Earnings Model Book January 29, 2014

Process in it's most basic form is continuing to do what you do as the market does what it does.  Three stocks popped up on my scans today and have been added to my watch list to monitor for the next three months.

EZPW

FSL

RFMD

Weekend Review 01/24/2104

The week ended with selling hitting the tape as 517 stocks in my universe were down 4%+ for the day.  The last such occurrence of this magnitude happened on 06/20 of last year.  Whether or not the ensuing action is similar remains to be seen, but caution is clearly warranted yet again.  The mere utterance of suggesting caution here reminds me of every day in 2013 that had a sell off on the major indexes above 2% only to see them rebound quickly and blur the fine line between risk awareness and risk aversion.

Over the past few years as I’ve honed my craft I’ve spent a considerable amount of time pondering and writing about market breadth and timing.  At times I’m unsure whether what I’ve written was from earnest or ignorance, and perhaps there isn’t much distinction between the two when it comes to trading, but warts and all I’ve externalized my process and have bread crumbs to follow.  What’s noteworthy is that in 2013 I was completely off base as the general market lacked cyclical behavior and often I would chastise my own analysis for not being more attuned to this, but in the least I’m in good company as the year 2013 befuddled many.

In hindsight 2013 appears to be an anomaly.  The slow and persistent grind up with corrections lasting mere days, yet just enough to get the claws extracted before the horns thrust upward befuddled and dumbfounded many.  I was fooled often and somewhat perplexed as many of the signals I use in my risk management tool box turned out to be nails and the market was the hammer.  What I had begun to practice the preceding years and learned to trust tested my belief, however, isn’t this exactly what the market does?

Two weeks back, Frank Zorilla posted the following on his blog: 2013 Conditioned Me To, and this got me thinking again about the concept of maximum adversity as described by Penfeld and viewable here: Maximum Adversity.   In circumspect, 2013 looks just like a market that is setting up the most participants for the most hurt as it has likely conditioned the most for it. 

In keeping with this spirit, one of the things I’ve been reflecting most upon is what did the market of 2013, or perhaps more precise late 2012 to current condition me.  Perhaps most disconcerting is that it did indeed cause me to lose faith in signals, especially this suggesting breadth was extended and the market in need of a pause.  In addition, when these signals arose I threw caution to the wind and failed to make proper adjustment to positions sizes and targets in a market that was extended.  In fact I thought that if anything the overheated nature

 would continue which brought misjudgment.

An example here is the signal I had for trading the VIX which began to show up a few weeks back, about the same time that my positions were beginning to show a lack of follow through, gap downs that lost profits, and stops getting tagged consistently. Of course this could just be recency bias and it remains to be seen if the the cycle required to profit from this signal consistently has returned to the market or not, but the simple fact is that signals are to be taken regardless of outcome if they have shown to have an edge over time.

2013 conditioned me not to follow bearish signals

To a strong degree risk awareness comes down to situational awareness and refining the nuances that each market period expresses and being able to adapt swiftly and bend like a branch, bow like the trunk, but never break.  In experiencing multiple market cycles and knowing that there will be periods that test one’s resolution and show one to be incorrect repeatedly, yet not being swayed in the moment.  realizing that over time there will be cycles and periods of pain.

Going into next week I have a couple of thoughts about what my plan of action will entail.  From a long perspective I see little point to expose myself under the current market conditions.  I’ve said this before and I’ll say it again with the acknowledgement that come Wednesday everything I believe today may be wrong.  Additionally I’ve recently expressed my views in a few tweets about my current perspective on China:

With the Chinese new years upcoming and their market being closed for and extended period I suspect all types of shenanigans to occur in these stocks, especially the potential of a hit piece from select short sellers.  This is my hypothesis until proven incorrect.  I am also focused upon biotech and shorting IBB by selling premium as I view this to be overextended and will be looking to trade around what I expect to be a down draft.  Other than this, I will continue to monitor earnings and curating a watch list of stocks that have the best reaction.

Earnings Model Book January 23, 2014

5 more stocks on the radar after earnings today.

GMT

LOGI

NTCT

QSII

SILC

SMCI, CKSW Model Book for Earnings 2014

Earnings season is beginning to ramp up so it's time to begin to build out the model book and watch list that I'll focus upon for the next 3 to 6 months. Each earnings season there tends to be a theme and nuance to the stocks that are breaking out and the pattern that unfolds thereafter. Two of the main characteristics that I will be looking for in my candidates is an 8% increase in price with the highest volume over a years period. One my early candidates is SMCI.

SMCI

SMCI meets my primary criteria. Additionally this earnings break out is to all time highs. The float is fairly small at ~34M of which 10% turned over today. Earnings were up 94% and sales 22% which is fairly solid.

A candidate that I took a small entry position in on the day of was CKSW which pre-announced its earnings. This met my 8%+ and YHV criteria and of note Soros has a position in this company. Earnings are still due to how this behaves before hand remains to be seen, but as of today it is getting close to breaking out to fresh highs with all time highs on the horizon as well.

CKSW

Beware of DOW

I rarely speak of the DOW because I rarely think of the DOW. It doesn't really exist to me because none of its components are in my trading universe. Ignoring it however is a mistake in my analysis because it is the granddaddy of all indexes. It is the one every John Doe Retail listening to the nightly news will hear about hitting a new all time high today. It is the index that will have them going to sleep tonight believing all is well in the market, but it's also the index that informs when something isn't quite right.

I consider a leading DOW as an indicator that my trading universe is lagging and since it is compromised mostly of small cap and momentum stocks it suggest that in the least it is currently a risk off environment or a period of distribution. With only 30 components a smaller amount of effort is required to misdirect the eye by pushing the needle and nudging the DOW to new highs while masking the relative weakness in the Russell and Nasdaq.

$INDU:$RUT

$INDU:$COMPQ

These are the times to be more alert and vigilant to a potential change of character in the market. A number of high fliers have been having some extreme volume sell-offs after earnings and many others are showing wide ranging intraday price movements indicating increased volatility which is a sign of distribution. Today TSLA, QUAD, MELI, and JCOM got to visit the woodshed and after hours it looks like SCTY, NDLS, and WFM will be joining them tomorrow morning. At this juncture market risk is beginning to increase and playing with this awareness is prudent speculation.

All is not foreboding however, as the leadership of tomorrow is taking shape today. Two that have been entered into my watch list are ECOM, and VOYA.

ECOM

VOYA

FadeBook?

FB

In October the entire float of Facebook turned over which coincided with the highest monthly volume in its trading history.  However, price closed below September's by 2 cents, and the open/close differential for October was only 26 cents.  Relating this to Wyckoff's third law of effort vs. result, the price/volume relationship is not in harmony on this time frame since price remained basically unchanged even though there appears to be a changing of the guard underway.  It's too early to say if this changing of the guard is from the strong to the weak or a shake out from the week to the strong, but the first price point to be hit, the October high of 54.83 or the October low of 45.26, may be the evidence required to make this call.

Weekend Review 11/01/2103

Had one sold in May and went away, one would have missed an 18% move in the Russel and Nasdaq, an 11% move in the SPX, and a 6% move in the DOW. The theme since May has been marginal high and shallow pullback which is most pronounced on a chart of the DOW, but can also bee seen with subtle variations across the other three as well.

$RUT

COMPQ

$SPX

$INDU

Part of the challenge of swing trading with market timing during this environment has been the sharp V-shaped rallies from the lows that swiftly surge breadth readings from one side of the pendulum to the other on a shorter time frame while keeping the longer term breadth trends extreme. There's a small window of opportunity to exploit from the pivot low of the correction to the pivot high, and if not already positioned much of the move is missed. The problem of waiting for the move to digest setting up tighter chart patterns is that by the time they break out the tendency to fade has been high due to the general market being extended with fewer stocks participating. One of the adjustments I've continued to make is moving away from swing trades on a shorter duration and switching to catalyst and earnings based trades with a longer holding period.   

Looking at the breadth numbers I follow a similar situation is arising yet again. The medium and longer term breadth readings for the most part are extended here, but the shorter term readings have begun to move towards the other end of the specturm.

This has been the character and nature of the market since May 2013. The last lengthy correction that wiped the breadth slate clean was September through November of last year before a linear and persistent up trend ensued. Perhaps there's a repeat and the recent October highs top ticked the market and a meaningful 5%-7% correction begins or perhaps this is just a shimmy shake to put some fear into a psychologically complacent and never ending bull story line and a spine for the bears before ripping to a marginal high yet again.

When I reflect upon the market of 2013 and what it has affirmed to me is to be alert to the harpy like lure that seduces traders to change their core methods and chase the market instead of allowing markets to come to them.  This market has forced me to rethink some of my (mis)conceptions about trading, entry/exit rules, vehicle selection and many other thoughts too numerous to lay out, however the one thing that I've held steadfastly to like a mast has been my core belief in momentum, that the market cycles from range contraction to expansion, and that there is an edge to be found here.  Some of my tactics have fluctuated but my overall strategic approach has not.