FRI. APR. 24- What A Pair?

Abbott and Costello. Laverne and Shirley. Batman and Robin. If you cannot tell, the theme for today’s piece is pairs. Pairs trading was very much in vogue during the late 1980’s in particular. The concept of ‘pairs trading’ was started by a quantitative analyst from Morgan Stanley named Gerald Bamberger in the late 1980’s. Bamberger discovered that certain equities- particular in the same sector if they were direct competitors- tended to correlate in their day-to-day price movements. For instance, KO and PEP and F and GM are but two famous pairs. To this day, pairs trading is often done with the thought that if a spread between two particular equities gets too wide, the spread comes in, i.e. if PEP rallies, KO should rally as well. The problem for day traders, however, is two-fold. First, there can be a lot of noise intra-day. Spreads can widen and come in intra-day seemingly randomly so it makes it hard to game the system. But the second issue is of more import- one must pick the right pairs. For instance, if one traded Reebok and Nike some time ago (or DELL and IBM most recently), seemingly equal competitors can diverge rapidly, i.e. Nike became the dominant shoe entity while IBM dwarfed DELL. Which brings me to my point: many traders recently have been trading GS and MS together along with the banks as a whole together. And much more often than not, if one is rallying, some of the others in the sectors do not necessarily catch up. This is because of the aforementioned two points: we may well be witnessing – namely the weak are separating from the strong in the financial sector and things are vacillating wildly intra-day. Namely, just because GS is rallying does not mean MS will and vice versa; indeed, MS posted poor earnings on Wednesday and traded down much of the day while GS actually rallied. Bottom line: do not overthink things. Keep up with the macro of course, but know that buying a competitor blindly when day trading does not always fellow common sense logic.

Markets in Asia were lightly mixed overnight with Tokyo down 1% and Hong Kong up fractionally. Markets were stronger in Europe with prices up 1% to 2% across the board. State-side, MSFT and AMZN are helping to lead a charge in techs while other sectors are following in lockstop albeit less so in relative terms. With it 70 degrees and sunny in New York tonight, look for a much slower day as traders file out early. But, we should have a marginally higher open. From there, there seems to be a ceiling in the short-term amid worries about the stress test results yet nobody wants to sell anything either in case the results are good. Ergo, we get stuck and that is probably what happens today…a tight range-bound trading market with individual stocks totally utterly the way to go. The bias is to the upside unless shown otherwise, but watch for the 2PM announcement about how the test was conducted as well as any leaks about stress test news.


Watch list:

04242009Eriklist.zip

Reiterating-
Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea.
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-



Good- The following stocks have good news and/or a strong technical pattern

AMZN- good earnings

MSFT- in-line earnings, revenue miss, but stock rallied after-hours

MHK- positive earnings guidance

AXP- good earnings

BNI- good earnings

JNPR- good earnings

CAKE- great earnings

WDC- good earnings

ALGN- good earnings

STAR- good earnings

RVBD- good earnings

PMCS- great earnings

DV- good earnings

NTY- good earnings

CF- good earnings

SYNA- good earnings

FIG- closed on high of day

COF- closed near high of day

CPHD- good earnings

BUCY- good earnings

SKT- good earnings

LVS- mentioned on “Fast Money” last night

PH- mentioned positively on “Mad Money” last night

OFG- good earnings

F- good earnings

HON- good earnings

SLB- good earnings

WL- good earnings





Bad-The following stocks have bad news and/or a weak technical pattern

NFLX- bad earnings guidance

SPWRA- weak earnings guidance

AMGN- poor earnings

WFR- weak earnings

IBKR- terrible earnings

CNW- bad earnings

DECK- warned on its outlook

EZPW- poor earnings

SWKS- bad earnings

ORI- closed near low of day

SD- doing a share offering at 7.60

MMM- bad earnings

ACI- bad earnings

Earnings:

FRI APR 24 BEFORE
ACI CYH F
HON IDXX IPCR
ITT KMT KTC
MMM PNK SLB

SWK WL XRX




Good luck today.

Epiphany Trading, LLC

www.epiphanytrading.com

Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President