Caution time

The market continues to churn at these levels. A slow distribution is visible in many stocks which rallied for long time. For some it might be end of their run, for some it might be a pause before they breakout again. It is not a time to be overly aggressive. The easy money period was couple of weeks ago.

I am mostly in cash and selectively nibbling at things which have recent catalyst. Today I picked up few shares of CBOU, Caribou Coffee Company Inc, DRRX, Durect Corporation, F, Ford Motor Company and ZIOP,Ziopharm Oncology Inc. Nothing major just playing with play money currently.

Here is what I have positions in or watching:

ABBC,Abington Community Bancorp Inc
ALY,Allis-Chalmers Energy Inc
AOB,American Oriental Bioengineering Inc
CBOU,Caribou Coffee Company Inc
CMT,Core Molding Tech Inc
CVU,Cpi Aerostructures Inc
DLLR,Dollar Financial
DSTI,Daystar Technologies Inc
DSW,DSW Inc
EMKR,Emcore Corporation
ERS,Empire Resources
GRA,W.R. Grace & Co
HRT,Arrhythmia Research Tech
MED,Medifast Inc
NCOC,National Coal Corp
ORCT,Orckit Communication Ltd
RVI,Retail Ventures Inc
SPF,Standard Pacific Corp
TSCM,Thestreet.Com
TTG,Tutogen Medical Inc
ZIOP,Ziopharm Oncology Inc
ZUMZ,Zumiez Inc

Housing and American Recessions

Excellent analysis of the housing slowdown and its impact on US economy.

A weak housing sector has accompanied every American recession since 1965, but not every episode of housing weakness has accompanied a recession. An annual drop in the growth rate of residential investment (a good measure of homebuilding activity) of more than 10 percent has coincided with a recession five of the seven times it has occurred since 1965. (In 1967 and in 1995, declines in residential investment occurred without a recession.) A significant drop in residential investment therefore appears to be a necessary condition, but not a sufficient condition, for a U.S. recession.

Housing slowdowns tend to lead recessions rather than result from them. During the second quarter of 2006, fixed residential investment fell at an 11.1 percent annual rate, followed by a 17.4 percent rate of decline in the third quarter. The intensity of the fall in U.S. residential investment during the middle two quarters of 2006 is approaching potential recession territory. The year-over-year drop reached nearly 8 percent during the third quarter. Moreover, moving into the fourth quarter, the housing slowdown is intensifying. Housing starts, another important measure, fell by nearly 15 percent during October, bringing the three-month (August through October) annualized rate of decline to nearly 50 percent.

Still, the chances of a recession in 2007 caused by housing weakness are probably only about one in two. Understanding how recessions result from a weaker housing sector helps to determine the odds of an upcoming recession.

Dollar Bounce

The Economist has an uncanny ability to time its covers. Last time it put disappearing dollar on cover the dollar rallied.

This was the cover in December 2004. Just look at the Dollar after that.


Immediately it stopped going down.

How about this in first week of June 2006.


The S&P and Dow stopped going down and rallied within few days of the cover hitting stand. This British rag has amazing timing sense.

Data Impact

Looking for explanation of market sell offs or rallies in macro data can be an interesting exercise and can keep you busy for a lifetime. Stocks down because of factory data is a very simplistic interpretation. Same data at different market phase will have no impact.

There are lot of speculators who track several macro data points like employment, factory orders, transport tonnage, housing permits, retail sales and so on to make sense of markets. Often it is tempting to dive in to the macro economics world and start tracking and talking like several TV commentators and pundits who write about such macro stuff. Reading lot of that kind of macro stuff can give you a sense of inadequacy that you are the only fool who does not understand or track it.

There are two critical things one must consider or at least I considered before abandoning the quest for holy grail in macro indicators and data. The first is data is a big speculators edge. No matter what you do, you will never get access to some of the best and timely and accurate databases as a small speculator. The investment banks, mutual funds, pension funds and large hedge funds have the resources and infrastructure to collect and manage such databases. Because the business is oligopilistic , each one keeps its data proprietary and jealously guards it. So some of the best data is not publicly disseminated. Plus there is a time lag between what you get and what big speculator get.

Second important thing to consider with data is even if you have an access to best databases, the data is only useful if it is a leading indicator. A data or indicator should be able to tell you the future direction of the market, then only it is worth it. Then you can use the data to forecast market. Very few things in macro economic data are leading indicator for market direction. All the talk about macro stuff might impress the cocktail crowd and might fool few clueless girls at bar, but if it was that easy, why would macro economic and big picture speculators be making their living selling newsletters and data services.

In fact macro data and too much analysis of them and beliefs in them can lead most analyst to be persistently wrong for extended period of time.Those who got stuck on housing lead slowdown had hypothesised that housing is a leading indicator for stock market. What they consider as leading indicator just does not act as leading indicator for market direction or the correlation changes. By the time they realise it the rally is over. The best leading indicator for economic growth is probably market direction itself.

I have looked at several macro economic variables and tried to model them before abandoning that approach. That is one way to trade. The other way is what I follow where I am focused on equity selection and more immediate to vehicle kind of data like earning, sales, price momentum, new product or management change as catalyst. Much of such data is actionable and comparatively easily available at low cost. Plus there are many ways to develop edge using it.

When I have billions to trade I will also look at macro things. For now researching and perfecting vehicle level edges is the best choice. You must only fight the battles where you have an edge.

Transition time

It is transition time in markets. The Monday sell off was indicator of distribution in some sectors and stocks running on adrenalin. The distribution in those names will continue. In fact more high flying groups would join in the slow distribution phase. New sectors are now breaking out. The money is moving in to sectors which were not part of the original up move. This can be a good dynamics as the rally becomes more broad based. But sometimes when laggards start moving up it can also be indicating that the rally is over and under the guise of action in the new sectors a serious and slow distribution is happening.

The brokerage sector is showing up on my short scans, the torrid rallies in GS, BSC, OXPS, LEH, AMTD, ET, etc. seem to be reverting or pausing. Similarly the exchanges like NYX and NMX are clearly showing the hype on exchanges was a good ruse to palm of shares to some unsuspecting fools. Most of the times when everyone gets it the party is almost over.

Last few weeks saw flurry of activities in exchanges with everyone saying , you can never go wrong buying exchanges. Mom and POP guru Crammer was hyping NMX pre IPO. James Crammer in his own book talks about how he told everyone to sell Thestreet.com shares when they popped up on first day of IPO. But here he was pumping everyone to buy NMX before the IPO. Good entertainment may not be the best investment advise. As a rule following advise of anyone on CNBC is a road to disaster.

The oil and metal sector is making a move. So bonds should also make a move. The inflation theme might be back soon. Market will continue to consolidate or move sideways for few weeks and then make a move either way. By that time we will be in the earning expectation for next quarter cycle. If you keep a tab on earning trends, you will get a good idea on what is likely to happen.

During the transition phase many times buying the high relative strength names or stocks at top of range after extended move up may not be the best strategy. Those stocks are most vulnerable to sell off especially if the sector has been hot for sometime. You have to find new stocks breaking out with lower relative strength and having new earning power. The relative strength strategy needs adjustment in such times.

I am keeping an eye on DSW, DSW INC and ICE, Intercontinental exchange based on earnings. There are some interesting candidates with potential showing up on my scans :

ALY,Allis-Chalmers Energy Inc
ATI,Allegheny Technologies
BONT,Bon-Ton Stores Inc
BTJ,Bolt Technology Corp
DBRN,Dress Barn Inc
DIL,Dyadic International Inc
DVAX,Dynavax Tech
EPG,Environmental Power Corp
GEOI,Georesources Inc
GHDX,Genomic Health Inc
GLDN,Golden Telecom Inc
IGLD,Internet Gold-Golden
IPS,Ipsco Inc
KEQU,Kewaunee Scientific Corp
OIH,HOLDRS Oil Service ETF
RNIN,Wireless Ronin Technologies Inc
SIGM,Sigma Designs Inc
TGEN,Targeted Genetics Cp
USEG,U.S. Energy Corp Wyo
VIP,Vimpel Communication Ads

Buying and selling

While the high fliers till last week are being sold , there is money flowing in several stocks which were not participating actively in the rally. Sector rotation is clearly visible everywhere. There are lots of opportunities and probably playing the game stock by stock and sector by sector is the best course of action. While I am bearish on some sectors and stocks, I am finding lots to buy in other sectors. Besides some of the stocks I mentioned in my earlier post today, I have opened fresh positions today in ATI, TIE, and CHIC. There are many more opportunities on long side currently. The trend is your friend till it bends.

Some of the other stocks on my watch or in my portfolio are:

ARO,Aeropostale Inc
ATI,Allegheny Technologies
AVR,Aventine Renewable Energy Holdings Inc
BONT,Bon-Ton Stores Inc
BTJ,Bolt Technology Corp
CHIC,Charlotte Russe Hldg Inc
DBRN,Dress Barn Inc
DIL,Dyadic International Inc
DVAX,Dynavax Tech
EDU,New Oriental Edu And Tech Corp
ENER,Energy Conversn Devices
EPG,Environmental Power Corp
GEOI,Georesources Inc
GHDX,Genomic Health Inc
GLDN,Golden Telecom Inc
GRA,W.R. Grace & Co
IPS,Ipsco Inc
KEQU,Kewaunee Scientific Corp
MBT,Mobile Telesys Ojsc Ads
MTCT,Mtc Technologies Inc
NYT,New York Times Co The
OIS,Oil States Intl
PFB,Pff Bancorp Inc
POSS,Possis Medical Inc
PPP,Pogo Producing Co
PTEN,Patterson-Uti Energy Inc
RBC,Regal-Beloit Corp
RNIN,Wireless Ronin Technologies Inc
RNOW,Rightnow Technologies Inc
RTI,Rti Internat Metal Inc
SIGM,Sigma Designs Inc
SNDA,Shanda Interactive Ent Ltd
STO,Statoil Asa
TATTF,Tat Technol Ltd
TEO,Telecom Argentina Sa
TGEN,Targeted Genetics Cp
TIE,Titanium Metals Corp New
TIF,Tiffany & Co
TRGL,Toreador Resources Corp
VIP,Vimpel Communication Ads
VSE,VeraSun Energy Corp
WNR,Western Refining Inc
ZVUE,Handheld Entertainment Inc

Breakouts to watch

The market is doing good job of frustrating the top callers. Early bears are getting whacked in some stocks. New sectors like China, Metals, Drugs and biotechs, and retail continue to see new breakouts.

As usual earnings is driving the action in some stocks like TATTF, MBT, BONT, DBRN, TIF etc. Keeping an eye on other stocks in the same sector can get you in to some good point moves. MBT earnings announcement is resulting in the Russian mobile sector stocks rallying. The FDA clearance news continues to provide good bid and decent pops for the biotechnology stocks.

Here is what I have positions in or looking at based on today's action:

BONT,Bon-Ton Stores Inc
BTJ,Bolt Technology Corp
DBRN,Dress Barn Inc
DVAX,Dynavax Tech
MBT,Mobile Telesys Ojsc Ads
POSS,Possis Medical Inc
QI,Qimonda AG
RNIN,Wireless Ronin Technologies Inc
RNOW,Rightnow Technologies Inc
TATTF,Tat Technol Ltd
TGEN,Targeted Genetics Cp
TIF,Tiffany & Co
VIP,Vimpel Communication Ads

New sectors and new themes

New sector and new theme stocks often attract buy interest when the already established leaders start breaking down or consolidating. Most of the times the markets attention is still focused on the earlier leaders, in the process you can miss out on good new opportunities.

Last night I was looking at some new leadership kind of stocks and here is what I found :

BCP,Balchem Corp
CDZI,Cadiz Inc
DG,Dollar General Corp
DWSN,Dawson Geophysical Co
ECMV,E Com Ventures Inc
FMCN,Focus Media Holding Ltd ADR
IOC,Interoil Corporation
KWK,Quicksilver Resources
LPX,Louisiana-Pacific Corp
MTL,Mechel Steel Group OAO ADS
OIS,Oil States Intl
OMRI,Omrix Biopharmaceuticals Inc
SNDA,Shanda Interactive Ent Ltd
SPN,Superior Energy Svcs Inc
SWM,Schweitzer Mauduit International Inc
TRBN,Trubion Pharmaceuticals
VSE,VeraSun Energy Corp
VTAL,Vital Images Inc

Many of these stocks are being quitely accumulated by those in the know. Some of them offer good entries at current levels.

Small caps in focus

The mid July to November rally was lead by large cap stocks. The Dow and S&P were the focus. Some of the selling on Monday was concentrated in those stocks. The small caps were not so much in focus. Now small caps seems to be finding some bids.

Here is what I have positions in or watching based on yesterday's action:

AEZ,American Oil & Gas Inc
AMAG,Advanced Magnetics Inc
ANIK,Anika Therapeutics Inc
ANTP,Phazar Corp
AXR,Amrep Corp
BITI,Bio-imaging Technologies
CSLR,Consulier Engineering
DIVX,Divx Inc
GGR,Geoglobal Resources Inc
GOAM,Goamerica Inc
ICOP,ICOP Digital Inc
NRMX,Neurochem
NTY,Nbty Inc
OMNI,Omni Energy Services Cp
PCCC,Pc Connection Inc
SVM,Servicemaster Co The
SVNT,Savient Pharmaceuticals Inc
SWAT,Security With Advanced Tech
TRT,Trio-Tech Internat
UAHC,United American Healthcare Cor

Resilient Stocks

Market corrections separate the boys from men. Stocks which are resilient during market downtrends are the one to focus on during such correction phases. Many of these stocks jump out and restart their rallies the moment the weight of market direction gets lifted. Many of the resilient stocks continue to crawl up during corrections.

Also some stocks which have specific catalyst or outstanding earning defy the market direction and breakout during overall downtrend in market. Keeping a close tab on them can offer good low risk entries. Some of the stocks breaking out today have such catalyst. I have a small position in one such play- ANIK, which I got in to on the FDA approval news.

Here is some of the resilient stocks I am monitoring and looking to get in to soon.

ACLI,American Commercial Lines Inc
ACP,American Real Estate Prt
ADL,Amdl Inc
AEM,Agnico-Eagle Mines Ltd
AEOS,American Eagle Outfitter
AEPI,Aep Industries Inc
AEZ,American Oil & Gas Inc
AFAM,Almost Family Inc
AKAM,Akamai Technologies Inc
AKH,Air France KLM
ALB,Albemarle Corp
ALGN,Align Tech Inc
ALTH,Allos Therapeutics Inc.
ALX,Alexander's Inc
AMAG,Advanced Magnetics Inc
AMIE,Ambassadors Internat Inc
ANGN,Angeion Corp
AOB,American Oriental Bioengineering Inc
AOI,Alliance One International Inc
APN,Applica Inc
ARRY,Array Biopharma Inc
ATI,Allegheny Technologies
ATNI,Atlantic Tele-Network
AUXL,Auxilium Pharmaceuticals Inc
AXR,Amrep Corp
AXTI,Axt Inc
AZK,Aurizon Mines Ltd
AZZ,Azz Inc
BAB,British Airways Plc Adr
BAMM,Books-A-Million Inc
BDY,Bradley Pharmaceuticals
BIDU,Baidu.com Inc
BIOV,Bioveris Corp
BITI,Bio-imaging Technologies
BRCD,Brocade Communications
BRLC,Syntax-Brillian Corp
BW,Brush Engineered
CAL,Continental Airlines B
CAPA,Captaris Inc
CCOI,Cogent Communications Group Inc
CHAP,Chaparral Steel Company
CHDX,Chindex International Inc
CHINA,CDC Corp Class A
CHTR,Charter Communications Inc
CKSW,Clicksoftware Technlgies
CLB,Core Laboratories N.V.
CLEC,Us Lec Corp Cl A
CNS,Cohen & Steers Inc
CNXS,CNS Inc
COGO,Comtech Group Inc
CPTS,Conceptus Inc
CPY,Cpi Corp
CRVL,Corvel Corp
CTDC,China Technology Development Group Corp
CTEC,Cholestech Corporation
CTRX,Cotherix Inc
CUBA,Herzfeld Caribbean Basin
DAKT,Daktronics Inc
DECK,Deckers Outdoor Corp
DGIT,Dg Fastchannel Inc
DHIL,Diamond Hill Investment Group Inc
DLLR,Dollar Financial
DPTR,Delta Petroleum Corp
DVAX,Dynavax Tech
EBIX,Ebix Inc
ELE,Endesa Sa
EZPW,Ezcorp Inc Cl A
FCGI,First Consulting Grp Inc
FIA,Fiat S.P.A. Adr
FMD,First Marblehead Corp
FRG,Fronteer Development Group Inc
FTEK,Fuel Tech Inc
FTGX,FiberNet Telecom Group Inc
GDP,Goodrich Petrol Corp
GEL,Genesis Energy (L.P.)
GEO,Geo Group (The)
GIII,G-III Apparel Group Ltd
GMTC,Gametech Internat Inc
GOAM,Goamerica Inc
GRC,Gorman-Rupp Co
GROW,U.S. Global Invest Inc A
GTXI,Gtx
GVP,Gse Systems Inc
HGO,Houston American Energy Corp
HRT,Arrhythmia Research Tech
HRZ,Horizon Lines Inc
IAAC,Internat Asset Holdg Cp
ICAD,Icad Inc
IEDU,Investools Inc
IGLD,Internet Gold-Golden
IIG,Imergent Inc
IMKTA,Ingles Markets Inc Cl A
INAP,Internap Network Svcs Cp
ININ,Interactive Intelligence
IOC,Interoil Corporation
IOSP,Innospec Inc
JST,Jinpan Internat Ltd
KBALB,Kimball Internat B
KBAY,Kanbay International Inc
KNOT,The Knot Inc
KONA,Kona Grill Inc
KOSP,Kos Pharmaceuticals Inc
LFC,China Life Insurance Company
LMRA,Lumera Corporation
LNOP,Lanoptics Ltd
LQU,Quilmes Industl Q.S.A.
LVS,Las Vegas Sands
LXU,Lsb Industries Inc
MAG,Magnetek Inc
MALL,Pc Mall Inc
MCDT,Mcdata Corp Cl B
MCDTA,Mcdata Cl A
MCF,Contango Oil & Gas
MEH,Midwest Express Holding
MEND,Micrus Endovascular Corp
MFB,Maidenform Inc
MFRI,Mfri Inc
MIKR,Mikron Infrared Inc
MNG,Miramar Mining Corp
MSII,Media Sciences Intl Inc
MWP,Markwest Hydrocarbon Inc
MWRK,Mothers Work Inc
MYOG,Myogen Inc
NEXC,Nexcen Brands Inc
NRMX,Neurochem
NRPH,New River Pharmaceuticals Inc
NTY,Nbty Inc
NVDA,NVIDIA Corporation
NVEC,Nve Corp
NWK,Network Equipment Tech
NYX,NYSE Group Inc
OBCI,Ocean Bio-Chem Inc
OMG,Om Group Inc
OMNI,Omni Energy Services Cp
OS,Oregon Steel Mills Inc
PCCC,Pc Connection Inc
PD,Phelps Dodge Corp
PERY,Perry Ellis Int'l
PMTR,Pemstar Inc
POT,Potash Cp Saskatchewan
PRGX,Prg-schultz Intl Inc
PSMT,Pricesmart Inc
PSPT,Peoplesupport Inc
QD,Quadramed Inc
RBN,Robbins & Myers Inc
REGN,Regeneron Pharm Inc
RGR,Sturm Ruger & Co Inc
RGX,Radiologix Inc
RIMM,Research In Motion Ltd
RKT,Rock-Tenn Co Cl A
RMKR,Rainmaker Systems Inc
RMTR,Ramtron Internat Corp
RNAI,Sirna Therapeutics
ROCM,Rochester Medical Corp
ROS,Rostelecom
RRA,Railamerica Inc
RTI,Rti Internat Metal Inc
SGMO,Sangamo Biosciences Inc
SIGA,Siga Pharmaceuticals Inc
SIGM,Sigma Designs Inc
SIM,Grupo Simec S A Adr
SOFO,Sonic Foundry Inc
SPAR,Spartan Motors Inc
SPTN,Spartan Stores Inc
SQNM,Sequenom Inc
SRSL,Srs Labs Inc
SRVY,Greenfield Online Inc
SSRI,Silver Standard Resource
STEC,Simple Technology Inc
STSI,Star Scientific Inc.
SUAI,Specialty Underwriters Allianc
SVNT,Savient Pharmaceuticals Inc
SWAT,Security With Advanced Tech
SWHC,Smith & Wesson Hldg Corp
SYX,Systemax Inc
TCC,Trammell Crow Co
TCHC,21st Century Holdings
TESS,Tessco Technologies Inc
TGEN,Targeted Genetics Cp
THK,Think Partnership Inc
TRT,Trio-Tech Internat
TTEC,Teletech Holdings Inc
TWTI,Third Wave Tech
UAHC,United American Healthcare Cor
UCTT,Ultra Clean Holdings
UUU,Universal Security Instruments
VSNT,Versant Corporation
VTS,Veritas Dgc
ZOLL,Zoll Medical Corporation

Wait and watch

After a big down day yesterday, today is as of now just a lackluster day. Lot of short term systems kick in long entries on such down move and that is helped by the fact that exits get jammed early in the morning. More people want to get out early and those holding longs sell on first hint of weakness. The market makers further accentuate the process by bidding down or pulling bids. When the dynamics plays itself out, you have a quick bounce.

So patiently waiting on the sideline for sometime with lots of cash in hand is good option currently. I am looking at number of longs and waiting to pounce on some good earning plays like JCG,OMRI,DLB,AMAG,ZOLL, GMKT,MGM, etc. which have a catalyst.The oil stocks are finding a bid but I do not yet see anything to be excited about.

There are some stocks up on earning or news and as usual the low float stocks are making some wild moves. This is what I have on my scans on long side:
CRDC,Cardica
CSLR,Consulier Engineering
ECMV,E Com Ventures Inc
GOAM,Goamerica Inc
LPX,Louisiana-Pacific Corp
SVM,Servicemaster Co The
SWAT,Security With Advanced Tech

Buyers Exhaustion

The market was in rally mode since mid July, so correction was expected and normal course of action. In the last few weeks there were several signs of froth with stocks gapping up and making 4-10 dollar moves after that. There were several blowout kind of late momentum phase moves The IPO market was red hot with everyone rushing in to buy Nymex IPO. The markets had moved ahead of themselves.

So a correction of some magnitude is a normal and healthy thing for the market. The markets ran out of fresh set of buyers. Those who bought late after being on sideline were caught holing the bag. Absence of bids leads to scary correction on days like yesterday.

The bears will be all over painting their bearish scenarios and peddling their doom and gloom. While it is easy to get tempted by such talks at these kind of junctures, a more balanced perspective is better option for those looking for profitable opportunities. Not all sectors will be equally affected by correction. Even a rush to short (unless you are a day trader) might result in some serious whipsaws.

The move will evolve over a period of time. The easy money phase of last few weeks is now over. It is back to being a stock pickers market. Stocks with significant earning/sales surprise in last earning season will withstand the correction, similarly stocks with earning and price momentum may go in to bases but some of them will start breaking out after few weeks in anticipation of next earning season. The opportunities on short side will also take time to evolve. Even greater skill is required to pick and time your shorts.

I have only 2 open position currently on long side (LVS and IAAC) and plenty of cash. Here is what I am watching on both long and short side currently:

Long
ADVNB,Advanta Corp Cl B
PNTR,Pointer Telocation Ltd Ord
DXPE,Dxp Enterprises Inc
JCTCF,Jewett-Cameron Trad Co
FTGX,FiberNet Telecom Group
TGEN,Targeted Genetics Cp

Short
BSC,Bear Stearns Companies
BIDU,Baidu.com Inc
GOOG,Google
GS,Goldman Sachs Group Inc
MA,MasterCard Inc
NMX,Nymex Holdings Inc
NYX,NYSE Group Inc
RIMM,Research In Motion Ltd

End of day scans

Just follow the earnings and you can get on some nice moves. I am travelling till Tuesday so posts will be few.


ATEA,Astea International Inc
BBI,Blockbuster Inc
BJ,Bj's Wholesale Club Inc
BRCD,Brocade Communications
BUF,Minrad International Inc
CRAY,Cray Incorporated
CTTY,Catuity Inc
CYBX,Cyberonics Inc
FTGX,FiberNet Telecom Group Inc
JCG,J Crew Group Inc
LAB,Labranche & Co Inc
LNOP,Lanoptics Ltd
MCDT,Mcdata Corp Cl B
MCDTA,Mcdata Cl A
MGM,MGM MIRAGE Inc
MR,Mindray Medical Intl Ltd
NMX,Nymex Holdings Inc
PDCO,Patterson Companies Inc
PLB,American Italian Pasta
PNTR,Pointer Telocation Ltd Ord
PSS,Payless Shoe Sources
SGMO,Sangamo Biosciences Inc
TGAL,Tegal Corp
ZVUE,Handheld Entertainment Inc

Buyers alive and active

Decent action so far. Lot of heavily shorted stuff is finding bid. But there are some excellent earning driven breakouts in this list I am watching or has positions in.
ATEA,Astea International Inc
BBI,Blockbuster Inc
BRCD,Brocade Communications
CRAY,Cray Incorporated
CTTY,Catuity Inc
FTGX,FiberNet Telecom Group Inc
JCG,J Crew Group Inc
LAB,Labranche & Co Inc
LNOP,Lanoptics Ltd
MCDT,Mcdata Corp Cl B
MCDTA,Mcdata Cl A
MGM,MGM MIRAGE Inc
NYX,NYSE Group Inc
PARL,Parlux Fragrances Inc
PDCO,Patterson Companies Inc
PLB,American Italian Pasta
PNTR,Pointer Telocation Ltd Ord
PSS,Payless Shoe Sources
SHLD,Sears Holding Corp

Gaps and traps

walter said...

you know of any way to distinguish between exhaustion gaps vs runway gaps vs normal good strength gaps, etc?

10:40 AM
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Pradeep Bonde said...

I make my leaving trading runaway gap on earnings. One has to look at catalyst plus the magnitude of gap. Gaps of certain magnitude indicate information mismatch. A new set of information was complete surprise and that indicates the move will proceed in that direction. Typically this happens on earnings, new products (in biotechs), regulatory action (on short side), or aberration (say a company has earning growth of 30, 34, 30, 40, 37.....for long and then 5 or -10 or the other way round 5, 7, 6, 8,---and then 100)
So I always investigate 20% plus gaps on both side to see opportunities. You also need to see the volume on such moves. I look at 20% plus 1 million volume.
Exhaustion gaps are easy to find if you know how much % a equity has moved in a year. Plus same thing works on these gaps you see sequence of earning like 80, 100, 120, 130, 120.... and then 140. The stock gaps up like HANS but by that time it was up more than 800% say in a year, so when the grandma in Timbuktu gets excited about it, it is exhaustion gap.



10:57 AM
Delete
Pradeep Bonde said...

The best place to find exhaustion gaps is IBD 100. At some stage they just move ahead of their potential and once the IBD crowd and others get very excited, there are exhaustion gaps or island reversals. IBD 100 is good source of ideas on both long and short side. These gaps also tend to be clustered around earnings.

Now if you are looking for a profitable trading system based on gaps or abnormal % change in price, then the book Swing Trading:Power Strategies to Cut Risk and Boost Profits by Jon D. Markman describes a trading system used by George Fontanills. It is a system based on price and volume gaps.

Now if you know Fontanills, he sells a 3000 dollar option course which basically tells you if you want to master these strategies then you need to buy another $5000 platinum course and so on. So when I read it at first I was very skeptical of it. But I tested it and it has lots of merits.

The system in short:
" Basically it comes down to finding stocks with greatest short term
momentum that will turn in to long term momentum."
The Scans:
1 up or down 30% in a single day on at least 300000 shares traded or
2 up or down 20% in a single day on at least 1 million shares traded or
3 up or down 5$ in a single day on volume of at least one million shares and
4 still trading above $7 and
5 has options
6 has a long term catalyst like earnings or accounting fraud

He buys options on it after few days , typically such stocks after a pause tend to move up or down.

I have tested it and it works, by using options it gives leverage. It gives very few signals daily, but they are very powerful. You can modify it to get better results.

What I am watching or buying

Slow day with lot of gaps in morning now reversing. There are still lots of good opportunities. Slectivity as always is the key.

BBI,Blockbuster Inc
CRAY,Cray Incorporated
CTTY,Catuity Inc
DE,Deere & Co
FTGX,FiberNet Telecom Group Inc
JCG,J Crew Group Inc
OLAB,OraLabs Holding Corp
PDCO,Patterson Companies Inc
PLB,American Italian Pasta
SHLD,Sears Holding Corp

Watch for buyers exhaustion

Shorts do not drive the market down. In larger market ecosystem shorts and perma bears are small insects. What you have to watch for at this stage is buyer exhaustion. On some of the high flying stocks the greater fool theory is at work, where there are no more fools ready to chase $3-5 every day gaps. The latecomers to the party find buying the morning exuberance leads to them being left to hold the bag.Some stocks have been up for days without a negative day. They are extremely prone to such exhaustion.

For longevity of this rally a correction is the best course of action. Picking individual stocks not prone to buyer exhaustion is currently the key.

Simple things work

Extremely simple things work in the market. But that is true of life in general. However most of us are addicted to complexities. Simple things like earnings breakout, earning momentum, price momentum, deep value, earnings acceleration etc. work.

Given a simple idea, most traders first instinct is to make it complicated. Add more indicators, more scans, more patterns, more elaborate multi factor equity selection models and the works. Instead of trading breakouts on high probability equities, they want to enter even before that, thinking that they will find some miracle system to get them in before breakout.

After reading some of the earning lead breakouts kind of examples I have talked about like TRT, SHR, BWLD, GROW etc, a trader has been exchanging emails with me for past few days. I explained to him why those plays work and why entry after the earning is best. After few back and forth, his point is but if he can get in before the earning then he will benefit from the 20 to 50% pop on day of earning. Now he has got in to some extremely complicated models to predict such events.

Some people love complexity. They have 30 different scans they run. They have 24 different chart patterns they monitor. They have at least 10 indicators on charts. They daily monitor some 15 different market indicators like Vix and so on. All this complexity gives them a feeling of control.

Look at all these traders who obsessively monitor GDP of USA and 200 other countries, get orgasmic about M3, are excited on days of inflation data release. They monitor everything and what is the end result. I can bet none of this helps them in their trading.

Modern corporations and modern life is full of complexities. Complexities leads to increased cost and poor decision making.

One of the companies I worked for had such and elaborate and complex budget making process that in most years the managers would spend six months doing budgets. The spreadsheets used for budget making were so intricately linked as complexities increased that one mistake some where would involve going trough 78 linked spreadsheets (needless to say each one of those 78 had furter linkages). The rate card had 27 different prices, which no one used, but it was faithfully printed and circulated and billing soft wares built to handles 27 prices.

So when I taught a strategy and perspective management course , I always use to insist on simple easy to understand one page analysis of complex management problems and 200 page plus case studies.For most MBAs complexity and jargon is engineered in to their DNA. In fact all you learn in most MBA schools is how to make complex presentations, graphic slides, and invent complex jargon for simple things. I always use to tell the students make it easy for me to understand. So much so that they started calling me "easyguru" behind my back.

As a trader if you want profitable systems just keep it simple. Avoid the first temptation to add more variables. Simpler the system, more profitable you will be.Complexity is not a profitable strategy. If you can not explain your strategy to 5 year old in easy language, you don't have a strategy.

Small caps offer some good opportunities

The overall market might correct at this level, but some good low risk opportunities are still available. Number of small caps are breaking out. Some from multi year consolidations. So they are not likely to reverse in hurry. Some have new earnings power or accelerated earnings and have just been discovered by market. As always the high priced stock offer good opportunities for point moves.

There are number of good ideas in the following list:

ACL,Alcon Inc
AFN,Alesco Financial Inc
ANDS,Anadys Pharmaceuticals
ANSW,Answers Corp
BIDU,Baidu.com Inc
BWS,Brown Shoe Co Inc
CAAS,China Automotive Systems Inc
CHINA,CDC Corp Class A
CTDC,China Technology Development Group Corp
DE,Deere & Co
FMCN,Focus Media Holding Ltd ADR
GOOG,Google
IMM,Immtech Pharmaceuticals Inc
JAS,Jo-ann Stores Inc
MCF,Contango Oil & Gas
MDT,Medtronic Inc
MEK,Metretek Technology Inc
MWRK,Mothers Work Inc
NYX,NYSE Group Inc
OSTE,Osteotech Inc
POT,Potash Cp Saskatchewan
SLG,Sl Green Realty Corp
USEG,U.S. Energy Corp Wyo
WTSLA,Wet Seal Inc Cl A The

Booking profits

Using current strength to book profits on positions opened in last couple of weeks.When your cumulative holdings start moving in 20-25 points increment per day, it is time to thank the god, the person or persons in charge of this bullish conspiracy, the Feds, the Chinese,Goldman Sachs, the perma bears and whoever else and bank some profits. Santa came early this season.

I have currently 5 positions open and in worst case scenario will lose 10% , some of that I am trying to protect with options. I also found one good possible short position, where I am planning to buy puts during this bullish season.

As always I remain ready to pounce on some bullish ideas if they meet my criteria. Here is what I am finding in my scans currently.



ACL,Alcon Inc
AFN,Alesco Financial Inc
ANSW,Answers Corp
BIDU,Baidu.com Inc
BWS,Brown Shoe Co Inc
CHINA,CDC Corp Class A
CNS,Cohen & Steers Inc
CTDC,China Technology Development Group Corp
CWTR,Coldwater Creek Inc
DE,Deere & Co
EFUT,E-Future Info Tech Inc Ord
FMCN,Focus Media Holding Ltd ADR
GOOG,Google
GRRF,China Grentech Corp Limited ADS
IAAC,Internat Asset Holdg Cp
IDP,Idera Pharmaceuticals Inc
IMM,Immtech Pharmaceuticals Inc
JAS,Jo-ann Stores Inc
JST,Jinpan Internat Ltd
JWN,Nordstrom Inc
KNOT,The Knot Inc
MCF,Contango Oil & Gas
MEK,Metretek Technology Inc
MWRK,Mothers Work Inc
NYX,NYSE Group Inc
OSTE,Osteotech Inc
SLG,Sl Green Realty Corp

2006 Earnings Estimates Rising

The reason for rally will become apparent at some stage, but there are some clues in the earnings trend. Analyst now are busy raising estimates.If you have noticed some of the best moves are happening in stocks with good earnings.

Earnings season is wrapping up and the bulls have reason to cheer. Since third quarter reporting began over a months ago, the last of the market’s bearishness has faded and a new wave of buying has taken its place. Whether or not the rally is justified can be discussed in another piece, but one thing does stand; favorable third-quarter earnings reports have continued to stoke investor expectations. Over 92% of the S&P 500 companies have reported and positive EPS surprises outnumber negatives by better than 3:1. The median surprise is an impressive 3.3% and median growth thus far is 12.7%.

Looking ahead to next year, the revisions ratio has continued its uptrend and remains above 1.0, at 1.21. This is extraordinarily important. With the economy slowing, housing in a free fall and the yield curve inverted, one can easily make an intellectually coherent case for a recession next year. However, there has never been a recession where earnings grow at anything close to a double-digit rate. This is the elephant in the room that must be explained by any recession predictor. There is no way that the expected growth rate will come down unless estimate cuts exceed estimate increases.

How will this end

If you want to know how this will end. Just look at 2003.Look at the top performers in 2003. The later part of the move was the best time to trade, things will breakout and just go. I remember catching number of moves like FLML, LCAV,NTES, RIMM ,TASR , etc, in the late bull phase in 2003. It is scary to buy something up 5 or 8 or 10 USD or up 20 to 30%. But those are the kind of stocks which make runaway move in late phase. This move so far has all the characteristics of that move.

I maintain a reading insight notebook where I write down leanings from each phase and then review it daily. That way I am constantly reminded of good and bad times in trading plus helps in quickly identifying moves. Everyday morning I flip through it, first thing in the morning.I keep adding insights or learning to it. I have been digging out 2003 notes and trades to keep one of the possible way in which the move will end. Look at the Mcclellan indicator during that period.

I am amazed at the number of people who are on sideline. Someone just sent me snippets from a fairly popular newsletter writer amongst blogosphere, he has been on sideline for more or less the entire move and has been advising the same to followers since July. Missing out some of the best money making period by being on sideline will definitely end up in under performing the market. That newsletter is not the only one on sideline there are many others like that.

I seriously question a methodology which could not find few good low risk ideas in last 4-5 month.Many of the stocks which broke out in August or September are now accelerating up. They offered many low risk entry points before the runaway phase started. I can understand someone on sideline in last couple of weeks but for extended period of 5 months is difficult to explain unless you have some very high hurdles for entry.

The rationalisation being offered is cash is position. I am every day amazed at how many people keep buying such misplaced advise. Chasing this move at this stage requires extremely good risk management method and brass balls. Not every ones game. You have to trade this move with one eye constantly focused on exit.

No time to R&D

It is not time to perfect your system or R&D, it is trading time. If you are trading any of the methods which I talked about for over a year, you should be cleaning it up. This is an ideal market for runaway moves. Those following the Boucher runaway method must be feeling like kids in candy land currently. If you are using any of the scans I talked about, you should be in most of the good movers in last couple of weeks.
Here is what I have on my watch or positions in.

AFN,Alesco Financial Inc
BIDU,Baidu.com Inc
BWS,Brown Shoe Co Inc
DE,Deere & Co
EFUT,E-Future Info Tech Inc Ord
FMCN,Focus Media Holding Ltd ADR
GME,Gamestop Corp
GOOG,Google
IMM,Immtech Pharmaceuticals Inc
JAS,Jo-ann Stores Inc
MDT,Medtronic Inc
MWRK,Mothers Work Inc
NYX,NYSE Group Inc
RS,Reliance Steel & Alum Co
TECD,Tech Data Corp

Methods and markets

Market is ever changing. Market is not predictable. Market is complex. Market offers too many choices. Market is not controllable. But methods are controllable. Methods can be constant irrespective of the market situations. Methods are under traders control. Your trading mix is completely controllable and that is the key to profitability.

In marketing there is a concept called marketing mix. The central hypothesis is that you can not control the consumer behaviour but what you can control is the marketing mix.

Marketing decisions generally fall into the following four controllable categories:

* Product
* Price
* Place (distribution)
* Promotion

The term "marketing mix" became popularized after Neil H. Borden published his 1964 article, The Concept of the Marketing Mix. Borden began using the term in his teaching in the late 1940's after James Culliton had described the marketing manager as a "mixer of ingredients". The ingredients in Borden's marketing mix included product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, and fact finding and analysis.
These four P's are the parameters that the marketing manager can control, subject to the internal and external constraints of the marketing environment. The goal is to make decisions that center the four P's on the customers in the target market in order to create perceived value and generate a positive response.

Same way your trading mix is completely under your control. The elements of trading mix are :

Market selection (equity selection in stock market case)
Entries selection
Exits selection
Risk selection

Like in marketing the product is critical no amount of price, promotion or place variable changes can substitute for poor product strategy. Similarly as a trader your most important decision is equity selection. Which stocks to trade is 80% of the solution to profitable trading success. That is why technical analysis often does not produce the desired results because it primarily deals with entry and exit selection.

In a complex market offering too many choices (around 8000 stocks), dynamically selecting the equities is the key. The dynamic selection should bring to your trading conveyor belt a series of best possible opportunities for given time periods.In a bear market or sideways market the method must select the best opportunities for that period dynamically. Similarly in a runaway markets it selects the best opportunities with runaway characteristics.

There are various way to select equities dynamically. But most of the one which work are based on some statistically proven anomalies. Traders may or may not be aware of them. No matter the markets certain things work. The amplitude of return might be different but few key anomalies work across market situations and across stock markets in various countries. The earnings drift is one such thing. Earning momentum is one such thing. Price momentum is one such thing. Neglected IPO effect is one such thing. Like this if you start focusing on finding anomalies, you will find around 50 such anomalies which have edge. Some highly secretive hedge funds and traders may have found even more.

While there is a belief amongst most traders that if you share you will lose your edge, it might be true of certain anomalies, but some of the robust anomalies just do not disappear. They have been written about for donkeys years and various explanations have been offered as to why they work, but they continue to work. Knowing does not translate in to profitability. Making these insights work is a craft.

Making Pizza is very easy but only certain pizza outlets are extremely successful. The ingredients of pizza are no secret, but the craft of making it differs and most very successful or famous pizza places have a small unique twist to the method, which makes them stand apart.
Similarly knowing a trading concept or method and making it work and making money out of that idea requires a trading craft. It might be qualitative pattern recognition or quantitative pattern recognition. Look around there are so many hedge funds (pizza shops), they use same ingredients, have similar calibre quants or technical analyst, they know most of these anomalies (having worked in investment banks before), yet some hedge funds (pizza shops) consistently do well while others struggle.

Converting idea in to profitable idea is the craft. One way to learn craft is by watching others who are more proficient at it. Deep knowledge works. Breaking down craft in to small units work. Mentoring works in high skilled professions. Crafts are difficult to transfer from one person to another. Transfer often requires an extended period of interaction between the two parties involved. Learning craft also requires extraordinary level of motivation and dedication and time efforts. Both the person imparting the skill and person learning it must have extraordinary motivation for the process to work successfully. Most successful traders may not want to commit that level of time to transfer craft unless they find someone with potential. That is why trading remains so difficult and elusive craft.

Every week I take my daughter to ice skating classes and watch some very skilled skaters and observe their training schedules and talk to some of them and their coaches. The efforts involved plus the cost involved are beyond what most people are willing to put in.

Day after day I trade the same set of methods which I have selected for my own kind of financial objective. None of them is secret all involve focusing on few (less than 100) stocks with outstanding earning surprise, earning momentum, sales momentum, or price momentum. Besides that I trade one neglected IPO's anomalies. By focusing and perfecting few it is now an automatic task. It is like chopping onions without looking at your fingers, the onion or the knife.

The markets change but methods remain same.

Big breasts , asset management, and steel

The theme for the day was silicone implant companies, asset managers and steel companies. New sectors keep breaking out on big volume. Many of these breakouts have legs and will find more buyers post corrections/consolidation.
Based on today's action I have put asset mangers and mutual fund companies like TRWO, BEN, and PJC on watch for next couple of days. I already have position in IAAC. It has excellent earning and small float.

ACOR,Acorda Therapeutics Inc
AGN,Allergan Inc
ASCA,Ameristar Casinos Inc
BXP,Boston Properties Inc
CALD,Callidus Software Inc
CRDC,Cardica
CYBX,Cyberonics Inc
EFUT,E-Future Info Tech Inc Ord
IAAC,Internat Asset Holdg Cp
IPS,Ipsco Inc
LCRD,Lasercard Corporation
MCF,Contango Oil & Gas
MNT,Mentor Corp Minnesota
REDF,Rediff.Com India Ltd Ads
STLD,Steel Dynamics Inc
ZVUE,Handheld Entertainment Inc

Short Targetting

I was watching REDF, which was showing up on my scan today. While going through news to find the catalyst for such a move, I found an alert issued by a site which targets naked short selling. Such kind of actions will proliferate now. While some heavily shorted stock might pop a day or two, the better bets are always one with earning/sales momentum.
Such speculative games are very common during such late momentum phases.

November 17, 2006 / M2 PRESSWIRE / BUYINS.NET, www.buyins.net, announced today that these select companies have been removed from the NASDAQ, AMEX and NYSE naked short threshold list: Adherex Technologies, Inc. (AMEX: ADH), Philippine Long Distance Telephone Company (NYSE: PHI), Rediff.com India Limited (NASDAQ: REDF), Utek Corporation (AMEX: UTK), Westside Energy Corporation (AMEX: WHT), Aradigm Corporation (NASDAQ: ARDM). For a complete list of companies on the naked short list please visit our web site. To find the SqueezeTrigger Price before a short squeeze starts in any stock, go to www.buyins.net.
........
Rediff.com India Limited (NASDAQ: REDF) provides online news, information, communication, entertainment, and shopping services focusing on India and the worldwide Indian community. Its Web sites consists of interest specific channels relevant to Indian interests, such as cricket; astrology; matchmaker and movies; content on various matters like news and finance; search facilities; a range of community features, such as email, chat, messenger, and e-commerce; broadband wireless content; and wireless short messaging services to mobile phone subscribers in India. The company also publishes two weekly newspapers aimed at the Indian-American community based in the United States and Canada. As of March 31, 2005, the company had 36 million online registered users. The company was founded in 1996 by Ajit Balakrishnan under the name Rediff Communication Private Limited. It subsequently changed its name to Rediff.com India Limited in 2000. The company is headquartered in Mumbai, India. With 29.08 million shares outstanding and 1.16 million shares declared short as of Oct 2006, there is no longer a failure to deliver in shares of REDF.

Profit taking

Ahead of the long holiday week, we are witnessing lot of profit taking. Frankly when you see so many gaps and gaps of 4 dollar plus after a long rally, you should expect some profit taking. Expect some wild moves on Tuesday and Wednesday as momentum players play their game in thin trading environment. Lot of heavily shorted names or sectors will be targeted to shake out short sellers. Low float and high short interest can sometime create explosive moves.
I am not finding much in scans today and have few new positions barring some quick morning hits.
Here is what I am finding in my scans currently:
AGN,Allergan Inc
ASCA,Ameristar Casinos Inc
BXP,Boston Properties Inc
CRDC,Cardica
CYBX,Cyberonics Inc
IPS,Ipsco Inc
LCRD,Lasercard Corporation
MCF,Contango Oil & Gas
MNT,Mentor Corp Minnesota
STLD,Steel Dynamics Inc
ZVUE,Handheld Entertainment Inc

No surprises in "web's most prominent investment bloggers" poll

There are no surprises in this poll since it started. Now as someone has commented on Tickersense, as against this poll the other sentiments poll are showing bullishness. The reason is apparent, the sample selection is subjective. What is "web's most prominent investment bloggers" definition. It is based on what Tickersense says. There is no science to it.

Subtle towel throwing by Dow 6800 bear

Now a prominent bearish analyst featured in major business publication (WSJ, CNBC, Business Week, Bloomberg etc) and a constant fixture on business TV is claiming that his persistent bearish thesis and cheer leading of the bearish case with a public prediction of Dow 6800 by 2006 end was just public posturing. Actually he was bullish and buying during that time, he never advised shorting or doubling down to hedge fund friends. Never, never, never.

Listen, people can snipe all they want. The Bulls are in full chest pounding mode, and as someone else wrote, the louder they yell, the more you know you are right.

Despite my protestations that Forecast is folly, I play the game and tried to shake things up. Any forecast is stale within a week -- did anyone predict the GSCI change? The elction sweep? Might that impact the thinking from that point forward?

Some sheeple seem to put way too much stock in other people's forecasts. GAPTFY -- Grow a pair / think for yourself is fast becoming our motto at TBP.

As to the long side, the short term trading calls have all been public -- including the Bullish BUY call on June 13 (pretty decent timing).

The option trade I rec'd on Q calls was only up 750% over the next 48 hours -- those made Cody crazy (why long? Aren't you bearish?) as if the long term macro view was going to impact your day to day trading.

Then there are the Buys of BP, SWY, ORCL, IBM, CPB, MOS, etc. All very public, and all pretty good.

Again, the blog is here for intellectual stimulation and discussion -- not trading advice.

I question the intelligence of those people who don't think for themselves, and are relying on blogs, Yahoo message boards, and (whattthehell) spam emails for their trading strategies and ideas . . .

Posted by: Barry Ritholtz | Nov 17, 2006 7:37:47 AM

It is always the intelligence of others which is in question. It is others who are pseudo contrarians. It is others who are morons.
That is a very subtle way to throw the towel and CYA.Now some would call that extraordinary deception. What was alleged crime of Henry Blodget, that he publicly was cheer leading a stock and privately dissing it. Apprenticed investors, you got screwed.

Price shocks

Unexpected events create price shocks like we are currently witnessing. Lot of the price shocks we are witnessing today are related to mergers and private equity deals. Many of these kind of price shocks benefit only those who are positioned for them.

But sometime they also offer easy money making opportunities. After looking at the merger/bids action in steel last Friday I had steel stocks on my watch and already had position in X. Today when I saw IPS gap up , it was just easy few hours trade for few points, I did not want to hold it as I already had position in X. So while I am primarily a reactive trader, currently I am also anticipating few moves. That works in current environment. The objective is to maximise profit while the party lasts.

One of the tricks I have learned over the years is that when markets go in such momentum phase is to concentrate on high priced stocks for short term trading as they give you 4-25 points in a matter of days during such environment.

Here are some of the things I am watching or has position in.

ACOR,Acorda Therapeutics Inc
AGN,Allergan Inc
ASCA,Ameristar Casinos Inc
ATI,Allegheny Technologies
BXP,Boston Properties Inc
CRDC,Cardica
CYBX,Cyberonics Inc
IPS,Ipsco Inc
ISRG,Intuitive Surgical Inc
IYR,iShares Dow Jones US Real Estate Index Fund ETF
MNT,Mentor Corp Minnesota
NTST,Netsmart Technologies
STLD,Steel Dynamics Inc
VNO,Vornado Realty Trust
X,US Steel Corp

Warren Buffet or momentum

Jon D. Markman has this to say about momentum traders and offers few momentum ideas.

Outside of crooked CEOs, few players in the investing world are the subject of more derision than momentum traders, people who buy stocks that are rising rapidly with the expectation that they'll go higher.

It's the usual Wall Street hypocrisy at work. You see, everyone says they want to be like Warren Buffett and focus on long-term value. But deep down, when the after-work martinis are flowing, most reveal that they really want to be like Buzz Lightyear and find stocks that will go "to infinity and beyond!"

So at this time of year, when animal spirits are stirred by good cheer and rising indices, let's take a week's break from our usual search for cheap, neglected, low-risk stocks that might find favor one day and take a look at pocket rockets whose fuses are already lit and which might take us on a wild ride. At least for a couple of weeks.

Carpe Diem

Leuconoe, don't ask--it's forbidden to know--
what end the gods will give me or you. Don't play with Babylonian
fortune-telling either. Better just deal with whatever comes your way.
Whether you'll see several more winters or whether the last one
Juppiter gives you is the one even now pelting the rocks on the shore with the waves
of the Tyrrhenian sea--be smart, drink your wine. Scale back your long hopes
to a short period. Even as we speak, envious time
is running away from us. Seize the day (Carpe diem), and trust as little as possible in the future.

Following a consistent methodology has its reward. My earning/sales/price momentum method keeps me on the right side of the market. Month after month following the same thing, gives you a steady stream of candidates to work with. Not all months are equally profitable.

Once or twice in a year the market enters the kind of phase we are in. In such phases the method hits jackpot. January to April was very good period for the method and now in past few weeks I have cleaned up. By doing, perfecting and trading the same method over years, you get trained in sensing the opportunities quickly and can change the gear fast.

When market enters the kind of phase we are witnessing for few weeks you just have to seize the opportunities and currently there is no lack of them. The opportunities like these do not come around often and they do not last long. You must be ready, you must be prepared and you must act boldly when such opportunities present themselves.

Here is what I have positions in or watching from Fridays action.

AMAG,Advanced Magnetics Inc
CHDX,Chindex International Inc
CUBA,Herzfeld Caribbean Basin
DRAX,Draxis Health Inc
DVAX,Dynavax Tech
ENT,Enterra Energy Corp
FMO,Fiduciary Claymore Mlp
FRN,Friendly Ice Cream Corp
HIBB,Hibbett Sporting Goods
ICE,Intercontinental Exchange Inc
JST,Jinpan Internat Ltd
LTON,Linktone Ltd
MELA,Electro-Optical Sciences Inc
SEED,Origin Agritech Ltd
SMOD,SMART Modular Technologies
SRDX,Surmodics Inc
X,US Steel Corp

Day traders market

This is an excellent market for day traders. Look at how many stocks have 3 dollar plus range. Those trading the Dummies, which is essentially a price/volume expansion method, must be laughing all the way to the bank. Even for swing traders it is very good time, how many times in a year do you get 5 to 25 dollar moves in few weeks.

Now there is a race to call the top. The market might just spend some time sideways to frustrate many and then make its intended move. Till then you have to capitalise on such rare money making opportunities. I have trimmed many holdings like ICE to book profits in the strength and now holding few position where I have high conviction that there is still more upside. In the meanwhile the market continues to offer opportunities for the bold and fearless.

Here is what I have positions in or watching:

AMAG,Advanced Magnetics Inc
CGA,Corus Group Plc
CHDX,Chindex International Inc
CTRN,Citi Trends Inc
DVAX,Dynavax Tech
ENT,Enterra Energy Corp
FMO,Fiduciary Claymore Mlp
HIBB,Hibbett Sporting Goods
ICE,Intercontinental Exchange Inc
JST,Jinpan Internat Ltd
SRDX,Surmodics Inc
X,US Steel Corp

Nymex bag holders

New York Mercantile Exchange (NMX) operator rocket from $59 IPO price to trade as high as $152 in debut session.

Is there an edge for mom and pop investors in buying an IPO with lots of buzz. IPO's are never bought, they are sold.And they are sold to clueless retail fools. There are hundreds of studies which show investing in hot IPO under performs the market.

When CME IPOed it was just the beginning of bull market, it had low float and because of market condition was low priced, so it performed very well. Each subsequent IPO in that sector has been priced much higher and has larger float. So in essence the cat is out of the bag. Even the grandma in Timbuktu considers exchanges as good investment. When everyone gets it the party is most likely to be over.

So what will happen to all those who bought it today. They will be the bag holders. Who made money on this stock, all those who bought it before IPO. They will dump it,it will most likely remain below the first day trading price for substantial period of time. When sellers are exhausted , if it has legs it will breakout and then might be good time to buy.

That is typically the story of IPO's with buzz. That is the path for majority buzz IPO's.The only people who make money on IPO are the one who get it at IPO price,buying it at retail price is fools game. The probability is stacked against you.

Conversation with a chartist

walter said...

gotcha...

i find that personally i do well with visual information - hence my interest and predisposition with charting. that being said, when i get a set of stocks that someone likes for some relatively consistent reason, i like to investigate to see if any visual commonality emerges among them...

in that sense, if you do, how to you use charts?

11:24 AM

Pradeep Bonde said...

How Charts can help you in the stock market by Jiller is what I like. I have nothing against chartists.
My submission is that if you use some logic first to select stocks like earnings/ momentum or value based PE envelopes kind of stuff and then use technical analysis on it, your returns are dramatically different.
For example if you are chartist and if you forget everything else and concentrate only on the IBD top/bottom 200 composite Stock lists which they publish on Thursday, you will get at least 3 times the return you get by using technical analysis on random set of stocks.
All those day traders who trade dummy method would find lot of easy money if they just make an effort to understand earnings. They will be (with their superior visual acumen) able to make more money and enter in anticipation. Plus will have more conviction in what they are doing. Will be able to prioritise opportunities. But many are so completely wedded to technical analysis that they are not even open to alternative possibilities.
They keep on reading more books on technical analysis and keep getting deeper in to it , while there may be a better way to make money.
Many times our deeply held beliefs or paradigms stop us from looking at other possibilities or create blind spots. I always suggest two books which have influenced me personally to look at things constantly differently.
1 Paradigms by Joel Arthur Barker
2 A kick in the seat of the pants by Roger von Oech
and if you can find watch the Paradigm movie by Joel Arthur Barker. It is one very insightful small documentary.

X

Markets are taking much needed rest today. But new sectors and new stocks continue to breakout. In recent weeks lot of quality large caps/ mid caps are breaking out on large volume. Lot of IBD kind of stocks have had very good breakouts. Now this kind of action is indicator of elephants at work. So this move might have more legs post correction.

The problem is you must act and act fast. Today I bought X (US Steel Corp.) the moment it started making a move. By the time I entered it was already up 3 dollar or so. By the time I could write an email about it to a trader friend it was up another buck or so. That is the problem with fast moving markets.

Here is what I am finding in my scans or have positions in:

ADSK,Autodesk Inc
AMAG,Advanced Magnetics Inc
CTRN,Citi Trends Inc
DVAX,Dynavax Tech
ICE,Intercontinental Exchange Inc
JST,Jinpan Internat Ltd
SRDX,Surmodics Inc
X,US Steel Corp

Who is buying the homebuilders

Value investors are the real contrarians. They wait for markets to misprice stocks and then pounce on them. If you have been watching homebuilders, the value funds and some big institutions are slowly building positions in them. If you understand the games played by large value and growth investors, you can substantially improve your trading success.

The Bill & Melinda Gates Foundation on Tuesday disclosed that it has taken an interest in homebuilders, reporting new stakes in KB Home (KBH), Pulte Homes Inc. (PHM), Centex Corp. (CTX), and Lennar Corp. (LEN).

Watchlist/positions

Bullish but cautious. That is the current prognosis. Correction can be sector specific. It can be limited to stocks which have moved a lot. Correction can also be sideways move followed by another leg up.

The best bang for the buck currently is for those following earnings. When you see good earnings like that on ZOLL or EXLS or many others in recent days, if you dither, if you wait for pullback, in most cases the opportunity is gone. In current bullish environment good earnings is being instantly lapped up creating those 10% kind of moves in a jiffy.This has been a good learning experience of the possibilities of playing the earning anomaly for those new to the earnings game. To play earnings you need conviction.

AMSF,Amerisafe Inc
CME,Chicago Mercantile Exchange
DCP,DynCorp International Inc
EGLT,Eagle Test Systems Inc
ELK,Elkcorp
ENT,Enterra Energy Corp
EXLS,Exlservice Holdings Inc
HOTT,Hot Topic Inc
NCTY,The9 Limited
OHB,Orleans Homebuilders Inc
RIMM,Research In Motion Ltd
RMBS,Rambus Inc
ZOLL,Zoll Medical Corporation

When making money becomes too easy.......

Momentum cycle is peaking when you can make 5 to 10 dollar in a day on a move. So the fun and game might be ending. My many statistical indicators like 65 day price movers and one month 50% plus are now signalling extreme momentum, which ends in substantial correction.

Momentum is cyclical. In late momentum phase like we are currently witnessing, the market goes in to frenzy. You will find several stocks with wide ranges. That is why most money is made in the last phases if you are a momentum followers. Yes risk of reversal is very high at such points, but risk management is for that.
In last 65 days 1300 stocks have been up 25% or more from their 65 days ago price. 310 stock were up 50% or more and 51 were up 100% or more. So no matter your methodology( even if you were technical analyst), you would have still made money.

It also depends on where you started becoming bullish on stocks. If you became bullish in August, you will be reaping rewards of the extreme momentum phase of the bull move.
Here is what I wrote on August 1, 2006
Some stocks set for rallies

The overall market action may look dreary but below the surface there is a strong rallies developing in some sectors and it looks like these rallies have legs.
How does a market turn and how can you anticipate market turns. Everyone has different ways to do it and it is a function of your understanding of overall market mechanics. It is also a function of your trading philosophy. Those who go by fundamentals look at stocks trading below a certain valuation levels. The macro players look at interest rates, liquidity, consumer spending, jobs etc. The cycle followers and Elliot wave followers look at cycles and their length. Technical traders look at support, resistance, chart patterns etc. No matter what trading style you follow you should have a way to determine overall market direction.
I follow a very simple objective method to determine market direction. It is based on a ratio of up and down stocks price in last 65 days. It gives you an objective consistently tradable signal. Going by that indicator we have a high probability of a rally developing in next couple of weeks.
When a rally starts developing you will see first set of stocks starts to rally, they have follow through , then more join in. In last couple of days certain set of stocks have started moving and are also witnessing follow through. So the early birds are off and that also gives clear indicator of what sectors are likely to rally.

The bearish propaganda machine is out in full force , denouncing the bull move and calling it a suckers rally. Calling those who made money during this phase as morons. After being persistently wrong for over a year, they might be right sometime , but is that a profitable methodology.Beliefs is all that matters to them, not making money.

Bearishness is a cult. It uses all the tools of cult building to seduce the followers. So many get sucked in, suspending their belief. Cult followers do all kinds of stupid things and have excellent justification for it. Cults are also built on creating alternative logic which is seductive and creates a alternative reality. Cult gurus are always very persuasive and have excellent arguments. For them the reward is ability to attract cult followers , not making money.

Just few months ago Barry Ritholtz was asking apprenticed investors to follow him. Many did. Now some of them are realising the folly. Couple of times some of those who followed his advise comment saying they have lost money following him, he as well as his other cult followers are quick to jump on them , to tell them, we never said to follow us. Now who was it that was handing out Gods 10 commandment on trading to the unwashed masses with the "Apprenticed investor series" just few months ago(with gems like "Thou shall never, never buy 52 week low").

So guru says follow me and become a cult follower but don't blame me if you are not profitable. Try making an alternative argument on Barry L. Ritholtz or Bill Cara's blog and see what happens. You will get roasted. The followers will jump on you, strangle you , the guru will call you moron or not the real thing.

Look at the blogs frequented by most traders, what have they been touting for over a year, a cult of bearishness or conspiracy. How many people have got suckered in to that logic. Lots and lots, that is why so many are bewildered and on sideline. They are the most popular blogs. I can understand about amateurs but even veterans get suckered in.

Last night I was chatting with a veteran trader who has a good profitable record and method, he has been on sideline for long and frustrated with himself at having missed out on good profit. What was the reason, in his own analysis, he started hanging out at one of the bearish gurus blog. Slowly he started believing in the cult , he started doubting his own methodology. Beliefs are very powerful, your actions flow from them. That is the secret of cult.They plant new beliefs in your mind. Once you start believing in aliens, you proudly start wearing a tin foil hat.

When I go to a blog, while I read the opinion, what I am most interested in is the methodology. Is their profitable methodology. If it is how much is the edge. What concept is it based on, can it be replicated. How much can you expect to make out of it. These are the kind of questions I ask and if I see a profit making idea, I will test it and incorporate in to my trading if it beats or improves my current method. You can dissect most people method very easily and figure out if it is profitable or not. The opinions are just opinions. They are for entertainment purpose only.

Slow action

After a couple of torrid sessions, the market is in mixed mood today. Buying fresh things means larger stops but if you had bought stocks couple of weeks ago, you would be sitting on nice 10 to 15 points moves.

Not much on my scans today and not looking at fresh buys as that involves giving up entries on good previously bought stocks. Sitting tight and not getting shaken out of those position is the key, many of them are likely to have second set of breakouts post consolidation or pullbacks. I can afford to give back some profits as last couple of weeks have been very profitable. But as always I am flexible and willing to change my mind fast.

Here are few things showing up on my scans:
Long

AMSF,Amerisafe Inc
ENT,Enterra Energy Corp
HGO,Houston American Energy Corp
HOTT,Hot Topic Inc
NCTY,The9 Limited
RMBS,Rambus Inc
SGMO,Sangamo Biosciences Inc
ZOLL,Zoll Medical Corporation

Short
SHLD,Sears Holding Corp
PTRY,Pantry Inc

Bullish Theory

Update: Intra day basis the Index is showing 2000 plus with a reading of 2022.
Mcclellan Summation Index is at 1929 currently.

Among the most significant indications given by the Summation Index are the identification of the end of a bear market and the confirmation of a new bull market. Bear markets typically end with the Summation Index below -1200. A strong rise from such a level can signal initiation of a new bull market. This is confirmed when the Summation Index rises well above +2000. Past examples of such a confirmation have resulted in bull markets lasting at least 13 months, with the average ones lasting 22-24 months.

Interpretation

The McClellan Summation Index is a long-term version of the McClellan Oscillator. Its interpretation is similar to that of the McClellan Oscillator except that it is more suited to major trend reversals.

As explained in the Calculation section, there are two methods to calculate the Summation Index. The two calculation methods create indicators with identical appearances, but their numeric values differ. These interpretational comments refer to the "suggested" calculation method explained in the Calculation section.

McClellan suggests the following rules for use with the Summation Index:

* Look for major bottoms when the Summation Index falls below -1,300.
* Look for major tops to occur when a divergence (page 29) with the market occurs above a Summation Index level of +1,600.
* The beginning of a significant bull market is indicated when the Summation Index crosses above +1,900 after moving upward more than 3,600 points from its prior low (e.g., the index moves from -1,600 to +2,000).

I am surprised with so many technical analysis junkies around why no one is focusing on this. It has one of the best logic behind it and considered very reliable by most technical analysts.

Junk book is #1 book recommended by readers of Kirkreport

Kirkreport has a list of 100 books which influenced his trading and at the end he has the number one recommendation by readers. The book recommended by most is Entries & Exits : Visits to 16 Trading Rooms.
Now most readers of this blog know that according to me this book is complete junk. Worst the negative reviews on this book just keep mysteriously disappearing from Amazon. The Amazon review process is sham. Publishers and authors are allowed to edit the reviews and Amazon deletes the bad reviews. See this review below, somehow it has survived.

Extremely Disappointed, June 4, 2006
Reviewer: bartok69 (Seattle, WA) - See all my reviews
I wrote an unbiased review on here that gave the book 2 stars. The review was deleted.

The summary of my previous review is that the premise of the book is brilliant, but the execution is poor. All of the traders interviewed are either Elder's students, or teachers at his trading camp. Essentially, they all trade the same system, and the book reads like promotional material for Elder's trading material.

I'm not sure why my review was deleted. This irritates me greatly. I buy a lot of books on Amazon and depend on other customers to provide neutral views. I'm highly suspicious of all of these 5 star votes given by reviewers who have written no other reviews. Traders, please be skeptical.

Here is my take on that book.

Entries & Exits : Visits to 16 Trading Rooms

Save your money don't buy Entries & Exits : Visits to 16 Trading Rooms by Alexander Elder. You will not regret buying it. Because it is an extended informecial for his trading seminars and chat rooms.
Alexander Elder gained his fame with the book Trading for a Living: Psychology, Trading Tactics, Money Management which had some useful trading concepts. Rest of all his book are attempts at milking the fame achieved from that book. This latest book is a high priced junk to attract more people to his trading chat room and seminar.
The book interviews 16 traders and looks at their entry, exit and trading methodologies. Elder adds expert comments to their own methods and offers some suggestion. The problem is all the featured traders are teachers at his chat room, or ex students. There is no performance criteria for selecting them. Most of them going by the interviews have still been struggling with their trading. The entry methods in most cases look similar, why because they are all followers of Elder and their methodologies are copycats of his methodologies. There is hardly anything new or insightful in these interviews. In case you are dumb there is also a very high priced guide to the book.
If this book is so bad why the reviews on Amazon so good? Because Amazon allows authors/publishers to edit the reviews and if you post negative reviews they just delete it.As someone on Amazon forum has said it correctly

If Elder knows so much why doesn't he stop writing expensive books and go trade and keep his mouth shut. I think there is more money to be made in trading camps, books, seminars and webinars than in trading!!

Don't waste your money on this high priced junk.

Season of opportunity

The market continues to show good momentum. Quality stocks are breaking out on high volume and more sectors are joining the rally. There might be correction along the way but the market is unlikely to reverse in a hurry. Some sectors will continue their rally. Momentum does not revert suddenly, the bears may wish for it , but that is not how markets behave. It will take few months for it to reverse.

It is time to be aggressive on good earnings plays. Nothing excites Wall Street more than earning acceleration. The high volume action you see in number of stocks is a clear sign of institutional buying. It is not mom and pop buying which generates that kind of volume.

Here is what I have on my watch or have positions in.

AAI,Airtran Hldg
AEZ,American Oil & Gas Inc
AOB,American Oriental Bioengineering Inc
ARIA,Ariad Pharmaceuticals
ARM,Arvinmeritor Inc
BRLC,Syntax-Brillian Corp
CAL,Continental Airlines B
CHINA,CDC Corp Class A
CME,Chicago Mercantile Exchange
CORS,Corus Bankshares Inc
DAKT,Daktronics Inc
ECMV,E Com Ventures Inc
ESE,Esco Technologies Inc
GCFB,Granite City Food & Brewery Ltd
GMTN,Gander Mountain Co
GROW,U.S. Global Invest Inc A
GRZ,Gold Reserve Inc
INWK,Innerworkings Inc
JWA,John Wiley & Sons Cl A
LCC,US Airways Group Inc
MALL,Pc Mall Inc
MELA,Electro-Optical Sciences Inc
PEIX,Pacific Ethanol Inc
RATE,Bankrate Inc
SVM,Servicemaster Co The
TRMS,Trimeris Inc
VNDA,Vanda Pharmaceuticals Inc
ZVUE,Handheld Entertainment Inc

When things start flying

Momentum feeds on itself. Catalysts like mergers, new products, earnings etc have more exaggerated effect during such times. Breakouts during normal sedate times are easier to buy and react to. In the market we are currently witnessing, risk of missing, short covering and bewilderment is pushing some stocks wildly.

Not everything breaking out currently has legs but there are number of recent breakouts which have very high probability of continuing post a correction. Stocks not having reacted to earning for few months are now breaking out and have god probability of continuing the move till the P catches with the E.

Here is what I have on my watchlist or positions in.

AAI,Airtran Hldg
AOB,American Oriental Bioengineering Inc
BDK,Black & Decker Corp
DAKT,Daktronics Inc
ESE,Esco Technologies Inc
GMTN,Gander Mountain Co
GOOG,Google
GRRF,China Grentech Corp Limited ADS
INWK,Innerworkings Inc
LCC,US Airways Group Inc
NVAX,Novavax Inc
SVM,Servicemaster Co The
TRMS,Trimeris Inc
VNDA,Vanda Pharmaceuticals Inc

Indicators moving in correction zone

My 65 day bullish/bearish indicator has started flashing correction signal. So risk on fresh entries might be high and this time the correction may surprise the bulls, shaking out some late entrants.

Rationalisation

The bears are out providing rationalisation for the move. Short covering by large hedge funds is one. As usual some are claiming conspiracy by Fed and the PPT. Some are claiming it is liquidity driven( now is this some new macro insight, the liquidity factor has been around since July, so if you are such a good analyst, why you did not think of it before, why yesterday). One of the perma bears amongst the Tickersense poll participant has thrown the towel. So finally there is some bear capitulation. How long the move will last, who knows. What is important is did you profit from it.

You can spend your life time trying to rationalise the move. At the end of the day all that matters is whether you have a profitable methodology. If you followed the earning/sales/price momentum method like I do, you would not have missed out on the opportunities.If you followed the IBD methodology, it would have still got you in to this move long ago. November has been one of the best months so far, for those methodologies.

Here is what I have positions in or on my watchlist so far based on current action:

AAI,Airtran Hldg
DAKT,Daktronics Inc
GMTN,Gander Mountain Co
GOOG,Google
LCC,US Airways Group Inc
TRMS,Trimeris Inc
VNDA,Vanda Pharmaceuticals Inc

Where to find China stocks

Reader has emailed asking where to find China stocks. Now it might be slightly late to get on to the party but the best place to find list of country or sector stocks is always www.bullsector.com. Couple of days ago when I saw few Chinese stocks in scans I put this list from Bullsector in watch list and caught all the major big moves without much pain.

The China Stock List

FXI ACH ASIA ASTT ASX ATS AUO AWRCF.PK BIDU BNSO CBA CEA CEO CHA CHDX CHINA CHL CHN CHNR CHT CHU CMED CMQ CN CNTF CRGI CTEL CTGLE.OB CTRP CYD DSWL GAI GRR GRVY GSH HIHO HNP HRAY HRCT.OB ICAB IMOS INTN IVN.TO JADE JOBS JRJC KONG LFC LONG LTON MXICY NINE NTE NTES NWD PACT PCLN PCW PEAK PTR SAT SDAY SHI SMI SINA SNDA SNP SOHU SPIL SSPI SWG.TO TOMO TSM UMC UTSI UUU XING YZC ZNH

ACH through ZNH

Early bird gets the worm

Those trying to catch up with the market now have real dilemma. Much wider stops are needed to get on to moves. It is much more risky. If you were bullish since August, then you would be now sitting on some nice profits. If you started building positions at the start of the earning season, you would still be sitting on good profit.

Now that the market has entered more speculative phase the risk is significantly higher, but at the same time some of the best and vertical moves happen late in momentum cycle. To trade those kind of moves, you first need methodology to identify those stocks, you need guts to act quickly and you need ball of steels to hold them through some scary moves of 20 to 30% plus in few days. Not everyone is comfortable doing that.

So if you have missed out on profit opportunities, you must do some serious soul searching about your methodology and deeply held market beliefs. So many people have rules about trading, one of the most popular one is "Trade what you see and not what you think".

Are you a trader or a rule maker

Since August you could see market going up, stocks breaking out, so why were you on sideline. As I have said before it is very easy to make rules , but very difficult to practice them.

Here is what I have positions in or looking at based on yesterday's action:


ALTH,Allos Therapeutics Inc.
AXR,Amrep Corp
BITI,Bio-imaging Technologies
CNTF,China Techfaith Wireless Communication Technology Limited
CRAY,Cray Incorporated
CYBX,Cyberonics Inc
DDS,Dillard's Inc
DKS,Dick's Sporting Goods
EFUT,E-Future Info Tech Inc Ord
EHTH,Ehealth Inc
FFH,Fairfax Financial Holdings
GOOG,Google
GRRF,China Grentech Corp Limited ADS
ICE,Intercontinental Exchange Inc
ININ,Interactive Intelligence
ITB,iShares Dow Jones US Home Construction Index Fund ETF
NTST,Netsmart Technologies
NTY,Nbty Inc
ORCT,Orckit Communication Ltd
PIR,Pier 1 Imports Inc
RICK,Rick's Caberet Intl
RKT,Rock-Tenn Co Cl A
SRSL,Srs Labs Inc
VSNT,Versant Corporation
WCI,Wci Communities

Where are the home builders bears now

Just a couple of weeks ago the perma bears at The Big Picture were dishing out bearish scenerio on housing. Doug Kass, the perma bear on housing, as usual has a very timely piece to further his bearish hypothesis on housing. Seems like everyone is listening to them. The homebuilders are flying today. To add insult to injury even the home improvement stores are flying.

AVTR,Avatar Holdings Inc
AXR,Amrep Corp
BHS,Brookfield Homes
BZH,Beazer Homes Usa
CHCI,Comstock Homebuilding Comp
CTX,Centex Corp
DHI,D.R. Horton Inc
DHOM,Dominion Homes Inc
ENV,Cet Services Inc
HOV,Hovnanian Enterprises A
KBH,Kb Home
LEN,Lennar Corp Cl A
LEN.B,Lennar Corp Cl B
MDC,M.D.C Holdings Inc
MHO,M/i Homes Inc
MTH,Meritage Homes Corp
NVR,Nvr Inc
OHB,Orleans Homebuilders Inc
PHM,Pulte Homes Inc
RYL,Ryland Group Inc. The
SPF,Standard Pacific Corp
TARR,Tarragon Corp
TOA,Technical Olympic Usa Inc
TOL,Toll Brothers Inc
WCI,Wci Communities

Small float leads to wild moves

A reader has emailed me asking my opinion on EFUT. It is too late to get in to it now. It has been on my scans since last 4 days. One of the reason for such wild move, where the stock has gone from 8 to 46 in matter of few days is because of small float.

When looking at 5 ideas to buy, I always look at float. Low float is always preferable. Trading low float is not every ones cup of tea. It requires tremendous patience to sit tight on such moves as they can make wild intra day moves. You need to have very good risk management strategy.

Low float along with explosive earnings is always a extremely good set up provided you get in at the right time.

Here are couple of stocks I have positions in or watching basd on action so far today.

ALTH,Allos Therapeutics Inc.
CYBX,Cyberonics Inc
DDS,Dillard's Inc
DKS,Dick's Sporting Goods
EFUT,E-Future Info Tech Inc Ord
GOOG,Google
GRRF,China Grentech Corp Limited ADS
ICE,Intercontinental Exchange Inc
NTY,Nbty Inc
PIR,Pier 1 Imports Inc
SRSL,Srs Labs Inc
WCI,Wci Communities

Air Pocket

After creeping higher for many days, the market is hitting an air pocket today. Some water is being thrown on the exuberance in Chinese stocks, but they should continue their move higher post correction.

There are very few things showing up on my scans currently. Here is what I am watching or has positions in based on today's action:

ALTH,Allos Therapeutics Inc.
DDS,Dillard's Inc
EFUT,E-Future Info Tech Inc Ord
ICE,Intercontinental Exchange Inc

Big Picture- Earnings

The third-quarter earnings season is coming to a close and it appears to be a layup win for the bulls. From the beginning there has been no doubt, as one positive surprise came in after another. And the trend has yet to let up. Nearly 89% of the S&P 500 companies had reported, and positive EPS surprise’s still outnumber negatives by over 3:1. The median surprise is an impressive 3.2% and median growth thus far is 12.3%.

The growth leaders are the Energy and Materials sectors. Energy has shown much greater strength than expected, with median growth of 27.5% and a surprise ratio nearly 5:1. The tougher commodity price comps haven’t hit the sector as hard as expected, and oil field service firms like Schlumberger (SLB) and Baker Hughes (BHI) have been picking up the slack for lagging E&P’s. Looking ahead to the fourth quarter, however, it is clear that the sector’s comparable growth is expected to lag, potentially dropping to less than 1%. Recall that last year’s fourth quarter results were so good that they prompted a congressional hearing. That’s a textbook tough comp. Also showing strength, the Materials sector boasts median growth of 21.5% and a healthy surprise ratio of over 2:1. Big upside surprises here came from Nucor (NUE) and Praxair (PX).
The growth laggard thus far continues to be Consumer Staples, with median growth of only 6.3%. This is more favorable than expected however, as the sector’s surprise ratio is over 3:1, with a median surprise of 1.9%. The two earnings surprise leaders for the sector were Estee Lauder (EL) and Supervalu (SVU). Food firms Conagra (CAG) and McCormick (MKC) also posted double-digit surprises. The Financial and Telecom sectors are also lagging with single digit growth.

Now that 90% of the earnings are in, the earnings picture explains to a large extent why the market rallied since July. You can look at it is as an after the fact explanation, but consistantly, the Zacks analyst was pointing out even 8 weeks before the earning season started that earnings are likely to be very good.

If you see the sectoral earning trends and keep track of them, by middle of the next earning season, you would also with lot of certainity predict which sectors are likely to have good earnings and enter individual stocks based on probable earning surprises.

China Syndrome

The Chinese stocks, after a sideways moves or pullback for a year or so have started flying again. Lot of recent IPO's are also witnessing breakouts. The leisure sector as also witnessed some breakouts recently. And Wall Streets favorite sector- Restaurants have also been doing well. So there is no lack of opportunities. And if you were following earnings/sales you would not have missed the obvious ones like CAAS and MEND. Few hits like these can make an year. Just follow the earnings. Low float and neglect, added to the earnings/sales mix is dynamite which gets you those 25% plus kind of moves in few days.

Breakdowns after good earnings like the one you see on ILMN are also good opportunities, if you are trading on the short side.


Long Position/watchlist

BIDU,Baidu.com Inc
CAAS,China Automotive Systems Inc
CHDX,Chindex International Inc
CHNR,ChinaNatural Resources
CRVL,Corvel Corp
CTDC,China Technology Development Group Corp
CYD,China Yuchai Int Ltd
DSTI,Daystar Technologies Inc
EFUT,E-Future Info Tech Inc Ord
GOOG,Google
IIG,Imergent Inc
IOC,Interoil Corporation
ISIS,Isis Pharmaceuticals Inc
KSW,KSW Inc
LQDT,Liquidity Services
MA,MasterCard Inc
MEND,Micrus Endovascular Corp
OLAB,OraLabs Holding Corp
TARR,Tarragon Corp
TRMP,Trump Entertainment Resorts Inc
VDM,Van Der Moolen
WTS,Watts Industries Inc A
WYNN,Wynn Resorts Ltd

Short Positions/ watchlist

ALOG,Analogic Corp
BBC,Bodisen Biotech Inc
ILMN,Illumina Inc

Popular blogger contrarian indicator

Popular blogs may not be the best place to find profitable ideas. This poll has become a good short term contrary indicator. Every time it gets released and shows that the popular bloggers are bearish, the market pops. Ever since it started the popular blogger sentiment has been more or less negative and the market has kept going up.

What determines popularity. Bearish blogs are more popular. Blogs which are wrong for over a year are more popular. Blogs which promote conspiracy are more popular. Blogs which offer newsletters are more popular. Blogs good at marketing are more popular. So if you don't want to beat the market just follow the popular blogs!!!

Update:
A little bit of truth serum has the bloggers participating in the Tickersense poll up in arms. Tradermike is outraged by the conclusion. Most of the arguments being presented are about semantics and not about data or methodology or what that poll is indicating.

When comparing three sets of data bullish, bearish and neutral when bearish numbers are the larger bears are in majority. All bulls and bears poll are presented that way.
So when 41% are bearish, 34% are neutral and 23% are bullish, who is in majority.

Forget the semantics just go through the content of the bloggers participating in the poll and look at what they have been writing about.

Look at how many of them have been bearish for ages, nothing changes their opinion, every data point is twisted to fit their hypothesis. Some of them have called for 50% drop from current levels by end of this year. For them Alcoa earning is an indicator of earnings for all stocks. Some have got stuck on housing bearish scenario and just got stuck their.

Then there are bloggers on that list who will make very good novelists. Their speciality is conspiracy theories. Often Goldman Sachs or the Fed is the villain in their fiction. Day after day they come out with elaborate conspiracy theories to explain the markets and call to action like, the constitution of USA should be changed because the market is going up! They have extremely large followings.

Then the third set are the charlatans, who are basically selling newsletters, software's, advisory services or TV punditry. Now these hucksters are expert at marketing. Some of them have been interviewed and have admitted they even don't earn their living from trading but from writing newsletters or other activities. But because of their skillful marketing and seduction techniques they have large following.

So if you want to follow them, who am I to object to.

Read my previous posts on these topics
Don't follow an analyst unless you understand Cognitive Dissonance
The Internet has provided good platform for many analyst to broadcast there view about markets and economy. The interactive nature of the media has also many benefits and many drawbacks. If you want to follow any analyst you must understand the dynamics of the media and also the professional hazards of following an analyst. In simple language avoid the risk of cult following.

The biggest problem to watch for in analyst is what psychologist call Cognitive Dissonance. Cognitive Dissonance is a phenomenon in which an individual or a group of individual with an established opinion refuse to accept another point of view, in spite of new irrefutable evidence suggesting quiet another conclusion.

The stronger their original opinion, the more resistant they are to changing it and tend to persist in creating new argument in favor of their original views.
The other problem which further accentuate this problem is if the analyst has large followers, or recognised by media as authority or has wide access to disseminate his or her views and discredit challengers. As a result both analyst and the followers are slow to change their established opinion as that has extremely high social and psychological cost. This leads to market behaving differently from the analysts firmly held positions for extended period of time. So an analyst who publicly says Dow 5000 or Dow 100000 continues to find new reason to justify his or her call inspite of market going the other way.

The Internet by adding interactivity to the process further accentuates this process. Read comments on most widely followed bullish or bearish or value focused or growth focused analyst site or blog. You will notice any dissent is swiftly ridiculed or chased away. Then it becomes a love fest between analyst and his followers. They act to reinforce each others belief, work to discredit new data points, impute motives to others or simply say a data contrary to their belief is "spin" or " manipulated". Now this is a typical cult behaviour. Day in and day out if such things get reinforced then it becomes a very strong cult.

Very few investors/ traders have the psychological make up to avoid such cults and change their opinion and accept alternative reality or accept they are wrong and quickly seize new opportunities.

Cognitive dissonance, refers to our desire to avoid believing two conflicting things. Whereby the brain attempts to find support for the belief that carries the greater attachment or emotional involvement by finding a way to ignore or discount the conflicting belief.

In the classic study of this characteristic, researchers found that once a person had purchased a particular automobile, they would avoid advertisements for competing models and seek out those for the model purchased, so as to avoid the pain of regret that was bound to follow if they were to realize they had made the wrong decision. One way to avoid regretting the purchase decision is to (irrationally) filter the information received (or believed) after the decision has been made. Similarly, people tend to minimize the importance of subsequent information that might call their original decision into question.

The upshot is that we resort to various subconscious mechanisms to defend our existing beliefs, even where the desire to maintain these beliefs has a less-than-rational basis.

Knowing this, how do investors adjust their behaviour to compensate for the tendency to avoid or deny new, conflicting information? The answer is to seek out contrary opinions; to realize that research doesn't stop once a decision is made; to strive to identify mistakes as early as possible and take pride in the ability to do so.

And my this post:
Media bias
A very though provoking lecture on capitalism and belief in the future by Johan Norberg, a Swedish writer devoted to globalisation and individual liberty. It reiterates my point about cognitive bias and why you should not get seduced by bearish analysts constant sky is falling rhetorics.

The media exploits this interest in problems and disasters. We want to hear the latest, horrible stories, because our stone-age brains think that this is important information upon which we must act. At the turn of the Millenium, a survey from New York University made a list of “Journalism’s Greatests Hits”. Would you expect news stories about new vaccines, fantastic inventions, the rise in living standards, or the spread of democracy from 0% of the countries 100 years ago to 60 % today? You would have been disappointed. The greatest hits were all about war, natural disasters, dangerous chemicals and unsafe cars.

Risks, horrible acts and disasters are easily dramatised and cheap to produce. That is why crime is such a popular theme on the news. Studies from the US show that the more time people spend watching the TV news, the more they exaggerate the extent of crime in their cities. A fascinating study about Baltimore showed that 84 percent feared that criminals will harm them or their loved ones, but at the same time almost everybody, 92 percent, said that they felt safe in their own neighbourhoods, of which they have first-hand knowledge. They all think that there is a lot of crime in Baltimore , but they all think that it takes place somewhere else in the city, in the places they only know about from the media.

These results appear again and again in surveys. People think that the environment is being destroyed, that the economy is going to bits and Germans think that the reunification of Germany was bad for most people. But they also think that their local environment is good, that their personal finances are improving, and that German reunification was good for their own personal situation. Problems and disasters are always somewhere else. And if we all think so, we must all be wrong.

The problem with a globalised world is that there is always a flood somewhere, there is always a serial murderer somewhere, and there is always starvation somewhere. And therefore there is constant supply of horrors to fill our TV screens. If you don’t know the background or study the statistics, it’s tempting to conclude that the world is getting worse.

Follow the volume

The idea that extreme trading activity (as measured by trading volume) contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a period of one day to a week tend to appreciate (depreciate) over the course of the following month. This effect is consistent across firm sizes, portfolio formation strategies, and volume measures. Surprisingly, the effect is even stronger when the unusually high or low trading activity is not accompanied by extreme returns, and appears to be permanent.
The significantly positive returns of our volume-based strategies are not due to compensation for excessive risk taking, nor are they due to firm announcement effects. Previous studies have documented the positive contemporaneous correlation between a stock's trading volume and its return, and the auto correlation in returns. The high volume return premium that we document in this paper is not an artifact of these results. Finally, we also show that profitable trading strategies can be implemented to take advantage of the information contained in trading volume.
http://finance.wharton.upenn.edu/~rlwctr/papers/9901.pdf

Like earnings announcement anomaly, the volume effect is another anomaly which can be profitably traded. Researchers have found this effect persists across various markets. Making it work as always requires crafting a proper trading system. Like these there are so many proven edges, but most traders are not aware of them. In a way that is good because the edge continues to work as very few people use it.

The dragon is on the move

China related stocks have been perking up for few weeks. If you have noticed, I am finding many of them on my scans. Last time they started rallying, the market topped out after few weeks!

There are number of other stocks which I have positions in which are flying. Lot of them have gap ups. So we are witnessing some nice momentum in select stocks. The earnings/sales breakouts continue to act well and keep providing fresh opportunities.

Here is what I am finding in my 11 A.M. scans.

CAAS,China Automotive Systems Inc
CHINA,CDC Corp Class A
CKEC,Carmike Cinemas
CMT,Core Molding Tech Inc
EFUT,E-Future Info Tech Inc Ord
IOC,Interoil Corporation
ISIS,Isis Pharmaceuticals Inc
LQDT,Liquidity Services
MA,MasterCard Inc
MEND,Micrus Endovascular Corp
OEF,iShares S&P 100 Index Fund ETF
ONEQ,Fidelity Nasdaq Composite Index Tracking Stock ETF
SLXA,Solexa Inc
TRMP,Trump Entertainment Resorts Inc
VDM,Van Der Moolen
WYNN,Wynn Resorts Ltd

Creep, creep, creep

The market keeps on creeping higher. One of the risk with such kind of market is it can be prone to sudden sell offs. So while prudence is the key, there are also lot of good opportunities.

Here is what I am watching or has position in based on Friday or few days ago action.


AOI,Alliance One International Inc
ASGN,On Assignment Inc
CNTF,China Techfaith Wireless Communication Technology Limited
DLB,Dolby Laboratories Inc
EFUT,E-Future Info Tech Inc Ord
FSYS,Fuel Systems Solutions Inc
LAB,Labranche & Co Inc
LSCO,Lesco Inc
MEH,Midwest Express Holding
MEND,Micrus Endovascular Corp
NYX,NYSE Group Inc
OSIR,Osiris Therapeutics Inc
TRT,Trio-Tech Internat
TWW,Terremark Worldwide Inc

Where is the strength

If you follow a momentum based stock selection strategy, you will always be looking for opportunities in the top momentum plays. If you can design a system that gets you in to few of the momentum stocks, you are ahead of the market. There are many ways to look at calculating momentum. Looking at weekly, monthly or yearly growth is one. The better approach should be to find the faster moving stocks sufficiently early and focus on few.

If you can not make money out of these kind of stocks, then there is some serious flaw in what you are doing, because they are the fastest moving stock for given period of time. They offer multiple opportunities for entry during the course of their move up. One approach to trading it is by buying a weighted basket of such stocks and adjusting it when the momentum drops on them. There are many other ways to trade it.

In many cases I find traders are not even aware of which stocks are the fastest moving stocks. If you do not track the best opportunities in market, then how do you compare your performance.

Here are the 30 fastest moving stock using a long term momentum criteria. Do you see opportunities or missed opportunities in it. How many positions do you have out of them.

AMIE,Ambassadors Internat Inc
ANGN,Angeion Corp
AUXL,Auxilium Pharmaceuticals Inc
AXR,Amrep Corp
BRLC,Syntax-Brillian Corp
CCOI,Cogent Communications Group Inc
CHDX,Chindex International Inc
CHTR,Charter Communications Inc
CLEC,Us Lec Corp Cl A
CNST,Constar Internatl
CRVL,Corvel Corp
FRG,Fronteer Development Group Inc
FTGX,FiberNet Telecom Group Inc
GEO,Geo Group (The)
GROW,U.S. Global Invest Inc A
HRZ,Horizon Lines Inc
IAAC,Internat Asset Holdg Cp
LMRA,Lumera Corporation
MFRI,Mfri Inc
MIKR,Mikron Infrared Inc
MWRK,Mothers Work Inc
NVEC,Nve Corp
SIGA,Siga Pharmaceuticals Inc
SIM,Grupo Simec S A Adr
SOFO,Sonic Foundry Inc
SQNM,Sequenom Inc
SRVY,Greenfield Online Inc
TRT,Trio-Tech Internat
UAHC,United American Healthcare Cor
UUU,Universal Security Instruments

Home builders

On a slow day I am watching the action in home building stocks. There is no shortage of bears on home building stocks. The easy trade on short side on home builder is over long time ago.

BZH,Beazer Homes Usa
CTX,Centex Corp
DHI,D.R. Horton Inc
HOV,Hovnanian Enterprises A
KBH,Kb Home
LEN,Lennar Corp Cl A
LEN.B,Lennar Corp Cl B
MDC,M.D.C Holdings Inc
MHO,M/i Homes Inc
MTH,Meritage Homes Corp
NVR,Nvr Inc
PHM,Pulte Homes Inc
RYL,Ryland Group Inc. The
SPF,Standard Pacific Corp
TOL,Toll Brothers Inc
WCI,Wci Communities

Clueless commentators, failed hedge fund managers, CNBC pundits, and newsletter writer keep trying to propagate fresh bearish scenarios on home builders. The action you see in home builders is a good lesson in understanding how markets work and where you should look for short ideas.

Look at the list I posted in reply to homebuilders discussion yesterday, you should find good short ideas in them for next cycle.Look at CRS, PD,PCU, POT and several other metal stocks. There might be some opportunities there. Looking for short ideas, look at top of the range, that is if you want to find profitable ideas.

Few opportunities

A slow start to the market so far. Market should end on positive note by the end of the day. Some of the recent IPO's like EDU, EFUT, GEOY,etc. are finding a bid. The transport stocks, which have been laggards till now are also finding a bid. Currently it is limited to few stocks in that sector. Keep a close watch on that sector. If it breaks out, shorts will be running for cover and longs on sideline will be busy chasing the momentum.

One thing which continues to work is earning surprises. My scans today has a few stock with clearly earning driven action.

Long Watchlist/positions

ASGN,On Assignment Inc
DLB,Dolby Laboratories Inc
FSYS,Fuel Systems Solutions Inc
MEH,Midwest Express Holding
NYX,NYSE Group Inc
TGEN,Targeted Genetics Cp

Short Watchlist/positions
POT,Potash Cp Saskatchewan
RIMM,Research In Motion Ltd

Technical Trap

After three days of rally a fourth day of rally was not a high probability event. So as expected the market continues to muddle in the correction zone. So not reading much in to yesterday's action.

When everyone and his mother-in-law is looking at double top, MACD, support break, cycle top etc.,and clueless bears comparing the markets to 1929, you find this obvious actions at such "technical trap points". Most of the times these are technical traps. Lot of people who follow such voodoo science take positions based on their indicators and then the market traps them. That is why you will see many breakouts/breakdowns happening at such technical trap zones.

This muddled action can shake out lot of people. That is what you are witnessing currently. If a stock has clearly defined catalyst, during such phase it might pullback but it will resume its intended path upwards or downwards once such correction plays itself out. Most well designed momentum based systems are self correcting, in the sense, the number of opportunities you find in your scans will decrease in such market environment.

So I see few opportunities, but still see some opportunities on long side. So here is what I have on watch list or has position in from yesterday's action.

AMKR,Amkor Technology Inc
BGP,Borders Group Inc
EPG,Environmental Power Corp
FNET,FortuNet
GMKT,GMarket Inc
GROW,U.S. Global Invest Inc A
GT,Goodyear Tire&Rubber Co
INT,World Fuel Service Corp
ISIS,Isis Pharmaceuticals Inc
KONG,Kongzhong Corporation
MLR,Miller Industries Inc
PARD,Poniard Pharmaceuticals
SRSL,Srs Labs Inc
STEC,Simple Technology Inc
SXCI,Systems Xcellence Inc
THS,TreeHouse Foods Inc
TRT,Trio-Tech Internat
URBN,Urban Outfitters Inc

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Gmail does a good job of eliminating most spam which hits my mailbox, but some how this mail managed to beat the spam filter. I went to the web site to see what this great new snake oil is from the kings of snake oil. Well they are selling a momentum plus anti trend system for , hold your breath $11495. Looks like a good scheme to raise revenue before Christmas. Every six month Tradingmarkets.com comes out with such miracle systems.

You can get same systems for free, if you plod through all the systems in Wealthlab. But there are enough fools who will fall for this kind of spam.

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Up and down

The market is doing a great job after three days of rally. It is in whipsaw territory currently. Not many stocks showing up on my scans, but the earning based breakouts continue to offer some good plays. It never is easy, I got whipsawed by the move in GIGM, but that is all part of the game. For every GIGM, there are others like BWLD, LNN, LVS, SRVY, GMKT etc. which have rocketed post earnings.

Added couple of positions today and reduced exposure to some things like BWLD and LNN which had popped a lot in last couple of weeks. Here are some stocks from today's breakouts, I have positions in or looking at adding.

AMKR,Amkor Technology Inc
BGP,Borders Group Inc
BMC,Bmc Software Inc
CELL,Brightpoint Inc
FNET,FortuNet
GMKT,GMarket Inc
GROW,U.S. Global Invest Inc A
GT,Goodyear Tire&Rubber Co
ISIS,Isis Pharmaceuticals Inc
MLR,Miller Industries Inc
PARD,Poniard Pharmaceuticals
STEC,Simple Technology Inc
THS,TreeHouse Foods Inc
TRT,Trio-Tech Internat
URBN,Urban Outfitters Inc

America's economy down but not out

The British business rag, The Economist, thinks that full blown recession is not yet a possibility.

RARELY have Wall Street's seers been so split. Not only are they divided about where the economy is headed, they even disagree about how it is faring today. Pessimists, such as Nouriel Roubini of Roubini Global Economics, reckon output is slowing from its already desultory pace of 1.6% a year in the third quarter and that recession is imminent. Optimists say GDP growth is rising after a weak summer. After analysing bond, equity and credit markets, Stephen Jen of Morgan Stanley recently argued that the risk of recession was only 13%, down from 19% a month before.

How can opinion be so divided? The glib answer is that America has two economies: residential construction and car production are in a slump, but the rest is still chugging along. Such resilience is why the jobless rate fell to 4.4% in October, its lowest since 2001, and why both wages and hours worked grew smartly. But how sustainable that is depends on whether the sectoral declines worsen and spread.

Slow day

Markets continue to churn at these levels. The earning as catalyst trade continues to work well. For those following earning strategy, there are number of stocks reacting positively to earning growth or surprises.

Here are some of the stocks in which I have existing positions or watching for entries:
AMKR,Amkor Technology Inc
GMKT,GMarket Inc
GROW,U.S. Global Invest Inc A
GT,Goodyear Tire&Rubber Co
ISIS,Isis Pharmaceuticals Inc
THS,TreeHouse Foods Inc

Riding the momentum train

The market continues to churn and continues to creep up. While I continue to be cautious but long. Even though I had a hunch that market might slide yesterday, I was ready to buy whatever comes up on either the earning/sales or momentum scan.

Below the surface you will find some sectors are breaking out of long multi year ranges. Look at two sectors Agricultural Chemicals and Auto Parts and you will see they have been quietly breaking out. Like these many stocks have broken out of their long ranges.

I am monitoring around 45 stocks like these which have broken out of two year plus ranges in last one month. Many times such moves are followed by earning/sales acceleration and then the market and IBD kind of crowd gets in to such plays to carry them forward. Here are couple of them from that list:

AFCE,AFC Enterprises Inc
APCC,American Power Conversn
ARRY,Array Biopharma Inc
BRLC,Syntax-Brillian Corp
CCRN,Cross Country Healthcare
CHTR,Charter Communications Inc
GIFI,Gulf Island Fabrication
IACI,IAC/Interactive Corp
IFF,Internat Flavors & Frag
MOS,Mosaic Company
MRX,Medicis Pharmaceutical A
RX,Ims Health Inc
SRR,Stride Rite Corp
SRSL,Srs Labs Inc
TEO,Telecom Argentina Sa
TRA,Terra Industries Inc
Y,Alleghany Corp

Below the surface there are many good opportunities if you have a systematic way of finding opportunities and well defined risk management strategy. Here is a sample of things which I have existing positions in or I am watching keenly :

AIRM,Air Methods Corp
ANTP,Phazar Corp
ARRY,Array Biopharma Inc
BIDU,Baidu.com Inc
BITS,Bitstream Inc
BLTI,Biolase Technology Inc
BMA,Banco Macro S A
BRLC,Syntax-Brillian Corp
BWLD,Buffalo Wild Wings
CBI,Chicago Bridge & Iron Nv
CCRN,Cross Country Healthcare
CECO,Career Education Corp
CMT,Core Molding Tech Inc
COSI,Cosi
CUTR,Cutera Inc
DNDN,Dendreon Corporation
FTEK,Fuel Tech Inc
GES,Guess? Incorporated
GOOG,Google
HOS,Hornbeck Offshore Services Inc
INPC,Inphonic
IOMI,Iomai Corp
LEV,Levitt Corp
LNN,Lindsay Manufacturing Co
LVS,Las Vegas Sands
MA,MasterCard Inc
MAXY,Maxygen Incorporated
MDCI,Medical Action Ind Inc
MEK,Metretek Technology Inc

If you set up your scans properly, you will find several such opportunities arriving on the momentum conveyor belt. The key is to narrow it down further and concentrate on few with best potential. I chose mostly the one with clearly defined catalyst like earning/sales or new product.

Market grinds higher

When the market is in rally mood, nothing can stop it. Biotechnology is catching a bid and there are number of good breakouts. Picking your spots is the key. NASDAQ stocks are also joining the party. Good earning plays are finding bid. If you are following either earning based or momentum based strategy, you should not have any shortage of ideas currently.

Here are couple of stocks that I have positions in or looking at seriously.

LVS, Las Vegas Sands
ARRY,Array Biopharma Inc
BITS,Bitstream Inc
CECO,Career Education Corp
CMT,Core Molding Tech Inc
GDP,Goodrich Petrol Corp
SNCR,Synchronoss Technologies Inc
SRSL,Srs Labs Inc
SRVY,Greenfield Online Inc
TG,Tredegar Corporation
TRMS,Trimeris Inc
UDRL,Union Drilling Inc

Google will close its kitchen and fire chefs

The Vallywag has a post about a leaked Google memo about their famed minikitchens: Leaked e-mail: Googleplex adds chefs to microkitchens, becomes even more of a Shangri-la

It makes an interesting reading and gives you a glimpse in to the kinds of problems faced by senior management at Google! Now here is my prediction for all those Google employees feasting on the gourmet food and savoring the food made by star chefs, 10 years down the line when Google hits a bump like General Motors or Ford, the first thing to go will be the chefs and the kitchen.

In good times management thinks that these kind of perks set themselves apart. It attracts talent, it attracts the PR buzz. All these indirect costs add up and when the downturn comes, all these and more of the fun and games just disappear.

Especially for Google whose main business of selling ads, is extremely cyclical, when the downturn comes it will hit them hard,really hard. So if you are a Googlite, enjoy the party while it lasts. If you are a Google shareholder, watch out. When companies are in news for such frivolous thing and boast about it( which Google has a habit of), they might be ignoring major issues down the road.

Market not scared of the jackasses

The Teflon coated market is not scared of the donkeys. While there are lot of theme based pops in certain sectors, the overall action is subdued and the gap down was actively bought. The real picture will emerge in couple of weeks.

While it is tempting to get in to some thematic sectors, most of the moves which you see in them are short lived. For a move to translate in to long term move at a specific company level, there has to be a company specific catalyst like new product, new earning/sales acceleration, or shortages etc. Much of broader policy changes do not have the power to move stocks for long term unless it translates in to growth.

There are few good opportunities in the market. Here is what I am finding worth a closer look in today's action.

CECO,Career Education Corp
CMT,Core Molding Tech Inc
MRX,Medicis Pharmaceutical A
SRSL,Srs Labs Inc
SRVY,Greenfield Online Inc
TRMS,Trimeris Inc

Breakouts to watch

The market will be volatile for next few weeks. Market still is in correction mode. Good earnings and season trends should put ceiling on any serious pullback or reversal. Many stocks continue to act well and here are some breakouts from yesterday worth watching.

CCRN,Cross Country Healthcare
CUTR,Cutera Inc
FTEK,Fuel Tech Inc
INPC,Inphonic
IOMI,Iomai Corp
MEK,Metretek Technology Inc
OMRI,Omrix Biopharmaceuticals Inc
PRGX,Prg-schultz Intl Inc
RCCC,Rural Cellular Corp
SWS,Sws Group Inc

Selling should start tommorrow

The serious correction should start tomorrow. The markets fun and games in last couple of days looked like were all in anticipation of election. So post election expect profit taking.

High volume breakouts

Market action continues to favor bulls. A melt up like this at this stage benefits those already in market. Those waiting for pullback or corrections have been sidelined. No one knows how long the move will last.

Here are some decent high volume breakouts, some of these are precipitated by earnings.

CCRN,Cross Country Healthcare
FTEK,Fuel Tech Inc
IDGR,Industrial Distr Grp Inc
INPC,Inphonic
IOMI,Iomai Corp
OMRI,Omrix Biopharmaceuticals Inc
PRGX,Prg-schultz Intl Inc
RCCC,Rural Cellular Corp
SWS,Sws Group Inc

Correction zone dynamics

The market is still in correction zone. The action like yesterday's is typical in such zones, where over eager shorts or over eager dip buyers are mercilessly squeezed.There were number of newsletters which went negative last week, so the market did its usual thing to shake out some of those over eager or early bears.This melt up may not be sustainable. I would have liked the markets to undergo more severe of protracted correction, but market seldom acts the way you want it to act. My model still is in the caution mode. So I am long but with extremely tight stops.

The earning season is still going on and the good earning scene has created some earnings based opportunities. As the good earnings were anticipated by market well in advance, the market might go sideways or pullback post earning and again rally in anticipation of good earning next season.

There are some potential negatives like lots of mergers and acquisitions and private equity deals. If you see some really big merger or acquisition, it might be time to expect severe correction. Such activities are common at momentum extremes, where management becomes overly bullish. Look at the oil and commodity sector couple of quarters ago where a parade of such deals signaled a top in that sector.

Earnings are very good

Beep! Beep! Is Uncle Sam set to go over the edge?

The third quarter is certain to be the 13th three-month period in a row in which corporate earnings have grown at more than 10pc. If the analysts are right and the final quarter posts another double digit rise then this will be the longest and strongest profits upswing since the Second World War.

Why have profits been so strong? Mike Lenhoff, a strategist at Brewin Dolphin, thinks one reason is the fact that the American economy is not as weak as the headline GDP numbers suggest. "If you look at the detail of the GDP numbers, consumer spending has been surprisingly strong," he says. The consensus view was that a housing slump would see Joe Public sitting on his wallet, but consumer spending is still growing at an annualised rate of 3pc.

The global economy outside America is also still firing on all cylinders, Lenhoff says. While the S&P500 is not as international an index as the FTSE100, it still derives around 40pc of its sales from overseas so the relative buoyancy of Europe and Asia provides useful support to the earnings of America's global corporations.

"Globalisation has also intensified competitive pressure," Lenhoff adds. "It's putting companies under the cosh and constantly forcing them to refocus and innovate." That, he says, is driving margins and productivity higher, allowing companies to drive profits even against an apparently unsupportive economic backdrop.

Finally, the emergence of China and increased immigration has forced wages lower, helping corporate profits take an ever larger slice of the economic pie. As the chart shows, profits are a bigger proportion of GDP today than at any time since the 1950s.

Earnings is the 800 pound Gorilla the bearish analyst want to hide. That is one of the reason the market has been resilient for last one year in spite of several people calling for a top. All trends ultimately end, but till they continue, buying the dip is the correct trade.
I would love a drastic , bone chilling bear market for a year or so. I have had one of the best year after the 2002 bottom. Earnings and momentum strategy work very well in the beginning of new bull move. They also work in the late stage of bull moves.

Profiting When Companies Split Up

Investors drawn to the reemergence of marquee names like these may be onto something: investing in spinoffs can be very profitable. Nearly two-thirds of the companies spun off over the last three years have beaten the Standard & Poor’s 500-stock index this year, according to figures from Spin-Off Advisors, a Chicago research firm.

- New York Times


New York Times has a long piece on spinoffs and how they perform after their listing. Now this might be a news to NYT, but this is a well known anomaly and many shrewed investors track spinoffs for such easy profit making opportunities.

If you want to benefit from investing in spinoffs read Joel Greeblatt's excellent book- You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits . He gives a reasoning behind such moves, tells you how to analyse them and when to buy them.



It offers several ideas to uncover such low risk ideas. That book came out several years ago, obviously the New York Times as always is behind the curve.

Stocks showing momentum

Stocks which are going up continue to go up. The momentum effect is well known on wall street. If you believe in momentum trading and willing to ride some of these trends up, there are lots of opportunities in this list. Not all of them make good long candidates. Some might breakdown. But there are enough in this list to keep you busy.

Many of the stocks in this list are currently blessed by the market goddess.

To understand more about this list read my old post.

I will also put a file of the same in the stockbee group. There is also detail discussion on various momentum trading methodologies in the stockbee group.


ACLI,American Commercial Lines Inc
ACOR,Acorda Therapeutics Inc
ACP,American Real Estate Prt
AEM,Agnico-Eagle Mines Ltd
AEOS,American Eagle Outfitter
AEPI,Aep Industries Inc
AFFX,Affymetrix Inc
AKAM,Akamai Technologies Inc
AKH,Air France KLM
ALB,Albemarle Corp
ALNY,Alnylam Pharmaceuticals
AMAG,Advanced Magnetics Inc
AMIE,Ambassadors Internat Inc
ASTE,Astec Industries
ATI,Allegheny Technologies
ATNI,Atlantic Tele-Network
AVT,Avnet Inc
AXR,Amrep Corp
AZZ,Azz Inc
BAMM,Books-A-Million Inc
BAP,Credicorp Ltd
BID,Sotheby's Holding Cl A
BL,Blair Corp
BLUD,Immucor Inc
BONT,Bon-Ton Stores Inc
BTJ,Bolt Technology Corp
BW,Brush Engineered
BWLD,Buffalo Wild Wings
CACH,Cache Inc
CAL,Continental Airlines B
CCO,Clear Channel Outdoor Holdings Inc
CHAP,Chaparral Steel Company
CHL,China Mobile Ltd
CITP,Comsys It Partners Inc
CLB,Core Laboratories N.V.
CLK,Clark Inc
CLUB,Town Sports International Holdings Inc
CMC,Commercial Metals Co
CNC,Centene Corp
CNS,Cohen & Steers Inc
COGO,Comtech Group Inc
CPTS,Conceptus Inc
CPY,Cpi Corp
CROX,Crocs Inc
CRVL,Corvel Corp
CTEC,Cholestech Corporation
CTRN,Citi Trends Inc
CVNS,Covansys Corp
CWEI,Clayton Williams Energy
DECK,Deckers Outdoor Corp
DLLR,Dollar Financial
DPTR,Delta Petroleum Corp
DRIV,Digital River Inc
ECMV,E Com Ventures Inc
ELE,Endesa Sa
EZPW,Ezcorp Inc Cl A
FEIC,Fei Company
FLML,Flamel Technologies Sa
FMCO,Fms Financial Corp
FMD,First Marblehead Corp
FTEK,Fuel Tech Inc
FTK,Flotek Industries Inc
GBX,Greenbrier Companies Inc
GDP,Goodrich Petrol Corp
GEO,Geo Group (The)
GES,Guess? Incorporated
GGL,Goodman Global Inc
GGXY,Golf Galaxy Inc
GIFI,Gulf Island Fabrication
GIII,G-III Apparel Group Ltd
GLBC,Global Crossing Ltd
GLG,Glamis Gold Ltd
GMKT,GMarket Inc
GMXR,Gmx Resources Inc
GRC,Gorman-Rupp Co
GROW,U.S. Global Invest Inc A
GYMB,Gymboree Corp
HAR,Harman Internat Ind Inc
HAS,Hasbro Inc
HELE,Helen Of Troy Ltd
HHGP,Hudson Highland Grp Inc W/i
HMSY,Hms Holdings Corp
HRT,Arrhythmia Research Tech
HRZ,Horizon Lines Inc
IAAC,Internat Asset Holdg Cp
ICOS,Icos Corporation
ICTG,Ict Group Inc
IIG,Imergent Inc
ILMN,Illumina Inc
IMKTA,Ingles Markets Inc Cl A
INAP,Internap Network Svcs Cp
ININ,Interactive Intelligence
IOSP,Innospec Inc
ITMN,Intermune Inc
IVAC,Intevac Inc
KBALB,Kimball Internat B
KNXA,Kenexa Corp
LEA,Lear Corp
LFC,China Life Insurance Company
MA,MasterCard Inc
MCF,Contango Oil & Gas
MFB,Maidenform Inc
MFE,McAfee Inc
MFRI,Mfri Inc
MIKR,Mikron Infrared Inc
MWRK,Mothers Work Inc
NOBL,Noble International Ltd
NRPH,New River Pharmaceuticals Inc
NTGR,Netgear
NVDA,NVIDIA Corporation
NVEC,Nve Corp
OII,Oceaneering Internat
PCLN,Priceline.com Inc
PCR,Perini Corp
PERY,Perry Ellis Int'l
PGS,Petroleum Geo-services Asa
PLXS,Plexus Corp
PNSN,Pension Worldwide Inc
POT,Potash Cp Saskatchewan
POZN,Pozen Incorporated
PRFT,Perficient Inc
PSMT,Pricesmart Inc
PSPT,Peoplesupport Inc
PWEI,Pw Eagle Inc
RBN,Robbins & Myers Inc
RCRC,Rc2 Corp
REGN,Regeneron Pharm Inc
RG,Rogers Commun B Non-Votg
RIMM,Research In Motion Ltd
RIO,Companhia Vale Do Rio Doce
RTI,Rti Internat Metal Inc
SBGA,Summit Bank Corporation
SHOO,Steven Madden Ltd
SIGM,Sigma Designs Inc
SIM,Grupo Simec S A Adr
SMSI,Smith Micro Software Inc
SPAR,Spartan Motors Inc
SPSX,Superior Essex Inc
SPTN,Spartan Stores Inc
SWM,Schweitzer Mauduit International Inc
TAR,Telefonica De Argentina
TCHC,21st Century Holdings
TDS,Telephone & Data Sys Inc
TELN,Telenor Asa
TESS,Tessco Technologies Inc
TTEC,Teletech Holdings Inc
UAUA,UAL Corp
UGP,Ultrapar Participacoes
USAP,Universal Stain & Alloy
UUU,Universal Security Instruments
VCLK,Valueclick Inc
VLCM,Volcom Inc
VOLC,Volcano Corp
VTS,Veritas Dgc
WARR,Warrior Energy Service Corp
WBSN,Websense Inc
WRLD,World Acceptance Corp
WRNC,Warnaco Group Inc (the)
WTS,Watts Industries Inc A
WWIN,Waste Industires Usa Inc
ZIGO,Zygo Corp

Teflon coated market

Looks like there is an underlying bid in the market. Action like today's is good action during corrections. Morning selling is followed by stabilisation and with late buying. Below the surface number of stocks continue to attract buy interest. So my current view remains, this is so far a garden variety pullback. It might be time to start dipping your toe back on long side.

I am ready to look at both possibilities. If the market rallies after this correction, it will be one very powerful rally. If it breaks down bonds and dollar is where the major fun will be. Anticipation and nimbleness will be the key to capturing the moves. So keeping buy list ready is never a bad idea. By the end of day I will post my list of 100 stocks with momentum that I am monitoring. This will be weekly feature now onwards. I will also put a file in the stockbee group.

Stocks attracting buying interest

Buying breakout during overall market correction is a risky bet, but keeping a close watch on what stocks are attracting buying interest can help you later when the market stabilises. Some of these stocks will attract more buyer during that phase.

CROX,Crocs Inc
DLLR,Dollar Financial
DRS,Drs Technologies
ERTS,Electronic Arts Inc
IRF,Internat Rectifier Corp
KDE,4kids Entertainment Inc
MTD,Mettler Toledo Intl Inc
NYX,NYSE Group Inc
PBCT,Peoples Bank Bridgept Ct
PCR,Perini Corp
POWI,Power Integrations Inc
RDEN,Elizabeth Arden Inc
SINA,Sina Corp
THQI,Thq Inc
WNR,Western Refining Inc
WTS,Watts Industries Inc A
WTW,Weight Watchers Intl Inc

Short for the long term

The Economist has just started a blog. One of the recent entries is about the US dollar as long term short.

A FINANCIER of my acquaintance cleverly shorted the stockmarket during the technology bubble. Unfortunately, he did so in 1997. And 1998. And also 1999.

He made a killing in 2000—but I am informed that it was only by very good luck, and some fast footwork, that the killing crossed the finish line ahead of bankruptcy, which had been nipping at his heels the entire way.

(Now please give me a minute to recover from that rather exhausting metaphor.)

The problem of the short-seller is summed up in my favourite financial adage: "The market can stay stupid longer than you can stay solvent." It was obvious to many professionals by 1999 that the stock market was in a bubble, but without knowing when it was going to end, they found it hard to turn their insight into an investment coup.

The same frustrated forecasters can now be found in the currency markets, thanks to America's trade deficit.

I am tired of using the same old descriptions of America's current account imbalances that everyone falls back on—gigantic, humongous, titanic, and a few things that can't be printed in a general interest newspaper. But it is hard to come up with an adequate metaphor to replace the overused superlatives. If America's current account deficit were a car, it would not be a Hummer, but a Mack truck. If it were a pro-wrestler, it would be Andre the Giant wearing Hulk Hogan as a shrug. If it were a newspaper, it would be The Economist. In short, it looms singularly large.

Read the complete entry it is very educational and funny.

How to get the smart money edge

Zacks latest earnings report

With over 59% of the S&P 500 reported, third-quarter earnings results thus far have been a positive surprise and show a clear win for the bulls. Median reported EPS growth sits is 12.3% and positive analyst surprises outnumber negatives by over 4:1. It seems that investor’s low expectations for third-quarter earnings reports have proven unfounded. Though there are still over 200 companies in the index left to report, it’s clear that the market’s recent run-up now has a leg to stand on.

The sentiments were extreme in August and the general cosensus was earnings will be lacklustre. By August anticipation of next earning season started and smart people had figured out that the earnings will infact be good, so they started buying in anticipation. Sometime stocks react in anticipation, sometime after earning. Now if you were not the smart money which has access to information about future earnings, you still could have got the same earning edge free.

Just keep a very close watch on earnings/earnings estimates/pre announcements trends. Here is what Zacks had to say on 7th August 2006 and about which I blogged here.

The overall market continues to consolidate near the recent low. Expect a possible move up in to next earning season. If you ignore the bearish noise from big picture types, you will notice the earnings have been very good so far and earning projections are not expected to go down.

Earnings Data: No Recession Soon
by Dirk Van Dijkr>Aug 07, 2006
The summer earnings season is wrapping up and the S&P 500Â’s growth numbers have been a pleasant surprise. Of the 413 (82.5%) companies within the large-cap index that have reported, the median second quarter EPS growth is 13.1%. The median surprise is an impressive 3.9% and positive surprises have outnumbered negatives by over 4:1.

With so many positive surprises flooding reports this season, a market rally wouldnÂ’t have been out of the question. But thatÂ’s not whatÂ’s happened. In fact, the S&P 500 is actually down almost 3% over the last three months.

So what gives? Well it seems to be a combination of factors. The The Israeli/Lebanon conflict, volatile energy prices, and choppy jobs and retail sales reports, weaker than expected GDP growth and higher than expected inflation numbers have investors biting their nails and holding their cash. In short as the “E” has been moving up, the P/E has been moving down, leaving the “P” basically unchanged (although very volatile from day to day).

So what is happening in the market is new leadership is emerging. The sectors which have done well in the past like oil and commodities have not seen any up move in this phase infact some of the stocks in these sectors are heading down. New set of companies have emerged in retail and technology sector to lead higher. Retail seems to be having some nice breakouts currently.
I continue to find some good opportunities like INPH, PWEI, DK, NUHC,AETH, STEC, etc. I am also eyeing some techs like RIMM and retail like AEOS, ANF, BEBE, MWRK etc. If you look below the surface some good opportunities are setting up on both long and short side. It is a stock pickers market.

If you were reading the earning trends weekly analysis it was constantly saying the same thing, E is not the problem, P is the problem. It kept on saying earnings will be most probably better than what analyst are expecting. Zacks is not the only site which does earning analysis, S&P, Reuters, Bloomberg all do weekly earnings trend analysis and keeping tab on it can give you the smart money edge.

Stocks attracting buying interest

As I said earlier, below the surface there are some nice breakouts. A market about to breakdown usually does not have this kind of behaviour. So let us see where this market goes.

Stocks with volume/price breakout.

ADVNB,Advanta Corp Cl B
AIZ,Assurant Inc
ANSS,Ansys Inc
BAP,Credicorp Ltd
BDX,Becton Dickinson & Co
BEC,Beckman Coulter Inc
CBT,Cabot Corp
CEC,Cec Entertainment Inc
CGX,Consolidated Graphics
CS,Credit Suisse Group
CTL,Centurytel Inc
CTRN,Citi Trends Inc
CTSH,Cognizant Tech Sol Cp A
DJO,DJO Inc
DOX,Amdocs Ltd
ESRX,Express Scripts Inc
FIC,Fair Isaac Inc
FMC,Fmc Corp
FXI,iShares FTSE/Xinhua China 25 Index Fund ETF
GES,Guess? Incorporated
GLD,streetTRACKS Gold Shares ETF
GRMN,Garmin Ltd
GSK,Glaxosmithkline Plc Adr
HSIC,Henry Schein Inc
IAU,iShares COMEX Gold Trust ETF
IFF,Internat Flavors & Frag
IHF,iShares Dow Jones US Health Care Providers Index Fund ETF
JEC,Jacobs Engineering Group
JH,John H. Harland Co
JWN,Nordstrom Inc
KB,Kookmin Bank
MA,MasterCard Inc
MGA,Magna Internat Inc
MGM,MGM MIRAGE Inc
MHS,Medco Health Solutions
MIL,Millipore Corp
MW,Men's Wearhouse Inc
NDE,Indymac Bancorp Inc
NFP,Natl Financial Partners
NYX,NYSE Group Inc
PHLY,Philadelphia Consolidated Holding Corp
PLCE,Children's Place Rtl Str
POT,Potash Cp Saskatchewan
PRU,Prudential Financial Inc
PX,Praxair Inc
RCL,Royal Caribbean Cruises
RNR,RenaissanceRe Holdings
RY,Royal Bank Of Canada
TD,Toronto Dominion Bank
TDS,Telephone & Data Sys Inc
TS,Tenaris Sa
TU,Telus Corporation
VLI,Valero Lp
WCG,Wellcare Health Plans Inc
WST,West Pharmaceutical Svcs
WTS,Watts Industries Inc A
WTW,Weight Watchers Intl Inc

The Kirk Report and INVESTools

The Kirk Report has a long post on his experience with trying to get information about INVESTools. It makes an interesting read and offers an insight in to how various sites and newsletters are trying to sell high priced money making courses and schemes. The unfortunate thing is that many new and struggling traders fall prey to this kind of snake oil.

That is one of the reason I set up this.

Garden variety pullback

So far it looks like a normal pullback. In a few days it might be time to get back in to the market. Below the surface there are some nice breakouts. I am combing through my earnings database for good entry points on number of stocks. Many stocks have not been dented by this pullback and the momentum universe continues to act well with few breakdowns.

I am ready with a buy list, if the market finds a bid here, it will be a good entry in to some good blowout moves. I continue to watch and be ready to pounce.

Day traders and short selling

My two posts about lower expectancy of sort selling strategy has a reader saying, but this logic does not apply to day traders. Day traders make more money from short selling as stocks go down faster.

Now I have heard this argument before. Lot of it is urban myth. In absence of data on day traders short selling, it is just one persons opinion. There is enough factual data available to show that this myth about day traders and short selling is just a myth. Look at the precipitous drop in day traders during bear market.

The best period for day traders was during bull market. Why did so many day trading firms disappear during the bear markets. Why did the trading volume on all exchanges drop during the bear market.

The simple fact is that it is extremely difficult to trade on short side. The structure of market participants and long term tendencies of the market has lot to do with it. Yes short selling works sometime, but focusing on it exclusively and getting enamored by it is sure recipe for under performance. The discussion is more about how much stress you should put on searching and perfecting your short strategy at the expense of long strategy. Day trading is not my area of specialisation and there are many better blogs focusing on it.

If you are primarily a medium or long term trader then the discussion on short selling might be helpful in putting things in perspective. I find it very fascinating to look at traders seductive addiction to the negative hypothesis crowd ( any bullish strategy is dismissed as cheer leading) while statistics shows very low probability for success for short strategies. But that is what makes trading interesting. People want to trade their hypothesis rather than what will make them money.

Richard Donchian put it nicely:
In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%

Ed Seykota has this to say about short selling:
In general, long-term simulations on Trend Following systems tend to show better results on the long side.
This correlates with the observation that volatility is proportional to price, so when you play from the long side you are starting with lower volatility and therefore a better reward / risk possibility.

Correction time

The correction which sarted last week is going on. Corrections are normal in markets which had gone up a lot witout pause. Yesterday for the first time we saw some serious selling. How long and how far will the correction last, I do not know. But my studies show selling is generally concentrated in bursts. After the burst is over, the market stabilises, rallies a bit and if there is more downside then it will be followed by another burst of selling.

While many sell off look scary, it is infact time to look at good earnings play, if they have legs, they will just keep hanging on to their gains or have very orderly pullbacks. Some might even start attracting buying. I added couple of earning plays yesterday. The resilient ones are the one to keep an eye on, any hint of market stabilising and they will quickly burst out of their ranges or pullback and move rapidly.

The momentm plays also work similarly . Look at stocks like AKAM, AMIE, OMG, AEPI, MWRK, GYMB, AMAG AMIE, etc. during the last major correction in June-July period. They just sat their clinging to top of range. When the skies cleared, they were the first to burst out and make 20-50% moves. A dynamic momentum based system helps me keep tab of such stocks and when I see a pause in selling, I am very aggressive to get in to such plays. These kind of stocks make 20-50% moves in few weeks, so if you time your entry right, it can compensate for siting on sideline during selling phases.

Avoiding the intense selling phases instead of being fully invested is what I find better ( I might have small commitments in market during sell offs but mostly they are less than 10% of total capital invested). The reason being, if you are trading high momentum, low cap , low float kind of stocks, often during corrections, the bids get pulled down and as a result you end up giving up lot of profit in pre existing positions.

I use corrections to spend time on developing new ideas and researching new systems.

Short selling does not work part 2

Reader has following comment on short selling post:

walter said...

i know that people short indexes - i dont... at any rate, your headline should read "short selling indexes does not work" and not "short selling does not work"

obviously, depending on smart stock selection, shorting can work, just like going long some stocks during a bear market, dont you agree?

The study specifically refers to stock. All quanti studies on stocks show the same thing.

For any given time period if you have to choose between long or short strategy, long strategy significantly outperforms short.

When you find a good short you have to ask a question , if I hold this for a year as against a choice of long stock , longs will do better. The opportunity cost of shorting is what one should consider.

Lets consider the last one quarter as example and look at it : there were 183 stocks (after removing thinly traded stocks) down 25% or more in last 65 days with 18 stocks down 50% or more. Now if you were very good stock picker and managed to also find stocks to short in your chosen equities, then you had an opportunity to make max 79% ( on the worst performing stock)

For the same period there were 1173 stocks up 25% or more in 65 days with 274 stocks up 50% or more and 74 stocks up more than 79% plus (as against only 1 in short universe)There were 10 stocks up more than 150% and the best performing stock was up 670%. So for 1 79% return stock on short side there were 74 opportunities on long side. Plus the potential for maximum profit was 670% as against 79% for short side.

This is just an example, but the reason why long only methodologies work even after staying out of market during bear market, is because of this significantly skewed long vs short returns.Stocks have potentially unlimited upside but downside is limited.

So all you need to trade successfully is a long methodology. Marry that with risk management and it will automatically keep you out of bear markets ( due to use of stops) and you will beat the pants of any expert short seller. Once you start analysing markets quantitatively or data mining, this is the first overwhelming thing which hits you: that long strategies have overwhelming edge over short.

The practical implication of it is very clear, put all your efforts in to designing long strategies. Use some market filter or risk management methodology to stay out of bear market and you are ahead of the game. So even though I have studied and designed short strategies that work, my overwhelming preference is for long strategies.

This is one of the reason, even if you have to follow a market guru, at least follow a bullish guru, following perma bear gurus is a way to poor house. When you understand and internalise this fact, you will also realise any guru claiming never to buy 52 week low is completely ignorant of how markets work. You will understand why both set of strategies, growth and value work(because they are long strategies).

Even a poorly designed long strategy will outperform a short only strategy. The stock market game is rigged in the favor of long strategies. Some people understand this some do not. Some people spend years on street and do not.

The market is one huge long biased conspiracy.

.

Short Selling Does Not Work

The Trading Roundtable forum is one of the best forums to discuss quantitative and statistical systems for stocks and commodities. You will find very unique insights and some of the most knowledgeable system traders on that forum. If you systematically go through all posts on that forum , you should find at least a dozen very profitable ideas.

There is an interesting discussion on short strategies going on currently and here is one traders quantitative observation.

Assuming that a trend-follower has the ability to short stocks as well, survivorship bias would imply higher returns in live trading compared to back-test (probably higher risk-adjusted returns as well).


This is true. But, this is usually nullified (for most people) because they are backtesting on data that has not been adjusted for cash dividends (which overstates the profitability of short selling).

We spent a long time trying to come up with ways to short stocks profitably. We couldn't come up with anything that worked over long stretches of time (>10 years) nor could we come up with a fundamentally sound reason to expect to. Stocks are basically a perpetuity with unlimited upside and guaranteed containment on the downside. Approx 50% of stocks have historically ended their existence with a negative terminal wealth relative, but their potential declines have always been capped at -100%. The other 50% of stocks enjoyed potentially unlimited gains, many exceeding 500%. From a short sellers perspective the math simply doesn't yield a positive expectancy.

The best we could ever come up with was -4% compounded annual return, which is better than -12% one gets from simply shorting the indexes. Still it's hard to get excited about losing less money than something else.

Conspiracies and failed traders

Market is just hanging on to top of the range. The earning season is yet to finish and there will continue to be surprises and disappointments. There are lot of cross currents on data and sentiment front, but the impact of them on market so far has been muted.

Relying on macro economic or sentiment factors has its own pitfall and by now most traders should have realised the folly of following such factors alone to make trading decision.The year 2006 as a good year to practitioners of such pseudo science, it kept them on sidelines. Those stuck on hypothesis are realising that the market is very ruthless in separating fools from their money.

Especially for those in money management business clients do not care about your hypothesis and conspiracy theories. They desert you much faster than you can churn out new hypothesis or new conspiracies. Even for newsletter writers cost of being wrong for extended period of time are fatal. Has anyone heard of Gilder Technology Report now. Once upon a time it was the hottest newsletter in town. Same phenomenon repeats again and again, investors always end up chasing wrong gurus and then drop them like dirty Kleenex.

One way out of that is to understand markets and some of the central tendencies of markets and build your strategies around them. Such strategies have enduring edge. Many of the market anomalies are well known like the earnings effect, the small size effect, the momentum effect, the value based anomalies and so on. They work across markets. For last couple of weeks I have been analysing data for Indian stock market for last 5 years and guess what, the biggest winners are all the stocks showing earning acceleration for that period.

There are countless studies which have shown the kind of anomalies which I mentioned work across different markets worldwide. There are hundreds of studies which have shown the stock market has an upward bias and long strategies outperform short by significant margin. But traders fascination with bearish side and short selling continues. If the US market was manipulated (as some bearish commentators and prominent and currently popular gurus keep on saying)then such anomalies would not work, but they continue to work.

My approach is to base my trading on such statistically proven anomalies and build models and refine them. Currently the model is on sideline and it went bullish in early August. Most of my comments on macro economics have no relevance to my trading. They are just mind exercises to keep the grey cells occupied.

One of the keys to profitable trading is to understand and master such proven anomalies and let the failed traders continue to believe in conspiracies.