Bernanke does it again!

There is just too much to write. So I will split this post into two – Bernanke and Non-Bernanke (vis-a-vis the earnings).

After being down 82 points in the early going the Dow reversed course and closed 78 points higher on Tuesday. Wow! Then the Nasdaq surged 1.1% as the technology sector led the market today.

The reversal was due to Fed Bernanke’s testimony this morning that the Fed is willing to do what it takes if the economy and labor markets do not improve.  He expects historically low rates to remain in place at least until the end of 2014 and most importantly he convinced the participants that the policymakers at the central bank seem to be preparing for additional moves to spur the economy in the weeks or months ahead.

This low interest rate environment should help stem any serious correction in the market averages.

So, where does yesterday’s trading action leave us now? First, I don’t think that this is a short squeeze anymore. Second, yesterday qualified as a decent follow through day from Friday’s key reversal which is a positive development.

Moreover, the basing action in some stocks and the sector rotation is almost clear now. One last thing to notice is that the junta seems to have realized that the tech and oil & gas stocks have been beaten to death. See below –

In fact we see rise or less “severe” damage to stocks even after the poor guidance.

  1. To exemplify, look at the the turn around in STX after it pre-announced a revenue miss by 0.5 Billion dollars (seriously!) or even QCOM which reported fiscal Q3 revenue and earnings per share a little light of consensus, and a Q4 view below analysts’ estimates.
  2. And of course an earnings beat is amply getting rewarded. e.g. MLNX – up 43% after hours, SCSS – up 17% after hours and SWKS – up 10% after hours.

So step in but be cautious.

Food for thought –

  • FDA approves Vivus’s diet pill (ABC)
  • Over 70% of earnings beating estimates (REU)

 

 

 

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Are we there yet?

So after two month hiatus from blogging and very less trading, I am ready to jump in. Hold on! by jump in, I don’t mean start trading. Let’s wait till the tug of war between the bears and the bulls shows direction. As of now bulls are winning bears are having hard time keeping up.

Let’s look at couple of charts –

The two big rallies seen both last Friday and back on June 29th have kept the bulls in charge although the price action overall continues to be mixed and mostly unimpressive. This is not to mention the anemic volume and the ADX on weekly chart.

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So why are we seeing so much confusion –

  1. Unemployment report – Nah! Look at the Friday’s rally
  2. Poor earning’s start – Nah! Look at the Friday’s rally
  3. Market is about to get the QE3 – Bingo! Look at the Friday’s rally. Don’t ever question the printing press of Bernanke!

What do we do? Sit tight and wait for earnings to shift the balance and we will follow the market – because Mr. Market is always right.

Gentlemen, Going forward I will be posting updates twice a week and portfolio summary every week once. I will post the trade as soon as it is made and the reasons for the transactions. I was busy with work and few other stuff. In short time, I will be bringing out the prototype of software that will generate trade signals based on rules. This will be followed up with an app.

Portfolio as of 5/2/2012

STX – 4% (Sold some today)

WDC – 7%

APA – 6% (Super Long Term)

QCOM – 6%  (Super Long Term)

ALLT – 5% ( Added some more after recent earnings)

GNC – 5%

FFIV – 7%  (Super Long Term)

URI – 7%

HAL – 6%  (Super Long Term)

VMW – 7%  ( Long Term)

TXRH – 3% (Initiated Yesterday)

UA – 3% ( Stop set at $93 and will add if it goes above $103)

TLT – 6%

F – 7%  (Super Long Term)

SWI – 3% ( Will add more around $43.9)

PCLN – 3% (Took significant profit off the table recently)  (Long Term)

CASH – 10%

Stocks which make up less than 5% of PORTFOLIO might be sold or added based on criteria, market condition, etc. I am very nimble and hence very low turn around time.

Shorts in the Making – GMCR, DECK, NFLX and Double Top!

Let’s quickly look at some of the stocks. PLease enlarge the images to get the entry points.

ON 5/3/2012 – I initiated a short of decker at $54.7 – 3% position. Stop loss is set at $57

On 5/3/2012 – with stop loss set at $31, I initiated a short of GMCR at $29.5.

Lastly, why so many shorts – DOUBLE TOP in the making?

How, When and Why I jumped a ship named Herbalife – HLF

Last few days have shown why trading momo stocks can be as dangerous as rope walking  in Nepal –

Check out the charts of – DECK, NFLX, GMCR, HLF, SCSS, etc. You think that it cant get uglier then this – Oh! you are so wrong.

Decker is going below $50, GMCR is going below $20, rest are also staring at slide if not doom. These all were once the darling of Wall Street.

Anyways I have owned quite a few of them myself and fortunately, most of the times I have been on the right side, the correct side.

Herbalife was my favourite for sometime –

Amazing quarterly profits and surprises – quarter after quarter, year after year. An excellent CANSLIM, IBD50 candidate. I  bought it after Feb 21st earnings beat at $64.3. It was a beautiful break out.

Rode it till 70s and started taking profits.

  1. Market started to slow down and
  2. all other leaders started going sideways.

so I took 60-70% profit off the table.

On April 30th , it delivered another stellar earning. It beat street by almost 10% but the guidance for Q3 was just inline with consensus.

Stock started correction, but I left a buy order for HLF at $68.5 untouched. These stocks tend to bounce off 50DMA and the report wasn’t as bad as Decker’s report. The stock purchase happened at $68.4. But in morning the tide seemed to have changed.

  1. Stock breached the 50 DMA on heavy volume and
  2. It ripped through the previous support.

Both these event signaled selling by institution had begun. So I bailed out. See a screenshot of actual account trades for 5/1/2012.

Moral of the story is – Never hope and never bring emotion in trading. There is no room for oops!

 

If you plan on entering HLF, I would suggest that you wait. I think HLF might go lower if $50 is breached. This is not the first time people have had negative opinion about HLF. It seems that they really dont have any product – just a marketing company. Moreover Mr. Einhorn does not have a dubious record.

Remember stock price is a speculation of what is going to happen in future. We have plenty of examples as mentioned above such as GMCR, NFLX, DECK,etc.

Dont just blindly follow IBD50. IBD50 is primarily a stock list with fundamentally good companies that are showing good RS (relative Strength). It will just take them one issue to drop the stock from the list but by that time damage will be done to your portfolio.

Lastly if market tells you something then we need to respect it.

There are plenty of companies, which are doing good such as ALLT, TXRH, GNC, WWWW, CRUS etc. Of couse we have oldies that are ready to BO – LULU, ALXN, ULTA, TSCO, UA, URI, etc.

Good Luck!

Portfolio As of 4/12/2012

Cash 40%.

Portfolio –

AAPL – 3%

PCLN- 4%

STX – 6%

WDC – 6%

HLF – 3%

SCSS – 4%

SXCI – 4%

QCOM – 6%

BLV – 3%

TLT – 3%

RWM – 3%

FFIV – 3%

F – 6%

APA – 6%

Sold last week –

CLR, WLL, ALLT, GNC, LNKD (I know!)

Reasons for the sale –

  1. Market broke 2 critical supports last week – 4 month old trendline and 50 DMA. Let’s wait till the market moves above 50 MA and makes new high, convincingly  (no double tops please:().
  2. The earnings season is underway. It’s better to reduce the high fliers by 50% to avoid losing profits.
  3. Quite a few breakouts in last couple of weeks have stalled, failed and occurred at below average volume – such as SWI, WDC, LVS, etc.
  4. Old adage – Sell in summer and go somewhere ( dont ask me where!.)

Lastly I added small positions of defensive stocks as mentioned earlier – BLV, TLT and RWM.

Week ahead –

  1. Stay defensive, preserve capital below the prior trading range. Above the range, expect a move back to and above the prior highs.
  2. Do not trade intraday, but rather focus on setups and keep an eye on earnings
  3. U.S. week ahead (Reuters)
  4. Next week’s trading radar (Minyanville)

Good Reads –

Earnings Season is here!

Welcome to the second earnings season of 2012. Alcoa kicked off the season with a big surprise that has stirred a mini rally in the commodity world.

There are a lot of companies that will be announcing their earnings in next few weeks. The bigger and more established stocks tend to be first to announce earnings. The smaller stocks announce earnings later in the season. 

Why do we really bother about earnings –

Back in 1968, accounting professors Ray Ball and Philip Brown famously showed that shares of companies that surpass consensus forecasts tend to perform better than the broad stock market; the phenomenon, which has been backed up by more recent studies, is known as post-earnings-announcement drift, or PEAD. FYI – The same Wall Street analysts who give buy, hold and sell advice on stocks make estimates of quarterly earnings, and pollsters gather those estimates to form a single consensus for each stock that analysts follow.

If the earnings is a major surprise compared to the expectation then the stocks react immediately to the news. Most of the time the stock will make 8 to 25% move on earnings day itself. The investors, in a perfectly efficient stock market, would think that the good news is priced in now and shares of forecast beaters would tend to perform in line with the market afterward. But hold on folks – the most interesting part of PEAD is the D. Shares indeed often leap on good earnings news, but afterward, they tend to gradually drift higher for months.

But not all the earnings surprise are dealt with equally – some companies are just market’s favorites – just kidding!. Nowadays, so many companies regularly beat their earnings forecasts that surprises aren’t always, well, surprising. Some of these companies set the bar low; others perform the accounting equivalent of searching the couch cushions for loose change just before the end of the quarter. Companies long ago got wise to the game, however.

Let’s leave that aside and figure out how to profit from the rigged system and make the best of the D. The gradual nature of PEAD suggests that even slow-poke traders can take advantage.

Ways to profit from profit –

1. Look for firms that beat forecasts by a lot rather than a little. Their results are likely driven by strong operations rather than accounting tweaks.

    • CSTR reported 4th quarter 2011 earnings of $1.00 per share on February 6, 2012. This beat the $0.64 consensus of the 17 analysts covering the company.
    • SCSS reported 4th quarter 2011 earnings of $0.27 per share on February 8, 2012. This beat the $0.22 consensus of the 9 analysts covering the company.
    • ALXN reported 4th quarter 2011 earnings of $0.41 per share on February 9, 2012. This beat the $0.34 consensus of the 19 analysts covering the company.
    • ASGN reported 4th quarter 2011 earnings of $0.20 per share on February 14, 2012. This beat the $0.16 consensus of the 4 analysts covering the company.
    • AAPL reported 1st quarter 2012 earnings of $13.87 per share on January 24, 2012. This beat the $10.16 consensus of the 48 analysts covering the company.

2. Look for companies that beat revenue forecasts at the same time they beat earnings forecasts. e.g. is RHT. Companies that top earnings estimates alone might have done so through cost-cutting, which is fine, but opportunities for cost-cutting can run out quickly. Companies that outperform on revenue, too, are likely benefiting from growth.

A 2006 study published in Financial Analysts Journal found that at any given point, the top 20 percent of companies ranked by recent upside earnings surprises alone went on to beat the market by three percentage points, on average, over the subsequent six months. The top 20 percent by upside revenue surprises beat the market by 2.6 percentage points. However, the top 20 percent ranked by a combination of earnings and revenue surprises beat the market by 5.3 percentage points over the following six months.

In fact a study slated for publication this year in the same academic journal: Watch investor reaction to the earnings reports. “If investors are truly surprised by an upside earnings announcement, the stock price should jump in the short-term,” explains author Haigang Zhou, a professor at Cleveland State University. Zhou and a colleague looked at returns from 1971 to 2009 and found that firms with upside earnings surprises followed by unusually high price gains over the next three days went on to beat the market by 5.7 percentage points over the subsequent 60 trading days.

When to buy them?

Let’s look at the charts of companies that deliver consistent earning’s surprises –

CSTR reported 4th quarter 2011 earnings of $1.00 per share on February 6, 2012. This beat the $0.64 consensus of the 17 analysts covering the company.

SCSS reported 4th quarter 2011 earnings of $0.27 per share on February 8, 2012. This beat the $0.22 consensus of the 9 analysts covering the company.

ALXN reported 4th quarter 2011 earnings of $0.41 per share on February 9, 2012. This beat the $0.34 consensus of the 19 analysts covering the company.

ASGN reported 4th quarter 2011 earnings of $0.20 per share on February 14, 2012. This beat the $0.16 consensus of the 4 analysts covering the company.

AAPL reported 1st quarter 2012 earnings of $13.87 per share on January 24, 2012. This beat the $10.16 consensus of the 48 analysts covering the company.

Earnings offer a lot of opportunities for profitable trading.Most big stock moves start with an earnings surprise. Behind every major multi month or multi month move there is an earnings story. PCLN, AAPL, LULU, SCSS, ULTA, ALXN,BWLD, and many other long-term movers have been primarily driven by their earnings trend. The earning season provides you with the ability to identify such stocks right at the start of their possible multi month move.

As explained above,  most of the time the stock will make 8 to 25% move on earnings day itself. But this is not the end of the opportunities unlike the common perception. The stocks continue to drift higher. In these stocks even if you react to earnings and enter after the earnings announcement, you still can catch bulk of the move.

One earnings surprise is typically  followed by many more earnings surprises. It is almost as if stock’s earnings have gained momentum. When you focus on first earnings acceleration there is good chance your stock will have more such earnings. So effort spent in researching stocks during earnings season can pay you off for many quarters. The structural factors which contribute to earnings acceleration do not disappear in one quarter. That is why earnings trends persist and price trends persist.

So during this earnings season pay attention to stocks that have significant earnings surprise or miss.

When you need to be careful about buying surprises –

There are periods when market goes sideways or goes into correction. During such periods even the best of the best earnings get beaten up. The fundamentals haven’t changed but market is not on your side. Just be patient. Good earnings tend to go sideways during correction.i.e. a correction of 20-25% max with a channel formation or even flag formation or consolidation. This holds good only during correction and not during recession.

So you see above that though the market corrected, the leaders hung in. In fact the market seems to have corrected more than AAPL of PCLN.

Bottomline –

In a good market don’t follow the herd mentality. Do exactly the opposite! George does it.