As a bit of a follow-up to Thursday’s blog on ‘trading unchanged’ along with the fact I’ve constantly peppered the concept of the ‘relative strength’ play the last few weeks in the blog. In fact, I wrote a piece about it on October 16, 2009 for those interested:
http://epiphanytrading.blogspot.com/search?q=it%27s+all+relative
However, what I’ve discussed a bit orally and in the chat room is something I’ve never noted in this space. Namely, what happens if the S&P is down 10, the Dow is down 100, the NASDAQ is down 20, and AMZN opened at 131 (up 5 on strong earnings) and flopped toward unchanged? There are two plays here. The most obvious is that if the stock gets toward unchanged, hovers out for half an hour in a narrow range above unchanged, and the market breaks, you want to short as much of the stock as you can stomach. The reason for this is that if the stock couldn’t hold up on the good news and instead switches to negative, it freaks people out who were convinced the stock would hold and indeed it flops rapidly. The second trade though is the cornerstone of this post: what happens if it tumbles toward unchanged rapidly and there is a bit of a pause in the market? Well, in a fast momentum market such as the one we’ve experienced in the last week, you want to go against the grain and buy it. Why? Because it is a strong stock relative to the market. Thus, in any rally, anybody who is short will rush to cover in certain pockets. On Friday, from 1:35-1:45, AMZN fell from 127.84 to 126.38 (with unchanged being 126.05); the Dow fell 35 points during this same time period. In the next 10 minutes, the Dow rallied 15 points…yet AMZN retraced almost all the ground to 127.58 (while the Dow was still down net 20)! Is this easy? No. It requires precise timing. But it is certainly a guide for a market such as this. From a broader standpoint, realize that the stocks that are defying market weakness will tend to perform the best during periods of market strength (and vice versa). Don’t get chopped up trying to pick bottoms for sure…but by the same token, if you see a market turning upward, don’t buy what is weak because the weak will lag…buy what is strong because the strong are the ones that really run (and vice versa). Furthermore, you can’t just blindly short a stock like AMZN in thinking it will get negative just because the market is selling off because you can destroy a day going against the relative strength/weakness particularly when a stock is near the unchanged demarcation on the trading session. Bottom line: it is just as important to know what not to do as it is to know what to do. And in this specific instance, realize the power of how a stock is doing relative to a rapidly moving market because for the most part, the relatively strong stocks tend to stay relatively strong and the relatively weak stocks tend to stay relatively weak all day.
Markets in Asia were up slightly overnight with Tokyo up 0.1% and Hong Kong 0.7%. In Europe, the bourses are up about ¼% on average. Oil and gold are both up a bit with the dollar mixed. Futures state-side are up on XOM’s number, but there are a number of divergences with AAPL and AMZN both negative in the very early-going. Look for a very choppy day today with some violent moves both days in individual stocks if not in the broader market. Focus on relative strength (big cap tech relatively weak, steels relatively strong early for instance) and cut down on size a bit.
Reiterating-
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 specified.
If 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
ARTG, CY- on “Mad Money” on Friday night, but announced stock offering and earnings this morning
CEPH- buying Mepha Group for $590 million; sees deal immediately accretive to earnings
XOM- great earnings
Bad-The following stocks have bad news and/or a weak technical pattern
AAPL, AMZN- closed near lows after trading substantially higher on Friday
IOC- continued its recent plunge in closing near a low
AVY- closed near a low after posting bad earnings
ACI, BTU- closed near lows after ACI announced terrible earnings Friday morning
X- continued its horrible week in closing near a low
ANR, FCX- among the resources and metals stocks closing near their lows
NUVA- reversed in closing near a low after announcing earnings guidance
THRX- closed near a low after FDA refused to review company’s Telavancin until company completed a response to a query to the agency
WL- closed near a low after posting earnings
NEU- closed near a low after posting earnings
HRZ- closed near a low after posting earnings
YTEC- closed near a low after posting horrid earnings
JOYG, BUCY- closed near their lows
GS- continued its recent plunge in closing just off of a low
POT, MON- closed near their lows in a weak fertilizer group
AMZN- to sell e-books at prices it considers too high as it wants to sell MacMillan’s line; thus, some of the prices on its products will go up significantly
SOHU- poor earnings
HEW- poor earnings
CYOU- lukewarm earnings
Earnings:
MON FEB 1 BEFORE
APC CYOU GCI
HEW HUM NI
ONB SOHU SYY
XOM
MON FEB 1 AFTER
CCK HOLX MNKD
PCL RCII TUP
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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