to blow up in the company, which is likely one of the 9 antibody drug conjugates that Roche has in clinical testing and which are based on SGEN’s technology. SGEN is sitting right on top of its 10-day moving average, so another pocket pivot might send some shorts scrambling to cover again. Keep an eye out for this.




In my report of this past Wednesday I discussed keeping an eye out for a potential pocket pivot in Splunk (SPLK) following its buyable gap-up in late August after the company announced earnings. At that time, SPLK was resting on top of its 10-day moving average but over the past two days the stock has moved just below its 10-day moving average on the daily chart, not shown. However, this does not take away any possibility of a pocket pivot buy point should SPLK push back up through its 10-day line with a proper pocket pivot volume signature. SPLK is a volatile little stock by nature, and so the weekly chart, below, helps us get a better read on what’s going on here. This past week the stock closed 39.1% off its intra-week low on heavier weekly volume, which I view as a subtle sign of support of the lows. The general rule is that the stock should close a couple of percent higher in the range for a valid supporting week, but given SPLK’s inherent volatility I don’t see that as a hard and fast requirement. Instead, what we see here is SPLK pulling back one week to form what might turn out to be a “high handle” to a cup-with-handle formation, not unlike what we saw in KORS prior to Friday’s buyable gap-up in that stock. Thus if the stock moves up through the 10-day line at 37.50 on 1,202,400 shares – the highest down-volume day in the pattern over the prior 10 days – it would qualify as a pocket pivot buy point within the handle.




Friday’s general market action was skewed by the volume impact of both quadruple-witching options expiration and S&P Index rebalancing, so it is difficult to get a clear read on the action based on the indexesn alone. On the other hand, it is a simple matter to simply focus on what one’s stocks are doing, and given that I own things like KORS and LNKD, for example, among others, I didn’t see anything unusual in the action. In fact, KORS’ action was a clear third buy point in the pattern, despite the discussions of those in the financial media who rely on what I consider deficient interpretations to label the stock as “extended.” Friday’s action was a buyable gap-up, period, and is actionable on that basis. With KORS looking to price its secondary offering on Monday after the close, there is the outside chance that a small pullback on Tuesday might give a better entry point, but I would not rely on that alone.


The next catalyst for the market might be the upcoming presidential debates in early October, and the market could continue to move sideways until then. On the other hand, leading stocks appear determined to do what they are going to do anyway, and that is where our focus should remain until further notice. Meanwhile, I invite members to email in their favorite stocks that I have not mentioned in any recent reports and I will pick a couple to discuss and give my take on in coming reports when space and time allow.


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, FB, KORS, LNKD, SPLK, and REGN, though positions are subject to change at any time and without notice.
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