Dear Earnings Edge Member,
So far this earnings season, we've focused on big-name doublers, from Altria to U.S. Steel, that give you ease of access.
Today I've got a tiny tech wunderkind. It is irresistible because it gives me the chance to use on one of my favorite strategies: Play the Fade.
Follow my instructions to the letter this morning, and you could do even better than a double in the next 3 days.
After yesterday's monster rally of 889 points, investors are hopping around on one foot like kids waiting for the pool to open. And, and, and Pappa Ben's gonna cut rates! Weee!
This is a market where you sell the rallies, my friend. Big days like yesterday are invariably followed by lower highs as the smart money locks up its profits and moves on.
Into a Play the Fade market, then, comes this classic Play the Fade tech stock.
HOW WE PROFIT
This tiny tech company is a beneficiary of the 3G phone movement and a leader in the miniaturization of electronics for gadgets.
The stock has been hammered, even by the market's standards: down 50% in 8 weeks, sliding relentlessly down its 20-day moving average line.
Then (sound the bugle) last night the company announced it had won a case against its top competitor in a patent dispute. The stock shot up 20% in after-hours trading and opened today nearly 3 points above Tuesday's close of $12.91.
AND the company reports earnings tomorrow!
On a day that the market was up 10%, this one was up half a percent … before the patent ruling hit the wire. I'm not impressed.
LOOK AT THE FUNDAMENTALS
The entire semiconductor industry looks like a picnic after a hurricane. This particular company has missed earnings 4 out of the last 11 times at bat. In the quarter ending July, it reported ZERO earnings, down from 5 cents for the May quarter. Yech.
AND THE DUMB MONEY?
You guessed it. It is true love. The ratio of bearish puts to bullish calls is at a 52-week low. It almost hit this love-fest level twice before, in April and August. Both times, the doting was rewarded with a sharp stick in the eye -- and losses of 25% - 43%.
PLAY THE FADE THIS MORNING
The good news is already priced in. This $12 stock is set for rapid 15% decline -- or more. Let's bag a quick double with a bearish trade as earnings fail to follow through.
I've put all the details you need to bag this double in this morning's Winning Edge, including extra analysis of analyst sentiment and support-resistance levels. Get it all here.
Act fast to Play the Fade -- we'll bag a double by Friday, I believe.
Keep your Edge!
Chris Johnson & Jon Lewis
Dear Fellow Winning Edge Trader,
OUTLOOK: Still Running With the Bulls
Persistent is one word that describes this market right now, as the S&P 500 and other major indices remain able to grind higher through the first two weeks of New Year trading. The fact that the news cycle fromEuropehas been lighter than normal has helped the underpinnings of this rally grow stronger, but the real work will start next week when earnings season truly starts.
This week, mixed earnings news and stronger than expected economic data have helped to keep investors’ interests going as the anticipation for the upcoming deluge of earnings reports grows. From our perspective, the market is going to have to work harder to disappoint investors than it will to impress. This is the kind of market in which, more often than not, it pays to be invested..
The year ended with some signs of promise for the contrarians, as all signs are pointing to a market that has exhausted investor’s nerves, resulting in a huge stockpile of cash that is now sitting on the sidelines.
For example, according to the Investment Company Institute (ICI), investors redeemed more than $100 billion in assets from stock mutual funds for the year of 2011. Compared to the $37.4 billion that was removed from funds in 2011, this is a display of the degree to which investors have been moving away from stocks. Historically, the best time to buy stocks has been when everyone else is selling. The surge in redemptions from stock mutual funds suggests that the crowd did exactly that. If this is true, improvements in the economy, both domestic and global, have the potential to shift the momentum from selling to buying as the New Year continues.
Similarly, we see a large percentage of analysts are calling for the market to remain flat through 2012, despite the better than average seasonality from the presidential election cycle and some fairly strong improvements in the fundamental picture here at home. This is the recipe for a much better than average year for the markets, as we all know the best time to be bullish on stocks is when everyone else is expecting little to nothing.
The latest short interest data were released today, and they are flashing some serious buy signals at the stock and sector level. We’ve been talking about how we favor the Regional Banks (KRE) over the large cap Financials (XLF) for months as the outlook grew much brighter for these nimble companies. The latest short interest data show that the short sellers are making bets against the regional banks, despite the fact that these companies are leading the market’s charge higher.
According to our Component Weighted ETF Short Interest ratio, the regional banks are the most shorted of the widely traded ETFs, with a weighted short interest ratio of 11.5. This is huge, especially given the fact that this level of shorts is higher than the micro- and small-cap sectors of the market. These shorts will get flushed out of these bearish bets, creating a short squeeze situation for the regionals. We continue to love the sector, and have a number of companies within the group that we’re fond of for intermediate-term positions. We’ll cover in more detail on our blog at www.thedailystocksblog.com.
Sectors that we’ve warned you to stay away from include technology, large financials and energy. Not surprisingly, these are the ETFs that are at the bottom of the Weighted Short Interest Ratio list, meaning that the short sellers are relatively bullish on these stocks. Continue to stay away from these sectors for now, as they remain market laggards and show no sign of pessimistic investor activity.
The market is flashing a lot of signals as earnings season continues. We’re maintaining our bullish outlook, as the market is still approaching a Golden Cross technical pattern. This would provide a very bullish intermediate-term signal for stocks, and it would also do well for flushing the investors sitting in their money market funds out of cash and back into stocks. We all know that the best time to be long the market is right before everyone else starts buying. Given the current picture in the market, that time may be now.
EVENTS: Next Week, Earnings Season Gets Rolling
This week, the rubber will really meet the road when it comes to earnings, as we’ll see about 10% of the S&P 500 Index report their quarterly earnings results. The brunt of the earnings activity will focus on the financials, because about half of the SPDR Financial Select Sector Fund ETF (XLF) will report earnings and about 30% of the SPDR KBW Regional Banking ETF (KRE) will report their results. Of course, as indicated in the outlook, I love the fact that the KRE will see a large percentage of it’s companies announce earnings. This may be the catalyst needed to get the growing population of short sellers to start closing their positions.
The table below displays the ETFs that have 20 percent or more of their component companies reporting results this week.
As discussed in the market update, we’re still expecting the market to move higher. This is reflected in the fact that we continue to hold calls only. We’ve been closing out winning positions in the portfolio for the last two weeks as a result.
Let’s take a quick look at our open positions.
Tyson Foods (TSN) Jan 19 Call (TSN 120121C00019000) – Tyson continues to wrestle with its 50-day moving average, right at the stock’s $20 mark. The same level is significant due to the large amount of put open interest at that strike ($20). For this reason, we’ll continue to hold the TSN calls with day-to-day evaluation.
This position is now a HOLD.
O’Reilly Automotive (ORLY) Jan 80 Call (ORLY 120121C00080000) – ORLY erased the 44% loss from last week by rallying right back to its recent highs. The position now holds a slightly negative return, but is showing signs that we’ll see a plus sign in front of the return shortly. We’ll continue to hold the calls as the stock looks to break above its $82 level.
This position is a HOLD.
Aggressive Portfolio –
There are currently no open aggressive positions.
Remember to keep those comments and questions coming in. We want to know what you’re thinking and what you want, rather than what we think you want, for the Winning Edgeservice.
So drop us a line at firstname.lastname@example.org. We appreciate it.
Also, check out our latest research and market observations at thedailystocksblog.com. And you can now follow us on Twitter - @Chris_JRG and @Jon_JRG.
Hope to hear from you soon.
Chris Johnson & Jon Lewis
The Winning Edge
While earnings expectations may feel as though they've been reined in, much of our quantified data on sectors and individual stocks suggests otherwise.
We've examined the trading landscape and developed an outlook for Q2 earnings and how we will profit from the coming earnings season. We'll send you the exact trades to make and the specific moves to take, but to see what's on our radar, click on the link to read:
We may be caught in one of the worst bear markets in history. But all bear markets, just like all bull markets, have one thing in common: They eventually come to an end.
So, when will the market rebound? Although no one can give us a specific time frame, there are four stages the market goes through before it can change course. Check our our four-part series on these stages: