Articles from Sep 2006

Dow 36000 or Dow 6800


Isn't it ironic that the bears who called for Dow 6800 by end of the year are out denouncing the author of Dow 36000. Both set of people are spectacularly wrong as of now. Both set of people made outrageous predictions based on some fancy theories. A good example of the pot calling the kettle black.

The mass media loves these kind of predictions and people who make such predictions.They are a constant present on the media everyday pouting out such extreme scenarios. It is good strategy to market books, newsletters and advisory services. The oldest trick in the mass media business is to make outrageous predictions. It gets attention. Paris Hilton knows it well. More outrageous her behaviour the more she gets attention. As a trader it is much better to stay away from such wild attention grabbing predictions.

My first earnings trade


This company has now been bought over by Bureau Veritas.Over the weekend I will write about how serendipity lead to me to finding this company at the right time. Till then like most others I was also lost in the technical analysis jungle.

RIMM (RESEARCH IN MOTION LIMITED )

RIMM is up 20% or so today morning post earning. Last night there was lot of excitement about RIMM earning. Day traders and option traders made some killings. Now even though I trade earnings based breakout, RIMM is not the kind of stock I am excited about. In fact I think those chasing RIMM here may be in for lot of pain.

On large caps earnings is anticipated. If you see RIMM price performance since August, it had already started moving in anticipation of good earnings. So is today's earning such a big surprise. Analyst are busy raising estimates and price target but I will let this pass. It is large cap and has over 186 million shares outstanding. That makes it unlikely to make a triple digit move from here in short period.

Not every earning surprise is worth playing. Only a handful of earning surprises in any quarters have legs.

Waiting for Godot



This will go down as one of the most torturous breaking of all time high by Dow Jones Index. The market seems to be in a state of suspension in anticipation of earning season. Volatility in individual stocks should pick up as the earning season hits in full force in next couple of weeks.

The earning season and pre announcement season is a good season . It is a season of opportunity for all kinds of traders be it day traders, swing traders or long term traders. Future prospects of companies get reevaluated during this season. Those who surprise or beat sometime find a good rally for six to 8 weeks. Sometime they launch multi month, multi year rallies. Those who disappoint find the market severely punishing them . Many of them go in to multi month or multi year funk.

Earning momentum and price momentum as strategies have statistical edge and much of growth investing is about identifying such opportunities. Most people believe that market are too efficient and things like these do not work. It is very good thing that people believe in that myth. That creates opportunities for those who can understand and operationalise strategies based on earnings.

During the course of the day I will talk about how I discovered earnings based strategies and about my first trade based on it . I bought the stock on earnings day and it tripled in next two months. It was in the midst of severe bear market. So stay tuned.

TRT -Trio-Tech Int'l anatomy of a trade


TRT -Trio-Tech Int'l

Now this is a trade I just closed when it spiked up by 1.80 today. I got in to this micro cap on Friday . It had blowout earnings and gapped up, I entered the moment I saw the earnings. I alluded to this stock in my post on Friday.
Noticing some good moves in telecommunication. China related stocks are also on fire. A good earning play is up over 40 % today


Look at the earnings.
Trio-Tech Int'l TRT 6/30/06 9,500.0 61.0% 705.0 1037.1% 0.22 0.02

It had a blowout quarter. Extremely small float and completely neglected stock. That is a potential mix for a blowout move. Every earning season there are plays like this. You have to be very quick in spotting them and getting in. When they move, they really move big time.

My bread and butter play is these kind of earnings plays. The earning season is a season of opportunity and I am looking forward to finding few more plays like these. If you focus on earning season you will find completely neglected companies with great earnings and then the market discovers them and they make significant moves. Over the last 5 years this is one strategy I have mastered and fine tuned in microscopic detail. Bulk of my profit come from such earnings related breakouts.

Another way to find these kind of plays is by using one of the ideas in the book I talked about last week- How Charts Can Help You in the Stock Market by William L. Jiler. The original genesis for this idea came from one of the chapters ( Chapter 6) in the book. While working on developing a scan for it I discovered most of these stocks make these move because of earnings.

Oil stocks may not be the best shorts now

A reader has asked my opinion on shorting oil stocks after this bounce. In my opinion they may not offer a good risk reward at this stage. The ideal time to short was a quarter ago. Now many are down more than 25% from their quarter ago level. Most likely they will spend lot of time in range. Alternative energy plays, ethanol, solar energy might be a better play probably on the short side.

A Case for Inflation Targets in the United States and Japan

The American Enterprise Institute for Public Policy Research has a free monthly newsletter about Economic Policy. It always has a good macro view on the economy. Because it is monthly, it does not suffer from the problem of trying to interpret every release of economic data. As a result you get a very good perspective.

The central banks of the world’s two largest economies are both worried but hopeful about inflation. The Federal Reserve is afraid inflation will increase, but hopes it will decrease. The Bank of Japan is afraid it will decrease, but hopes it will increase. Ironically, the Bank of Japan says it would like to tighten monetary policy more, while the Fed says it would not.

Clearly, the world’s leading central banks are struggling with what is happening to prices in their respective countries, what they should say about it, and, more importantly, what they should do about it. Inflation targeting may be a desirable approach to addressing these questions.

Keeping inflation low and stable is the primary goal of the world’s central banks. Virtually all have been strongly influenced by the “Great Moderation” whereby low and stable inflation rates have been associated with higher rates of growth and better overall economic performance. The basic reason for this association is the fact that high and volatile inflation rates are disruptive and empirically linked to poorer economic performance.

Amaranth is amongst top 10 queries on Google

The top ten queries on Google are always dominated by celebrities and sports figures.Scantily clad females have the highest probability of making it to this list. So it is a surprise to find a hedge fund making it to this list. Hedge funds have gone mainstream. Too bad there is no hedge fund ETF!

Gaining Search Queries: Week Ending September 25, 2006
1. elin nordegren
2. ryder cup
3. deal or no deal
4. america's next top model
5. tmx elmo

6. Kari Ann Peniche
7. grey's anatomy
8. talk like a pirate day
9. rachael ray
10. amaranth

Furious sector rotation

Sometime reading the market is tricky. One of the prominent feature of the current market in last few weeks is the furious sector rotation. Money has flowed out of sectors like commodities and energy in to retail, restaurants, technology and software. Every day a new sector is attracting attention. In recent weeks the transport and biotechnology are finding a bid. Lot of money flow is concentrated in the large cap. Many stocks after breaking out have just hung on to gains but not gone in to rally modes.

Now this kind of scenario creates a bit of dilemma. Large caps lead in the later part of the bull move. But at the same time speculative sectors like biotechnology and technology are also attracting buying. So the message of the market is mixed. It possibly points to a protracted sideways move.

A range bound market presents special challenge as many breakouts do not go very far off either on upside or downside. Such challenging markets are the playground for certain kind of strategies. While we would like to have a market making a strong move in either direction, one has to adopt to the given condition.

I continue to find opportunities on both long and short side, but many of them are giving lesser profit than what I like to get. Over the years I have learned that these kind of market environment are cyclical and bad times are followed by good times. Such market environment is when you need good risk management strategy. I am using time stops on lot of my positions in this environment. So if a stock is not making an expected move in a desired time frame, I am out of it. I am also aggressively moving stops to protect profits.

Note: Some of you have requested that Friday is not a good day for the chat on "developing a good market feel". So I am planning to re-schedule the online chat sometime next week. If you are interested please send an email and I will let you know about the time and other details.

Bulls may get ambushed once quarter ends

Over the years I have learned to be wary of strength after 8-12 weeks move. For short term tactical swing trades it always helps to have your strategy aligned with the anticipated market direction. Mid July is when many of the stocks stabilised after a brief and vicious correction. Since then the DOW, S&P and NASDAQ have creeped higher. Along the way there were many good opportunities for trades lasting months to weeks.

It always helps to buy on negative sentiments. In July the sentiment was extreme. Now many of the thesis's on which the July correction precipitated have proven not to be necessarily true. Now there is a gradual realisation that things are not as bad as proclaimed by the bears predicting doom.

The home builders is a classic tale of how you should discount news and look at the tape to make your decision. Everyday the bears come with more dire predictions for home building stocks, but the stocks have not budged and in fact rallied. A clear lesson in how trader should think differently from TV pundits, analyst, and newsletter writers. That is the kind of case study one should write down in a trading journal for future reference. You will find same things repeating in other sectors again during your trading lifetime.

The energy sector offers another good lesson on how to think like a contrarian and trader. This time it is on a bullish side. There was not even one analyst who was predicting a drop in oil prices a quarter ago. Now they are falling over each other to explain why oil is down.

Now we are at an interesting juncture. There is the quarter end, there is an upcoming earning season and there is the last quarter of year with the tax related issues for many institutional investors as well as individual traders. Analysing them correctly is the key to anticipating the likely market direction. Many times the quarter end strength is deceptive. Somewhere waiting is an ambush. So I have trimmed my positions and will start positioning for shorts sometime soon. At the same time I am willing to go long some selective earnings/momentum plays.

Whether you are a Macro trader or a micro trader, developing a skill in anticipating the possible market direction can pay rich dividends. Many of you have asked how to develop the skill of anticipating the market direction. I have replied to many of these emails. I am planning to schedule a online chat sometime on Friday with some of those who sent emails. If you are interested please send an email and I will let you know about the time and other details.

Don't trade based on this analysis. This might be completely wrong.

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