WED. MAY. 4- Tracking Groups

I’ve witnessed literally countless times over the past few years the lack of preparation/knowledge for/of many traders much less an unwillingness to acknowledge basic trends. I know. I have been guilty of all of this countless times in the past. One of the top questions I am asked is: how you do track groups of stocks, how do you differentiate news flow, and how do you trade them in the context of relative strength/weakness? I want to try to address that. In my mind, it’s astoundingly simple, but I’ve never actually written it down. Let’s say for sake of argument that four of the major Chinese ADR’s that I follow are BIDU, SINA, SOHU, and YOKU. All of them are not exactly alike- I get it, but close enough. BIDU provides Chinese and Japanese language Internet search engines. SINA provides online media services in China. SOHU provides news, information, and communication services in China. YOKU is ostensibly a Chinese Internet video website. So, I’d place them in the general category of “Chinese technology companies.” Pretend that the Shanghai stock market overnight was down 2% with S&P and NASDAQ futures both down 1%. For ease of argument, amid that weak tape, BIDU is down 3%, SINA, and SOHU 2% with YOKU down 0.2% at 9:25AM ET when I notice this. I immediately question why YOKU is so strong and BIDU so weak. At that point, I look up the news on each as well as study the profile of each company to understand their general businesses. This takes me about one minute literally to do if not less in educating myself. From here, generally three things happen. In the first scenario, let’s say there is no news. Let’s also say that the market rallies off of the open. I don’t look to buy BIDU because it’s down more than the rest of the stocks. Rather, I buy YOKU through unchanged because it’s the strongest of all four. I do that because strength tends to beget strength. If groups of people came in heavily short YOKU and it gets positive on the day with the other Chinese ADR’s down, they tend to rush to cover. Furthermore, what if there is a reason for the moves but I don’t see it? Maybe there was an article in some arcane Chinese newspaper. I don’t know. I just know that the leader leads more in a strong market while the laggard will be among the first to fall in a weak market. In the other scenario, let’s say there is news. Pretend all four of the stocks were downgraded by Goldman Sachs. My strategy for purposes of relative strength/weakness is…exactly the same (with one slight corollary)! The corollary is that the news story makes the trade much more definitive as long as it’s universal, i.e. YOKU shaking off a downgrade is phenomenally bullish from an immediate-term vantage point. I don’t ask why it’s doing it…I just know it’s doing it and I‘ll buy it even heavier than in the earlier description.. And if BIDU, SINA, and SOHU were downgraded but YOKU wasn’t? I’d look to buy YOKU in a strong tape yet short BIDU (not SINA nor SOHU) if the market wore down more than in the first two scenarios. See a pattern much? So, the bottom line is that it’s inevitably best to buy strength in an upblip and short weakness in a down blip particularly if there is a news trigger involved.


Markets in Asia were down fairly sharply overnight with Hong Kong down 1.3% and Shanghai off 2.2%. The trend is the same in Europe although a bit more modest with Frankfurt down 0.3% although London is down to the tune of 0.9%. Gold and oil are both down a little with the dollar quiet. The MBA Mortgage Index, Challenger Job Cuts, and ADP have already come out (ADP notably a little weaker than expected). ISM Services (57.3) is due out at 10AM with Crude Inventories out at 10:30AM. For today, the markets will likely be quite choppy but with no real sense of direction. The focus will likely be on the earnings plays, the casinos, and the Chinese ADR’s following yesterday’s action with the RENN IPO.

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

EXLS- closed near a high after posting good earnings

ROG- closed near a high after posting good earnings

NEOP- positive NE03-09 study

GMCR- great earnings

JAZZ- decent earnings

INT- decent earnings

CBS- decent earnings

MYGN- decent earnings

CMCSA- decent earnings

FEIC- good earnings

GRMN- good earnings

ZBRA- decent earnings

VSEA- received $63/share cash bid from AMAT

RAH- received $86/share cash bid from CAG

SPPI- decent earnings

TRW- decent earnings




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

DNDN- closed near a low after posting poor earnings

EMR- closed near a low after posting poor earnings

ADM- closed near a low after posting poor earnings

MEE- closed near a low after posting poor earnings

SHLD- closed near a low after posting poor earnings

SOHU, SINA- among the Chinese ADR’s which closed near their lows

TZOO- closed near a low

VHC- closed near a low

TRMB- closed near a low

CVI- closed near a low

CSC- closed near a low after posting poor earnings

FST- closed near a low after posting poor earnings

FSLR- bad earnings

LVS- bad earnings

OPEN- decent earnings but management shake-up

MCK- poor earnings

OCZ- poor earnings

PLT- poor earnings

QSFT- bad earnings

THQI- poor earnings

BEXP- poor earnings

MOLX- poor earnings

MOTR- bad earnings

CENX- poor earnings

CNQR- poor earnings

OPLK- bad earnings

PWR- poor earnings

K- poor earnings

Earnings:

WED MAY 4 BEFORE

AGN AGU AOL

CHTR CLH DVN

FCN GRMN HCA

HNT ICE JOE

K LAMR MGM

MMC MMP PWR

RRD SPW TRW

TWX

WED MAY 4 AFTER

ACE ATML BMC

CECO CLR CVD

ENOC ERTS EXPD

GG GGC IPI

JDSU KIM LBTYA

LEAP MELI MET

MRX MUR NUVA

NWS ONXX PAA

PL PRU RIG

SWI THG TSO

VMC WFMI WFR

Epiphany Trading, LLC
www.epiphanytrading.com

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