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The Little Book That Beats the Market- Update

Posted on 7/31/2006
Baron had an article about The Little Book That Beats the Market sometime back. They attribute the superior returns to database selection. Even if you account for the database selection, you can still get market beating returns with the strategy in the book. The concept is still valid and there are number of value managers who show great returns following similar strategy.


The Little Book's Little Flaw
By BILL ALPERT
THE LITTLE BOOK THAT BEATS THE MARKET has become a bestseller since it appeared in November. In it, hedge-fund manager Joel Greenblatt describes a "magic formula" for picking stocks and shows how the formula identified winners when tested on an historical database. The awesome test results helped The Little Book win rave reviews. Stocks selected by Greenblatt's magic formula from 1988 to 2004 would have beaten the market by nearly 20 percentage points annually, he says, with yearly returns averaging almost 31%, versus 12% for the overall market. "It can't be this easy!" he writes."The results are just too good!"
But should you expect to nearly triple the market's performance, working just minutes every few months, if you apply his formula over the long haul? Greenblatt's strategy does make sense and probably would beat the market by some margin. But don't count on
30%-plus: Investment formulas that look great in a historical "back test" often prove less powerful in the real world. Trading commissions and other irksome frictions hurt performance, of course, but there are more fundamental limits to the predictive power of the kind of study The Little Book crows about. Simply put, the magic formula's jumbo returns were probably limited to the data Greenblatt used in his test.

To get a rough sense of how data-specific the magic formula might be, Barron's arranged to test it on a different financial database. From the beginning of 1997 through 2002, The Little Book reports 16% average returns on large-capitalization portfolios chosen from a Compustat database. But on data from Bloomberg,Barron's found, the strategy averaged 10% annual returns in that span. Readers should probably moderate their expectations, therefore, if they plan to use the magic formula on freely available databases -- like that offered at www.smartmoney.com1, the Website of Smart Money (the monthly magazine published by Hearst and Dow Jones, Barron's parent).

ETF trends

Posted on 7/30/2006

Two sectors, pharmaceuticals and telecommunication are showing clear trend of high volume buying.

ADRE,BLDRS Emerging Markets 50 ADR Index Fund ETF
EEM,iShares MSCI Emerging Markets Index Fund ETF
EWW,iShares MSCI Mexico Index Fund ETF
ILF,iShares S&P Latin America 40 Index Fund ETF
IXP,iShares S&P Global Telecommunications Sector Index Fund ETF
IYZ,iShares Dow Jones US Telecommunications Sector Index Fund ETF
PPH,HOLDRS Pharmaceutical
TTH,HOLDRS Telecom ETF
VWO,Vanguard Emerging Mkts Etf
XLV,SPDRs Select Sector Health Care ETF

Gap and trap

Posted on 7/28/2006
The market is following the gap and trap pattern. The morning strength does not lead to more strength in the afternoon. The month end effect will ensure that we stay in range. The action typically sucks in bulls and unnerves the bear.

Earnings so far are much better than expected.


Through the close on Tuesday, a total of 212, or 42.4%% of the S&P 500 stocks have reported their second quarter results (defined as the fiscal period ending in May, June or July). Thus far the results have been very encouraging. The median year-over-year growth rate is 13.1%. As in recent quarters, positive surprises have been swamping disappointments, with the ratio currently running at almost 5:1. The median surprise has been 3.4%. This is almost identical to the 3.5% median surprise that this same group of companies delivered in the first quarter. In every sector, positive surprises far exceed disappointments.
It looks pretty certain that we will have yet another quarter of double-digit year-over-year growth in earnings. If anything, the 13.1% growth shown so far is more likely to increase than decline when all the results are in. The forward looking growth rates, for the third quarter, and 2006, are the median growth rates of only those firms that have reported so far, not the sector or the S&P 500 as a whole. The median expected 2006 growth for those that have reported is 10.5%. However the median expected 2006 growth rate for the S&P 500 as a whole is 12.2%. Every sector except the two Consumer sectors is currently showing double-digit growth for the quarter. Thus, more of the high expected growth firms, at least for the year as a whole, are yet to report.

For every sector except Materials, growth is expected to slow, often significantly, in the third quarter. Many firms which may have reported better than expected numbers for the second quarter have issued downbeat guidance for the second half. A great example of this is among the Homebuilders, where four of the five firms in the sector have already reported for the second quarter, and all had positive surprises. On the other hand, all made it very clear that it was the last good quarter to be expected from them for quite some time. For several quarters now, the “next quarter” has been expected to be softer than the “current quarter”, at least until that “next quarter” gets reported. In other words, it appears that firms are following an under promise and over deliver strategy with respect to their guidance.

Backdating of options is no big deal

Posted on 7/27/2006
There is lot of attention on backdating of options and I got couple of emails from readers blaming current market weakness on the backdating scandal and predicting dire consequences due to it.
The current market weakness is not related to it. It has to do with other issues like interest rates, inflation, valuation and so on. After a four year rally a market weakness and correction is a very normal market reaction.
In my view the backdating of options is no big deal.History of Wall Street is full of scandal after scandals. If you go back in history and see some of the other insider and management scandals, this one is a insignificant event. Ever since the market existed the insiders have always tried to game the system. The regulators have always lagged in enforcing the rules. Most of the time rules are put in place to avoid future scandals. But the nature of fraud and scandals keep changing.
The market takes care of all such irregularities over a period of time. This scandal will have impact on individual companies and managers in those companies but it is not going to affect the market for long. Any one who claims it is going to have significant impact is not well versed in history of speculation.
If you have a methodology which works and if you have a system with structural edge , you should just ignore such scandals. The gurus and pundit scream about it because that is what they get paid for. It also appeals to their blind cult followers.

The Little Book That Beats the Market



I have been catching up on my summer reading and one of the book I finished reading in two hours last night was The Little Book That Beats the Market by Joel Greenbalt. It is a easy to read fun book which details a simple value investing trading system in a very simple to understand language. Joel Greenbalt is a hedge fund manager with an impressive 40% anualised return since 1985.
There are many books on value investing and I have read almost everyone of them but this slim book is by far the best value investing book your money can buy. It lays out the case for value investing in simple easy to understand language.
The book boils down the value investing methodology to finding stocks with high return on capital and earning yields. The methodology suggest buying the top 30 stocks ranked by the two parameters and holding for more than a year to take advantage of tax laws. The most important thing for a simple approach like this to work is to have conviction in the logic behind it. If you are savvy enough you can improve on the stock selection and improve your returns.
You can find the stock meeting his criteria at his free web site.

More leaders breaking down

The earning season continues to slam some old leaders and some new plays might be emerging.
Stocks which had rallied for long time based on stellar earning are finding a slight miss or lukewarm guidance is being punished heavily. Much of these change is reflected in the sector leadership also.
The quarterly earning reporting period establishes new trends both on long and short side. Many of these trends have legs and last few quarters.
Some of the stocks in oil sector are finding renewed buying interest and are set to extend their rallies.

Leaders down
ACLI,American Commercial Lines Inc
CHH,Choice Hotels International Inc
CRS,Carpenter Technol Corp
FTI,Fmc Technologies
ISRG,Intuitive Surgical Inc
LVS,Las Vegas Sands
NTRI,NutriSystem Inc

The stocks below are finding buying interest post earnings or in anticipation of earnings.

Earning Effect

ACL,Alcon Inc
DFG,Delphi Financial Group A
DO,Diamond Offshre Drilling
FTK,Flotek Industries Inc
GIFI,Gulf Island Fabrication
ICLR,Icon Plc Ads
JLL,Jones Lang Lasalle Inc
NOV,National Oilwell Varco Inc
SNA,Snap-On Inc
TRMB,Trimble Navigation Ltd
TSAI,Transaction Sys Architects Inc
YCC,Yankee Candle Co Inc

Don't bet against the dollar

Posted on 7/26/2006

This cover of Economist appeared at the height of bearishness on dollar. Since then the dollar started going up. People with big pockets like Warren Buffet had big bets against dollars and the conventional wisdom was doom and gloom for dollar. Since then the dollar continues to defy the skeptics.



Here is an insightful explanation as to why.
The explanation for the stability--strength, in fact--of the U.S. dollar, even as the current account deficit has since 1990 risen from zero to 7 percent of GDP, lies with the globalization of wealth storage by rapidly growing countries--both advanced and emerging. Wealth is increasing rapidly in emerging markets, China of course being the largest, but also in Europe and Japan, not to mention the oil-exporting countries. The United States offers the largest menu of wealth storage options, not only in terms of variety, but also in terms of liquidity (defined as the ability to move huge sums--tens of billions of dollars worth) with only a small impact on price.

20 Stocks to watch

These are some of the stocks I am keenly watching currently or have positions in (some of them). They have the mojo.

AEM,Agnico-Eagle Mines Ltd
AEPI,Aep Industries Inc
AMAG,Advanced Magnetics Inc
AP,Ampco-Pittsburgh Corp
CPY,Cpi Corp
EMCI,Emc Insurance Group Inc
EZPW,Ezcorp Inc Cl A
FAL,Falconbridge Ltd
FMCN,Focus Media Holding Ltd ADR
HANS,Hansen Natural Corp
IBCA,Intervest Bncshs Cp Cl A
ILMN,Illumina Inc
LCC,US Airways Group Inc
LFC,China Life Insurance Company
MWRK,Mothers Work Inc
NEU,Newmarket Corp
OMG,Om Group Inc
TXUI,Texas United Bancshares Inc
VOL,Volt Info Sciences Inc
WBD,Wimm Bill Dann Foods Ojsc

Best Broker- Interactive Brokers

Business Week has an article on Best Brokers on the web site. For active investors by far the best broker is Interactive Brokers. I have tried most of the brokers in their list but my favorite is IB. It has the best execution. The application is easy to use and very stable. It is very technology focused company and the founder himself is a successful trader.

Talk about cheap: At Interactive Brokers, a stock trade costs 0.5 cents a share, with a minimum of $1 a trade. That's below what most institutional investors pay. The catch is that the firm charges a $10 monthly maintenance fee if you don't spend at least $10 trading. But for many investors, the $120 minimum annual cost is well worth it. According to the J.D. Power survey, the average online investor made 36 trades in 2005, up from 23 in 2003. Even at Scottrade, 36 trades amounts to $252 a year, more than double Interactive Brokers' $120.

For active investors, the margin rate -- what it costs to borrow from the broker to leverage your holdings or sell stocks short -- may also be an important factor. Every broker has a tiered pricing system for margin loans, with larger amounts getting the best rates. Here again, Interactive Brokers has the best deal: just 7% for borrowings of $100,000 or less and as low as 5.5% for $3 million or more.

NTRI- Nutrisystem Inc

Posted on 7/25/2006
After a string of triple digit earnings for several quarter, NTRI is down around 10 points today. This is how many earnings driven trend end. At some stage the good earning is already priced in and market starts anticipating slowdown. NTRI will soon be a history.
If you play the earning strategy, always look for stocks which are just starting out in their earning super performance. As the trend becomes older the risk increases. Investors Business Daily says never to buy late stage bases.

Most successful stocks build a number of bases as they pause on their way to larger gains. The first time a stock forms a solid base, few people are even aware of the company, so most miss this first-stage base. More people notice the company during it's second base after the stock moves up 20 to 30% from the first stage base breakout point. By the time third- or fourth-stage bases have formed, many more investors have belatedly "discovered" the stock. This, however, is when the stock is more likely to disappoint you. In about 80% of fourth-stage bases, the stock fails to make further price increases.

Update:
More on late stages buying by IBD in today's edition. You can see the link in the right sidebar under the headline 'Sell What You See And Not What You Think'

When a stock makes a new high off a fourth-stage base, it's too obvious to the market. When everyone is optimistic, it's usually too late to join the action. By this time, all the buyers have gotten on board. There aren't enough new ones to push the price higher.

Merck leads pharma higher

Merck is up 51% from its yearly low. The large cap drug sector after underperforming for many years is attracting buyers now.

Major Drug firms

ABBI,Abraxis Bioscience Inc
ABT,Abbott Laboratories
AOB,American Oriental Bioengineering Inc
AZN,Astrazeneca Plc
BMY,Bristol-Myers Squibb Co
GSK,Glaxosmithkline Plc Adr
JNJ,Johnson & Johnson
KAL,Callisto Pharmaceuticals Inc
KERX,Keryx Biopharmaceuticals
LLY,Eli Lilly & Company
MRK,Merck & Co
NVS,Novartis Ag Ads
PFE,Pfizer Inc
RIGL,Rigel Pharmaceuticals Inc
SGP,Schering-Plough Corp
SPPI,Spectrum Pharm Inc
WYE,Wyeth

Trade ideas

Posted on 7/24/2006
Large number of breakouts today. Here is a select list.

AEPI,Aep Industries Inc
ATYT,Ati Technologies Inc
BRLI,Bio-Reference Labs Inc
CRAY,Cray Incorporated
CV,Central Vermont Pub Svc
DRYS,Dryships
DTLK,Datalink Corporation
EMCI,Emc Insurance Group Inc
GRB,Gerber Scientific Inc
IHR,Interstate Hotels & Resorts
MIG,Meadowbrook Insurance Gr
NVTL,Novatel Wireless Inc
OSG,Overseas Shipholding Grp
PRAN,Prana Biotech Ltd Adr
WRLD,World Acceptance Corp

Get ready for a bounce



It is mean reversion time again. This week will again see a high magnitude bounce to frustrate the bears. Those late to the bearish party and those just about perfecting their short strategies will again get a good lesson on why it is tough trading the bear markets. Unless you have overwhelming conviction and stomach to withstand high volatility on short positions you should not short.



Update: The hate mail keeps coming. Again lot of traders are spooked by the bounce and the viciousness of moves without volume. The mails range from "I was expecting a crash on Monday" to saying its all manipulated by Fed, Bush etc.
Most new to the market do not understand the dynamics of shorting. If you must short then you must be very early or very late.

Top and bottom ETFs

The leveraged Proshare ETFs seems to be attracting lot of traders and so far have done well.

Top 10
EWW,iShares MSCI Mexico Index Fund ETF
IDU,iShares Dow Jones US Utilities Sector Index Fund ETF
IHF,iShares Dow Jones US Health Care Providers Index Fund ETF
MYY,ProShares Short MidCap400 ETF
PSQ,ProShares Short QQQ ETF
PUI,PowerShares Dynamic Utilities Portfolio ETF
UTH,HOLDRS Utilities ETF
VPU,Vanguard Utilities Etf
XLU,SPDRs Select Sector Utilities ETF
XLV,SPDRs Select Sector Health Care ETF

Bottom 10
HHH,HOLDRS Internet ETF
IEZ,iShares Dow Jones US Oil Equipment & Services Index Fund ETF
IGN,iShares Goldman Sachs Networking Index Fund ETF
IIH,HOLDRS Internet Infrastructure ETF
ITB,iShares Dow Jones US Home Construction Index Fund ETF
OIH,HOLDRS Oil Service ETF
PSI,PowerShares Dynamic Semiconductors Portfolio ETF
PXJ,PowerShares Dynamic Oil Services Portfolio ETF
QLD,ProShares Ultra QQQ ETF
XSD,SPDRs Semiconductor ETF

Bottom Sectors

Technology is the dominant theme in this list. If you are value investor and not afraid of short term pain, there are number of bargains in this sector list.

MG124,Oil & Gas Drilling & Explorat
MG125,Oil & Gas Equip & Services
MG311,Appliances
MG621,Farm & Construction Machinery
MG632,Manufactured Housing
MG636,Heavy Construction
MG735,Electronic Stores
MG739,Catalog & Mail Order Houses
MG744,Music & Video Stores
MG752,Building Materials Wholesale
MG754,Electronics Wholesale
MG765,Staffing & Outsourcing Service
MG775,Trucking
MG815,Networking & Comm Dev
MG832,Semiconductor-Memory Chips
MG834,Semiconductor-Integrated Cir
MG836,Printed Circuit Boards
MG843,Processing Systems & Products
MG844,Long Distance Carriers
MG852,Internet Information Providers

Defensive Sectors in Focus

The top 20 sectors are full of defensive sectors. The tobacco and grocery store sector is shaping up for some good trading action. The grocery sector has after lot of restructuring managed to improve earnings and some of these stocks have legs.

MG349,Beverages-Soft Drinks
MG351,Cigarettes
MG352,Tobacco Products - Other
MG413,Regional-Mid Atlantic Banks
MG414,Regional-Southeast Banks
MG415,Regional-Midwest Banks
MG417,Regional-Pacific Banks
MG443,Reit-Healthcare Facilities
MG511,Drug Manufacturers - Major
MG523,Health Care Plans
MG525,Hospitals
MG529,Specialized Health Services
MG733,Drug Stores
MG734,Grocery Stores
MG742,Toy & Hobby Stores
MG757,Drugs Wholesale
MG821,Multimedia & Graphics Software
MG912,Electric Utilities
MG913,Gas Utilities
MG914,Diversified Utilities

Curtis Faith - The Original turtle

Posted on 7/22/2006
Curtis faith has a very interesting insight on the different markets and how they behave and probably why.

I believe that there are actually three classes of markets which behave distinctly differently:

1) Fundamental Driven Markets - These are markets like currencies and interest rates where the trading itself is not the primary force behind the movement. As time goes on this seems to be less and less true but I'd argue that the Fed or country-specific equivalent and a country's monetary policy still influence prices more than speculators. These markets have the greatest liquidity with the cleanest trends and are the easiest to trade.

2) Speculator Driven Markets - These are markets like stocks, futures such as coffee, gold, silver, crude oi, etc. where speculators influence the markets more than governments or large hedgers. The prices are perception driven. These markets are harder to trade.

3) Aggregated Derivative Markets - These are markets where the driving force is speculation but that speculation is diluted because the traded instruments are not what drives the price. A good example is the e-mini contract. It moves up and down but it's range is constrained by the underlying index which moves only indirectly because of speculators. It aggregates the purely speculative moves of many instruments so you get an averaging out and a dilution of momentum. These markets are the hardest ones to trade.

"Never buy a stock making a 52 week low"

Posted on 7/21/2006
Barry Ritholtz is saying "Never buy a stock making a 52 week low" . Anyone who makes such absolute statements does not understand markets. There is an overwhelming statistical evidence to show there is a clear edge in buying weakness.
I have tested several systems which show significant edge when you buy weakness. The fundamental principle is that markets are mean reverting and markets tend to over react on short side.
Never blindly follow anyone who makes such absolute claims. Test the validity of any market related claims.

A bull market in bearishness

The strong bull market in bearishness continues. Some of the earnings plays have been whacked back in to bases. All this bearishness and the Dow Jones Index and S&P still continue to defend their recent lows. Technology and small cap is leading most of the things down. Now that no one wants to be bullish, next week there will be another rally to whack the bears and dent some of the profit on bearish side.





Mid day scan long

AMGN,Amgen Inc
ATYT,Ati Technologies Inc
AYE,Allegheny Energy Inc
B,Barnes Group Inc
CERN,Cerner Corp
CPS,Choicepoint Inc
DJ,Dow Jones & Co Inc
HYSL,Hyperion Solutions
JCI,Johnson Controls Inc
LAUR,Laureate Education Inc
LSTR,Landstar System Inc
MSFT,Microsoft Corp
MYY,ProShares Short MidCap400 ETF
PEG,Public Service Enterprise Group Inc
PETD,Petroleum Development Corp
PNW,Pinnacle West Capital Cp
REY,Reynolds & Reynolds Co
SCST,Scs Transportation Inc
TER,Teradyne Inc
TPX,Tempur-pedic Intl
TSRA,Tessera Technologies Inc
ZION,Zions Bancorporation

More earnings example

My yesterdays post on BIDU and earnings based strategy has many asking for more examples of earnings play.
Here is a quick and dirty list I pulled out from my database for last 2 year of some of my trades based on earning.
ARS,Aleris International Inc
ATI,Allegheny Technologies
BMHC,Building Materials Hldg
BOOM,Dynamic Materials Corp
BTJ,Bolt Technology Corp
CAS,A.M. Castle & Company
CELG,Celgene Corp
CRM,Salesforce.com Inc
CUTR,Cutera Inc
DRQ,Dril-Quip Inc
ERS,Empire Resources
FORD,Forward Industries Inc
GG,Goldcorp Inc
GLG,Glamis Gold Ltd
GMXR,Gmx Resources Inc
GROW,U.S. Global Invest Inc A
HANS,Hansen Natural Corp
HOLX,Hologic Inc
HSOA,Home Solutions Of America
ICTG,Ict Group Inc
ISRG,Intuitive Surgical Inc
IVAC,Intevac Inc
JOYG,Joy Global Inc
KNOT,The Knot Inc
KNXA,Kenexa Corp
KOMG,Komag Inc
LVS,Las Vegas Sands
MEK,Metretek Technology Inc
NETL,Netlogic Microsystems Inc
NGS,Natural Gas Svcs Grp Inc
NTG,Natco Group Incorporated
NTRI,NutriSystem Inc
NVDA,NVIDIA Corporation
OYOG,Oyo Geospace Corp
RAIL,FreightCar America Inc
RTI,Rti Internat Metal Inc
STMP,Stamps.com Inc
SWS,Sws Group Inc
TIE,Titanium Metals Corp New
TRID,Trident Microsystems Inc
TTI,Tetra Technologies Inc
TWGP,Tower Grp Inc
USAP,Universal Stain & Alloy
ZUMZ,Zumiez Inc

If you study this list carefully and see in last two years period where they had significant price appreciation in compressed time frame you should get a good idea behind the strategy. Study also what earnings growth levels or sales levels triggered the move. Look at the float. Look at previous earnings. There are many things to look at and derive at some of the factors to look at.
There are more questions and I will put in a more detailed answer sometime this weekend.

No enthusiasm for good GOOG earnings

Posted on 7/20/2006
With big caps like Google, earnings are dissected to death, but the good earning has not lead to immediate good price reaction. One thing is clear any rally in Nasdaq 100 and GOOG will be the leader.

Google Inc. said late Thursday second-quarter profit more than doubled as the world's largest provider of Internet searches expanded its leading share of the lucrative market for online search advertising.
The Mountain View, Calif.-based company said it earned $721 million, or $2.33 a share, for the period ended June 30, up from $342.8 million, or $1.19 cents, a year earlier.
Sales surged 77% to $2.46 billion as the company placed more ads alongside its search results.

Reader query on BIDU

what's your take on BIDU? With earnings due next week, would you rate it a short term buy now or after earnings with increased volume?




Any specific stock does not matter. The overall methodology is more important. I have no opinion on buying before or after earning. Here are some of my observation on what happens to stocks during and after earnings:
1 Start of a new rally. In some cases there is a start of new rally which lasts until next earning season. This mostly happens in neglected stocks, where there is no analyst, no forward guidance, no complicated balance sheet maneuver. The market simply discovers these hidden gems during the earning season. e.g. HSR during last earning season. It had a 400% move post earning.
2 A small rally and then an extended range formation.
3 Reversal and then after few weeks or a few week before next earning date a rally in anticipation. e.g. BOT and BIDU
4 Reversal and it continues to drop. e.g. USG

Now the trick is to find the first one and have the conviction and courage to hold on till it reverses. For that you need to look at number of other things. Based on datamining several quarters of earnings over several years, I have found some patterns which increase the probability of finding the first kind of plays.

Mid Day scan

The post bounce action is subdued. The bearish commentators are out saying it is one day wonder. But there are lots of good opportunities. Good earnings are being rewarded, look at Cbot Holding, it had a good earning two quarters in a row and is up so far.
ALL,Allstate Corporation
ALY,Allis-Chalmers Energy Inc
AVCI,Avici Systems
BAX,Baxter International Inc
BHE,Benchmark Electronics
BKD,Brookdale Senior Living Inc
BOT,CBOT Holdings Inc
CHIC,Charlotte Russe Hldg Inc
DOX,Amdocs Ltd
EMCI,Emc Insurance Group Inc
EWBC,East West Bancorp Inc
FSL,Freescale Semiconductor Inc
KTCC,Key Tronics Corp
LOGI,Logitech Intl Adr
MOD,Modine Manufacturing Co
MOT,Motorola Inc
NCX,Nova Chemicals
NKTR,Nektar Therapeutics
NOK,Nokia Corp Ads
NUHC,Nu Horizons Electronics
NVR,Nvr Inc
ORB,Orbital Sciences Corp
REDF,Rediff.Com India Ltd Ads
SPWR,SunPower Corp
STLD,Steel Dynamics Inc
SWKS,Skyworks Solutions Inc
SWY,Safeway Inc
TRAD,Tradestation Grp Inc

What will be the sector theme

What sectors are likely to benefit from the bounce? Here are two sets of possibilities. Look at both set of sectors carefully. There are lots of opportunities. As to my own trading I am very excited about many centuries old high technology sector.

Quarter
Based on quarterly relative strength, these are top 20 sectors.
MG121,Major Integrated Oil & Gas
MG122,Independent Oil & Gas
MG123,Oil & Gas Refining & Marketing
MG125,Oil & Gas Equip & Services
MG131,Steel & Iron
MG132,Copper
MG134,Industrial Metals & Minerals
MG135,Gold
MG136,Silver
MG352,Tobacco Products - Other
MG441,Reit-Diversified/Industrial
MG442,Reit-Office
MG444,Reit-Hotel/Motel
MG446,Reit-Residential
MG523,Health Care Plans
MG627,Metal Fabrication
MG733,Drug Stores
MG771,Major Airlines
MG772,Regional Airlines
MG776,Shipping


Short term

Based on sectors which outperformed during recent intense market correction.
MG316,Toys & Games
MG342,Farm Products
MG349,Beverages-Soft Drinks
MG351,Cigarettes
MG352,Tobacco Products - Other
MG413,Regional-Mid Atlantic Banks
MG414,Regional-Southeast Banks
MG415,Regional-Midwest Banks
MG441,Reit-Diversified/Industrial
MG442,Reit-Office
MG443,Reit-Healthcare Facilities
MG446,Reit-Residential
MG447,Reit-Retail
MG523,Health Care Plans
MG527,Home Health Care
MG529,Specialized Health Services
MG733,Drug Stores
MG821,Multimedia & Graphics Software
MG912,Electric Utilities
MG915,Water Utilities

Update So much for my analytical ability,many stocks from many centuries old high technology sector had ugly reversal today.

Complacent shorts get gored

Posted on 7/19/2006


It is always difficult to trade the bearish side. Going by the emails I have got so far, it looks like some adventurous shorts and those late to the short party got gored today. Many of the emails have disbelief about the move and some curse word for Fed Chairman Bernanke. Frankly if you were not prepared for a bounce of some major magnitude then you do not know a lot about how the market behave or you are under the spell of bearish commentators.

Market lacking animal spirit

As expected the bounce has come but it is lacking in fill fledged animal spirit. I see very few stocks with high relative strength breaking out. Lot of breakouts are in beaten down stocks. There are few stocks with good earnings breaking out.
Here is what I am finding in my mid day scans.

ADRE,BLDRS Emerging Markets 50 ADR Index Fund ETF
BLK,Blackrock Incorporated
BRKR,Bruker Biosciences Corp
CBSS,Compass Bancshares Inc
CDWC,Cdw Corp
CSR,Credit Suisse Group
CTBI,Community Trust Bncp Inc
DB,Deutsche Bank Ag
DTLK,Datalink Corporation
FDM,First Trust Dow Jones Select MicroCap Index Fund ETF
FRED,Fred's Inc
HAN,Hanson P
HCSG,Healthcare Services Group Inc
IHF,iShares Dow Jones US Health Care Providers Index Fund ETF
ILMN,Illumina Inc
IMA,Inverness Medical Tchnlg
IPAR,Inter Parfums Inc
ISSX,Internet Security System
IYR,iShares Dow Jones US Real Estate Index Fund ETF
KBE,streetTRACKS KBW Bank ETF
KEA,Keane Inc
LUFK,Lufkin Industries Inc
LUV,Southwest Airlines Co
NITE,Knight Capital Group Inc Cl A
NURO,NeuroMetrix Inc
NXL,New Plan Excel Realty Tr
OO,Oakley Inc
PJC,Piper Jaffray Companies
PKG,Packaging Corp Of Amer
QGEN,Qiagen Nv
RL,Polo Ralph Lauren Corp
RTH,HOLDRS Retail ETF
SON,Sonoco Products Company
SPIL,Siliconware Precision Industries Company Ltd ADS
STEC,Simple Technology Inc
STZ,Constellation Brands Inc
TCB,Tcf Financial Corp
TRCA,Tercica
TSS,Total System Services
TXUI,Texas United Bancshares Inc
UBA,Urstadt Biddle Properties
UHCO,Universal American Fin
UNH,UnitedHealth Group Inc.
USNA,Usana Health Science Inc
V,Vivendi Universal
VFC,Vf Corp
VFH,Vanguard Financials Etf
VICR,Vicor Corp
VMI,Valmont Industries Inc
VOD,Vodafone Group Plc
WBKC,Westbank Corp
XHB,SPDRs Homebuilders ETF
XLF,SPDRs Select Sector Financial ETF

Zacks: Earnings Expectations Still Solid

Despite most of what you have been hearing, earnings season has started on a positive note, particularly in terms of profits relative to expectations. Positive surprises have outnumbered disappointments by almost 12:1. The median firm has reported year-over-year growth of 14.4% and has topped expectations by 3.9%.

Several companies have come in a bit light on revenues, or have made somewhat downbeat comments about the outlook for either the third quarter or the second half. However, if a firm reports inline earnings, but lower than expected revenues, by definition it means that margins are better than expected. It is not intuitively clear to me that that is all bad.

So far, estimate revisions have also been holding up nicely. More estimates have been raised than lowered over the last month for 2006. While the revisions ratio has been dropping in recent weeks, it remains positive. The perennial leaders, Energy, Industrials and Materials remain strong. Interestingly the Consumer Staples sector, a traditional safe haven in times of trouble, has been showing signs of strength. As for the downside, the fact that Tech rhymes with wreck, is not just a coincidence right now. Health Care, which has been weak on the estimate revisions front for several months now, remains so.


Keep close eye on earnings. Look at ILMN today, up 5.64 pre market due to good earnings. Like this you should find 20-25 good set ups during earning period which make 40% plus move in the post earning quarters.

Google and Yahoo

Reader asks,
"I would like to know what you think of Google in the wake of Yahoo's disappointing earnings tonight."

I don't know and does not affect my trading. Google is in my database because it has had good earnings for several quarters. Post earning if it breaks out on high volume I might be a buyer. I do not track Yahoo. One individual stock seldom has an effect on market direction. If the market has to go up it will go up.
Even though Yahoo and Google are in same business, when it comes to online ads Google is the clear leader. Lot of people are talking about problems of click fraud and others like Microsoft getting in to business, but that has not slowed down Google. Google clearly is in growth phase currently. If it continues to grow earning, it will keep going up. What else can you buy in Nasdaq 100 which has as good an earning as Google currently.



I have been currently reading a fascinating book on Google, The Google Story and it give great insight in to Google.

Trade ideas

Posted on 7/18/2006
A good constructive day. The indexes show first sign of stabilization. Earning season has really kicked in. Many companies are pre announcing or coming out with good earnings. Many individual stocks have a catalyst to take their price higher.
There is abundance of opportunities today. I have over 152 stocks in my scan today. Selecting the one with event risk behind them and the one with catalyst would be the key.

Stock Scan Long

AMV,Amerivest Properties Inc
BCR,C.R. Bard Inc
BRE,Bre Properties Inc Cl A
CACB,Cascade Bancorp
CSGS,Csg Systems Internat Inc
CTBI,Community Trust Bncp Inc
CVD,Covance Inc
CXW,Corrections Corp Of Amer
DCTH,Delcath Systems Inc
FAL,Falconbridge Ltd
GDW,Golden West Financial
GGI,Geo Group (the)
HBHC,Hancock Holding Co
IBCA,Intervest Bncshs Cp Cl A
ILMN,Illumina Inc
JTX,Jackson Hewitt
LHO,Lasalle Hotel Properties
LMIA,Lmi Aerospace Inc
MIG,Meadowbrook Insurance Gr
OKE,Oneok Inc
OMCL,Omnicell Inc
PEP,Pepsico Inc
RTK,Rentech Inc
UST,Ust Inc
WWW,Wolverine World Wide

Goldman Sachs adds N11 to BRIC

11 countries have been dubbed N11 by Goldman Sachs: Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, Vietnam. According to Goldman Sachs these countries might emerge as important player by 2050.
This latest paper in the series discusses how the BRICs
countries have progressed. We also look at how ‘BRIClike
’ other large population countries are, and present a
measure to show how these, the BRICs and all the
world’s economies score in terms of sustaining a healthy
environment for growth. The BRICs economies do seem
to be ahead of many other developing economies, both
large and small.
We also present a detailed study of the prospects for
another set of developing countries, a group we call the
N-11—the Next Eleven. Of them, only Mexico and
perhaps Korea have the capacity to become as important
globally as the BRICs, although many of them have
compelling potential.

The bear case

Let us summarize the bear case so far.

High Interest rates: High interest rates are negative will slow down the economy.
Inflation: We are headed for sustained inflationary times.
Overextended US consumer: Stagnating wages, high personal debt level and no more recourse to cheap home equity.
Declining home prices : Real estate correction will be painful and will destabilize the market.

When the market has to rally it will rally not with standing all these problems. If you start believing too much of this bearish hype, you will be too scared to buy.
The other thing is most of the bearish commentators have a poor timing record. Most of these same things have been talked about for last 2 years and did not matter.
The most interesting thing is most of the well known bearish blogger have poor conviction when it comes to trading based on their own analysis.
There is a prominent blogger, who has been in media lime light for making a correct call on market direction during this correction, if you see his own public trades during that time three or four times he has chickened out on small correction. So keep in mind most bears don't trade with conviction based on their own negative analysis.
Market corrections after a sustained multi year rallies are part of the market normal behavior. This correction will play itself out followed by another rally. The initial period of rally after such period is easiest to trade and most profitable as stocks with excellent fundamentals sprint out and rally without much correction.

Oil Services ETF- OIH



The OIH can not rally in the face of Gulf War and Iran trouble. That is significant. The OIH just can't get a rally going. You can kiss your oil stocks good bye for now.

My earlier June 16 post on this predicted this.



The energy sector has seen a multi year high. Expect many years of under performance from this sector. The bounce in last two days does not matter. Majority of these stocks are not going to see their high again. Alternative fuel, coal, oil, gas all these sectors will not regain the leadership for long time to come. Every rally in the energy sector is a shorting opportunity.
I am watching following stocks from this sector.
ACI,Arch Coal Inc
ADM,Archer Daniels Midland
ATW,Atwood Oceanics Inc
BHI,Baker Hughes Inc
CAM,Cameron International Corp
CLB,Core Laboratories N.V.
DO,Diamond Offshre Drilling
FCL,Foundation Coal Holdings
FTI,Fmc Technologies
FTO,Frontier Oil Corp
GRP,Grant Prideco Inc
HAL,Halliburton Co
HOC,Holly Corp
IEO, iShares Dow Jones US Oil & Gas Exploration & Production Index Fund ETF
IEZ,iShares Dow Jones US Oil Equipment & Services Index Fund ETF
IXC,iShares S&P Global Energy Sector Index Fund ETF
MDR,Mcdermott Internat Inc
OIH,HOLDRS Oil Service ETF
OII,Oceaneering Internat
PBW,PowerShares Wilderhill Clean Energy Porfolio ETF
PEIX,Pacific Ethanol Inc
PXJ,PowerShares Dynamic Oil Services Portfolio ETF
RIG,Transocean Inc
SLB,Schlumberger Ltd
THE,Todco
UCO,Universal Cmprssn Hldgs
UPL,Ultra Petroleum Corp
USO,United States Oil Fund ETF
VDE,VIPERs Energy ETF
VLO,Valero Energy Corp
VTS,Veritas Dgc
WFT,Weatherford International Ltd
WHQ,W-h Energy Services Inc

Those chasing this sector now are too late for the party. If you are holding on to these stocks, you should be worried.

Mean reversion time

Several of the mean reversion based systems are signaling a rally is around the corner. How to trade such a move depends on your methodology and instrument selection. There are large number of market followers who use mean reversion based systems. Almost all these systems triggered a buy end of last week.

If you want to study and develop mean reversion based system, the best book on it is Trade Like a Hedge Fund: 20 Successful Uncorrelated Strategies & Techniques to Winning Profits by James Altucher. The book has many system based on the principle of mean reversion. After reading it you will also realize why most funds do not have spectacular returns by following inherently low expectancy systems like those advocated by the book.



There are many ways to make money in stock market. Mean reversion is one of them. Personally I do not trade these systems but keep a close eye on them and track their performance and signals to get good idea on short term market direction.

Ethanol Stocks have lost the spark

Posted on 7/16/2006
A few months ago the ethanol stocks had captured market imagination. The great appetite for ethanol stock produced some stunning rallies like the one in The Anderson Inc., ANDE and Pacific Ethanol Inc., PEIX.



Now some of these stocks have corrected by 50%. Oil prices are up and ethanol stocks do not seem to be following the trend. The only attractive stock in that sector looks to be Archer Daniel Midland., ADM. Keep an eye on it. It might make a move post earnings.

Ethanol Stocks

ADM,Archer Daniels Midland
ANDE,Andersons Inc (The)
GPRE,Green Plains Renewable Energy
MGPI,Mgp Ingredients Inc
MON,Monsanto Co
PEIX,Pacific Ethanol Inc
VSE,VeraSun Energy Corp

Top 20 ETF

Posted on 7/15/2006
Not all sectors have ETF, so ETF action is slightly different from the sector action. Energy and commodities clearly lead the action.

Top 20 ETF

DBC,DB Commodity Index Tracking Fund ETF
GDX,Market Vectors Gold Miners ETF
GLD,streetTRACKS Gold Shares ETF
IAU,iShares COMEX Gold Trust ETF
IEO, iShares Dow Jones US Oil & Gas Exploration & Production Index Fund ETF
IEZ,iShares Dow Jones US Oil Equipment & Services Index Fund ETF
IGE,iShares Goldman Sachs Natural Resources Index Fund ETF
IHF,iShares Dow Jones US Health Care Providers Index Fund ETF
IXC,iShares S&P Global Energy Sector Index Fund ETF
IYE,iShares Dow Jones US Energy Sector Index Fund ETF
OIH,HOLDRS Oil Service ETF
PUI,PowerShares Dynamic Utilities Portfolio ETF
PXE,PowerShares Dynamic Energy Exploration & Production Portfolio ETF
SLV,iShares Silver Trust ETF
TLT,iShares Lehman 20+ Year Treasury Bond Fund ETF
USO,United States Oil Fund ETF
UTH,HOLDRS Utilities ETF
VDE,Vanguard Energy Etf
XLE,SPDRs Select Sector Energy ETF
XLU,SPDRs Select Sector Utilities ETF

Sector action

As the panic selling phase subsides, next week many stocks and sectors will resume their onward march. One ay to look at sectors is to look at sectors which in last 20 days shown resilience. Number of these sectors have a definite catalyst to attract new buying. Within these sectors number of stocks have managed to cling on to top of their range inspite of the overall market weakness. When the market stabilizes they will be the first to sprint back in to action.

MG120,-Energy-
MG121,Major Integrated Oil & Gas
MG122,Independent Oil & Gas
MG123,Oil & Gas Refining & Marketing
MG124,Oil & Gas Drilling & Explorat
MG125,Oil & Gas Equip & Services
MG126,Oil & Gas Pipelines
MG132,Copper
MG135,Gold
MG136,Silver
MG349,Beverages-Soft Drinks
MG350,-Tobacco-
MG351,Cigarettes
MG441,Reit-Diversified/Industrial
MG523,Health Care Plans
MG529,Specialized Health Services
MG733,Drug Stores
MG742,Toy & Hobby Stores
MG821,Multimedia & Graphics Software
MG912,Electric Utilities

The weekend dilemma

We are at a very interesting stage in the market. If you are bearish and short do you want to take the risk of being short over the weekend. Similarly those who want to buy panic or weakness the problem is event risk over weekend.
Geo political trouble is tricky thing because so much can happen over weekend. Market often turn on dime. If you chose an instrument like calls or puts then it is a different game.

Watch this guys next move



At some stage the Fed will indicate enough selling. Asset prices are important Fed consideration. When that happens watch the fireworks.

A recurring topic of debate among monetary policymakers and academic experts for a decade and more is whether, and under what conditions, a central bank should adjust policy in an effort to affect the direction of the stock market. This issue arose initially in the context of the stock market boom in Japan in the late 1980s, and the subsequent market decline in the 1990s. Not only did the Japanese stock market decline but also the Japanese economy has suffered from an almost continuous stagnation since the early 1990s. In the United States, the stock market boom after 1995, and especially after the fall of 1998 until the early part of 2000, raises the same issue. Given that the U.S. economy’s growth has been near zero this year, it is natural to ask whether tempering the prior stock market and economic boom might have reduced the difficulties the economy has faced this year.

Inside the House of Money


How quick are you at spotting an opportunity. What was your reaction to recent Israel retaliation in Lebanon. Could you spot a long term opportunity in it.
The reason for the question is I am reading a very fascinating book on global macro Inside the House of Money : Top Hedge Fund Traders on Profiting in the Global Markets by Steven Dronby.



It has Market Wizard style interviews with top global macro traders. Two examples of quick thinking trades from it stand out.

Christian Siva-Jothy:

" On the morning o September 11, I was already long U.S. Fixed income as I had structured view that the U.S. economy was weak. It was a decent-sized position as I had been having a reasonable year. I was on Goldman trading floor in London and I remember hearing someone say "A plane crashed into the side of World Trade Center." The first thing I noticed on the TV was that it was a perfectly clear blue sky day. I'm a helicopter pilot and I've been flying for 14 years. I know that when you've got a plane that's going down, you don't aim for tallest building to fly into; exactly the opposite, you go into the river or you go for a flat piece of land.
I immediately thought "Terrorist act". I figured this was going to whack consumer sentiments, which was the only thing keeping the United States afloat at that point. I bought Eurodollars and calls on Eurodollars after the first plane hit but before the second. Strangely, I think they rallied no more than 13 basis points on the day. Markets can be unbelievably slow to figure out the consequences of big events. "

Here is what happened to Euro after that.




Jim Leitner

Are disaster and tragedy always a buying opportunity?
"Yeah, look at Russia or Botswana or Turkey. For example, when Turkey had a massive earthquake in 1999, we bought shares of glass manufacturers because we knew everybody was going to have to replace their windows. It was a no brainer. Turkish stocks were going down across the board but we bought all the shares of glass manufacturers we could."


The book is very good. One of the best books I have read on trading this year. I highly recommend Inside the House of Money : Top Hedge Fund Traders on Profiting in the Global Markets by Steven Dronby.

Earnings Breakout: National Beverage and Cascade Bancorp





The market reacted positively to some earnings related stock yesterday. Keep a close watch on FIZ, CACB, PEP and WNI
If you want to beat the market in good times or in bad times follow the earnings. This is a clear strategy with edge . If you are willing to invest time and effort to understand and operationalise it you will find rich rewards with it. Just follow the stocks highlighted under the earnings breakout for next year and you will see how the earning effect unfolds.
I will later have a more detailed post on the earnings effect.

Daily Stock Scan - Short

Posted on 7/13/2006
For the brave traders there is no shortage of stock ideas to short. Today I have 1247 stocks in the short scan. This level of negativity in the past has indicated bottoms.
If oil is rallying why is the OIH not rallying?



Short Scan

ACL,Alcon Inc
ANR,Alpha Natural Resources
BFAM,Bright Horizons Fam Solu
BKS,Barnes & Noble Inc
COGN,Cognos Inc
CREE,Cree Incorporated
DOW,Dow Chemical Co
FOE,Ferro Corp
HHH,HOLDRS Internet ETF
HNI,Hni Corp
HOV,Hovnanian Enterprises A
JRCC,James River Coal Company
KERX,Keryx Biopharmaceuticals
MAS,Masco Corp
MEE,Massey Energy Company
MIC,Macquarie Infrastructure
MRX,Medicis Pharmaceutical A
MTK,streetTRACKS Morgan Stanley Technology ETF
MTX,Minerals Technologies Inc
NLS,Nautilus Group Inc (the)
PARL,Parlux Fragrances Inc
PFCB,P F Chang's China Bistro
PII,Polaris Industries Inc
PLAY,Portalplayer
PTEN,Patterson-Uti Energy Inc
QQQQ,Nasdaq 100 Index Tracking Stock ETF
RECN,Rscs Connection
SPF,Standard Pacific Corp
SSP,E.W. Scripps Company
SWK,Stanley Worksthe
TARR,Tarragon Corp
TKLC,Tekelec
WABC,Westamerica Bancorp
ZMH,Zimmer Holdings
ZNT,Zenith National Insurance Corp

Total bull capitulation

With the latest news of missile strike on Israel cities, there is a whoosh down. This looks like total capitulation. We are in final phases of bear phase where good, bad and ugly is being sold. From this will emerge a bull market. The easiest money is made in the earliest phase of bull market after such bearish corrections.
A reader has wrote back saying you are underestimating the Middle East conflict and more bearishness is around corner. If you are becoming bearish now, you are too late to the party. As to Middle East, ever since I learned how to spell Middle East it has been like this. No one in Middle East wants peace. Most of the sundry dictators and terrorist who rule Middle East from time to time overestimate their strength and make foolish bets. Fortunately the world opinion has changed today and the world has very little tolerance for such antics. So in few weeks the Middle East situation will resolve itself.
As a result of all these factors, the Fed will not raise rates in its next meeting.

Earnings Breakout: Flow international Corporation (FLOW)



Flow International Corporation (FLOW) designs, develops, manufactures, markets, installs and services ultra high-pressure (UHP) water pumps and UHP water-management systems.
Flow International Corp., a maker of high-pressure waterjet cutting technology, on Thursday reported a fourth-quarter profit versus a loss in the year-ago period, which included a charge from an asset sale.
For the quarter ended April 30, the company reported net income of $6.8 million, or 18 cents per share, versus a prior-year loss of $15 million, or 64 cents per share. The year-ago results included a $7.1 million loss related to Flow's Avure business unit, which it divested in 2005.
Revenue rose 30 percent to $63.3 million from $48.8 million in the year earlier period.
Wall Street had forecast a profit of 12 cents per share, the average estimate of seven analysts surveyed by Thomson Financial, on projected sales of $56.5 million.

Today will be a up day ?

Gap down at open.Panic.Quality is being sold along with junk.Looks and smells like capitulation. High probability today will be a up day.

Henry Clews wrote in Twenty-Eight Years in Wall Street (1887):
But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes, these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellows will be seen in Wall Street, hobbling down on their canes to their brokers’ offices.

Then they always buy good stocks to the extent of their bank balances, which they have been permitted to accumulate for just such an emergency. The panic usually rages until enough of these cash purchases of stock is made to afford a big “rake in.” When the panic has spent its force, these old fellows, who have been resting judiciously on their oars in expectation of the inevitable event, which usually returns with the regularity of the seasons, quickly realize, deposit their profits with their bankers, or the overplus thereof, after purchasing more real estate that is on the up grade, for permanent investment, and retire for another season to the quietude of their splendid homes and the bosoms of their happy families.

Fifty Years in Wall Street by Henry Clews

Update: Watch Nasdaq to lead the rebound.

The dark art of short selling

Some readers have asked for short scan. Even though I scan for short side on daily basis, I do not short stock much. Years of experience and testing have not shown me many systems which can consistently make money on short side. Many times the thing which I want to short are not available to short. If I have to short I use the Index futures. I have no edge on short side and so I keep away from it till I find something which works.
There are many people who claim just use a reverse of long strategy to short, which sound very simple but does not work. What works on short side as far as my experience goes is selecting a few sectors to short. The nature of certain businesses is such that when things go wrong it is difficult for the companies in that industry to recover. Retail and biotech are such sectors.
Another thing which works on short side is monitoring earning misses. Earning misses in stocks with long history of beating earnings can trigger a good cascade. If this happens as a total surprise or on stocks which are at top of the range then you can get nice low risk entry.
The other thing which I monitor on short side are the companies flagged by Herb Greenberg. Without doubt he is the most reliable high profiled short tracker on street working with lots of shrewd street players who feed him with research for his column. His picks do not necessarily become good shorts as between the time he starts flagging problems and the street actually agreeing with him there are several counter trend rallies, short squeezes and management fight backs. However the reason I monitor him is to keep a close tab on my long positions he flags because once I as badly burned on a long position he highlighted in which I had pyramided and had lots of profit in it. I do not subscribe to his newsletter but I have an alert set in Google for news, discussions and web site updation on his name.

Short Scan

AFFX,Affymetrix Inc
ANR,Alpha Natural Resources
AVT,Avnet Inc
BAK,Braksem Sa
BC,Brunswick Corp
BGP,Borders Group Inc
BHS,Brookfield Homes
CBRL,Cbrl Group Inc
CGNX,Cognex Corp
CHKP,Check Point Software Technologies Inc
CHS,Chico's Fas Inc
CTAS,Cintas Corp
ELK,Elkcorp
FMT,Fremont General Corp
GCO,Genesco Inc
GTRC,Guitar Center Inc
GYI,Getty Images Inc
JNPR,Juniper Networks
KSWS,K-Swiss Inc Cl A
MCRL,Micrel Inc
MDC,M.D.C Holdings Inc
MSO,Martha Stewart Lvg Omni
MTH,Meritage Homes Corp
MTX,Minerals Technologies Inc
PFCB,P F Chang's China Bistro
PII,Polaris Industries Inc
RYL,Ryland Group Inc. The
SMTC,Semtech Corp
SNS,The Steak N Shake Comp
TUTS,Tut Systems Inc
URBN,Urban Outfitters Inc
YCC,Yankee Candle Co Inc

Daily Stock Scan

Posted on 7/12/2006
Below the surface there is some strength in selected sectors. The overall market weakness makes buying breakouts risky, but the kind of stocks attracting buying currently gives you lot of idea about what kind of stocks will take off once the correction is over.

ACGY,Acergy S.A. Ads
ALJ,Alon USA Energy Inc
ESS,Essex Property Trust Inc
FIZ,National Beverage Corp
INFY,Infosys Technologies Ads
KNOL,Knology Inc
MDR,Mcdermott Internat Inc
NWS,News Corp Inc
SIM,Grupo Simec S A Adr
WBD,Wimm Bill Dann Foods Ojsc
WFT,Weatherford International Ltd

A romance that sank the market


What triggered this two and half month selloff ? It all started with one small romantic dinner. This is a perfect example of how the market behaves and why speculation is such a difficult profession. Since that famous dinner the market is down abut 15%.
The factors which are being sited for the correction like inflation, rising interest rates, slow down in housing were the same factors being talked about for eternity till May. None of that mattered till May and now its effect are magnified.
Now what will trigger a rally ? Something completely innocuous event which will catch everyone by surprise. Till then you will here several explanations for continued bearishness. The latest worry is war worries with Iran and Korea.



I know only two things when a market is down 15% from recent high a good tradable rally has very high probability. Second thing which I have taped on my trading desk is "Wars are bullish. Buy when the bomb start falling."


The May 03 post

Was Ben Bernanke romancing Maria Bartiromo ?
I do not watch CNBC, so I had no idea about what happened till next day. There are several traders very bitter about this and there are several theories about what happened. I like this one: Victor Niederhoffer thinks that Bernanke was trying to impress Maria.
My first reaction to this is that Dr. Bernanke suffers from a disease that old men are all too prone to -- the temptation to try to impress a pretty reporter. It's so easy to try to appear expansive and profound at an evening off the record session with an attractive reporter. "Why is it always romance?" Horace Rumpole asks at the end of one of his mysteries where he follows the pretty girl to catch an English Professor for a terrible crime? I believe that many of the most powerful people on Wall Street succumb to this character flaw and they should follow the motto that the prettier the reporter, the more careful they should be in their utterances.

Here is what Maria said about her conversation with Ben Bernanke:
Federal Reserve Chairman Bernanke told me over the weekend that the media and the markets basically got it wrong last week in speculating that the Fed is done raising interest rates. I asked Chairman Bernanke whether the markets got it right after his congressional testimony. He said flatly, 'No.' Bernanke also told me it is worrisome to him that anyone would think of him as dovish, that that feeling did permeate last week.
He said that he and his Federal Open Market Committee members were trying to basically create some flexibility for the Federal Reserve, saying the Fed may pause, but the data will really dictate whether more rate hikes will occur at future meetings. Chairman Bernanke made the comments to me during the annual White House Correspondents' dinner Saturday night. He used Europe as an example. He said look, Europe moves either up or down, takes pauses and then moves again."

Update: Barry Ritholtz has more on this story.
More here: Bernanke slips on Bartiromo peel

Earnings breakout: Infosys Technologies Limited , INFY

Infosys Technologies Limited (ADR):INFY



Was this a real surprise or market was expecting it? When a stock starts making a move a month before earning, market is expecting good earnings. Best earnings breakouts happen when market is not expecting them or when the stock is basing before earnings. Also notice a future stock split for 18th July. Management knows something about the future direction of earnings before increasing liquidity for stock. Not all impending stock splits are bearish. If you test stock split effect on price you will find it is bullish. Too many stock splits and too frequent stock splits are a problem and are bearish. Investors for some strange reason find high priced stock unappealing.

Zacks predicts double digit earnings growth

The best commentary on earnings is at Zacks. If as predicted the earnings show double digit growth, we will find many good stocks. The multi month correction has separated the men from the boys. There are several good stocks forming nice bases at top of their range. Earnings will act as catalyst to trigger rallies for them.

This week is the “official start” of the second quarter earnings season with Alcoa (AA) having reported yesterday. I am expecting yet another very solid set of earnings to be reported. In all probability double-digit year-over-year growth…again.

Any problems the market is having are coming on the multiple side of the equation, not the earnings side. North Korea can fire all the missiles it wants and it is not likely to affect what any firm I can think of will report for the second quarter or for this year or next. International tensions do, however, reduce confidence and thus the multiple that the market trades at. The effect of another Fed rate hike in August (more likely than not, but not a slam dunk either) is mostly found on the multiple side as well.

Not only is strong growth currently expected for this year, but on balance analysts are continuing to raise more estimates than they cut. Over the last month six estimates were raised for every five that were cut. The increases were concentrated in the Industrial, Energy and Materials sectors — the sectors with the highest expected growth rates for this year. Add in below market P/Es in those sectors (particularly Energy) and you have a very convincing reason to overweight them in your portfolio.

Trend following and mean reversion

Some times trend following works but most of the times mean reversion works in the stock markets.
The market teaches a new lesson everyday. Yesterdays action caught many by surprise. Over the years I have learned my lessons in speculation by getting caught in such moves. Now experience has taught me to be ever vigilant on the market and always to keep market lessons in mind for future use.
All successful speculators know that the markets have a strong tendency to mean revert. The only problem is on day to day basis many forget the lesson. It is the nature of the market that bearish view point sound very appealing when the market is going down, because the market action seems to be reinforcing the bear case. Just when you begin to become a trend follower, the central tendency of the market reasserts.
Why does the market behave in such manner. The best explanation of it I have found so far is in the book Mechanical Trading Systems : Pairing Trader Psychology with Technical Analysis by Richard L. Weissman.



" I believe equity indices tend to exhibit intermediate term choppiness as a function of the dynamic among three separate groups of participants.
- large short term speculators
- institutional momentum followers
- smaller, undecapitalised momentum followers
Typically the interplay among the group is one in which the large short term speculators and institutional players push the market to new highs or lows.
At this point smaller undercapitalised momentum followers initiate new position in to these market extremes as large short term speculators take profit and fade the breakout.
This in turn lead to capitulation of small speculators and weaker institutional momentum followers. Such capitulation usually results in quick, sharp retracement following breakouts prior to dominant trends reasserts."
Mechanical Trading Systems : Pairing Trader Psychology with Technical Analysis by Richard L. Weissman

Bulls begin to stir

Posted on 7/11/2006


The only thing which works again and again is to buy panics, bearish extremes, bearish gloating and capitulation. When it comes to the indexes,mean reversion based systems are the best.
If you play the bear side you have to always keep in mind that the profit on bearish bets are ephemeral.

Earlier post at 11.49 A. M.
S&P 500 INDEX



We are setting up for a nice bounce. Lots of selling. Bold shorts. Terrorism. All nice ingredient for a nice bounce from this level.