Barcelona Wins Champions League; VIX < 30 = Short; Obama Gives Alternative Energy a Boost

Where are our international readers at?  Right now I’m wearing my old Batistuta jersey I got from an Italian friend who swapped jerseys with me in an indoor match I played in Italy a few years ago.  It’s a pretty nasty ritual they do, but whatever, that’s their custom.  It’s washed, I promise.

If you live outside of the United States, then I’m sure you saw the game.  Great game!  If you live in the US, then you probably were watching the Laker game… great game too.  Sorry Manchester, I honestly thought Ronaldo should have scored at least 3 goals in the first 5 minutes of the game.  Total team came up with nil.  If Manu won, then Ronaldo is #1, but Messi claims title as best in the world and he showed it yesterday.  Little guy got skills.  FC Barcelona has been my favorite football club for a while, and I’m glad they knocked off Manchester United.  Finally.  Next up… Lakers!

Anyway back to stocks… before all these games aired, Obama was busy shaking his alternative-energy pom-poms.  I mean, I sat there watching this guy put lipstick all over this sector, while the underlying stocks were being bid up fast!  Now we know why some of those energy plays were in play yesterday.  YGE extended its near 20% gain with another 10% move. 

As for the rest of the market… well, I’ll say it again, VIX in the 20s is making it very difficult for stocks to extend its rally.  I’ve wrote that in Sunday’s report, so I hope you caught that.  I’ve been fading this tape, or keeping a careful eye on the tape whenever the VIX gets under 30.  So far this has worked quite well.  I’m not sure how much longer this will work, but I can see the VIX is trying to change direction.  Still waiting for that slow downward trend to be broken. 

Let’s continue to use that VIX < 30.  Look at these two charts, can you guess where I began fading and beefing up shorts on this intraday tape?

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You, my friend read iBankCoin daily, therefore it is a requirement that by the time you finish up and close your browser, your stock/financial/company IQ will be significantly higher than the inferior average person.  Yes, your frequent visits to iBC will equip you with the knowledge and swagger to dominate every conservation about stocks…

Friend: Hey man, I bought some IBM stock.

You: What a coincidence.  I gave a monkey a pencil and he circled that same stock too.

…You should be able to shout out the CEOs of products that your friends try to introduce you to….

Friend: Dude, have you seen Google Earth?  It’s way trippy man.  I think I can see my car!

You: Oh, you mean the product of Eric E. Schmidt who invested in Matthew O’Connell‘s  GeoEye-1 high-resolution commercial imaging satellite to send back images to Google’s mapping system?  I heard a little about.  In fact I installed it on my grandma’s BlackBerry Bold.  Can you even get Google Earth on your Razor?

And of course, by reading iBC you will [unfortunately] be able to wow that nerdy girl with hairy legs that sits in front of you in your discrete-mathematics class by telling her all the different companies that built each component of your iPhone.

Unpleasantly looking hairy woman: Hey, I like your iPhone.  Can I touch it?

You: My friend has a Razor, I think you should touch that instead.  And I’m not talking about a    Motorola.

Hot girl: Hey nice phone.  Can I touch it?

You: Sure!  Did you know BroadCom (BRCM) makes the components to support that touchscreen?  And a little company named SkyWorks (SWKS) handles the power amplification for the receiver?  It’s amazing stuff.  I love amazing stuff… So, Miss Amazing, tell me about your components.

Hot girl: Ew.  Get away from me you creepy nerd.

So anyway, that got me thinking about more popular products that people are using, but don’t know a thing about them.  I mean, people, your friends, your girlfriends, relatives… whatever … they all see a product, but they only look at them from a consumer’s point of view.  We here look at something, dissect it, and tell you all about that company’s revenues, shoddy accounting principles, CEOs, and market potential.  So let’s get to it and talk a little about Twitter and FaceBook, two products that are becoming household names.

Twitter vs FaceBook

So let me ask you this?  Who is the founder of Twitter?  If you say Howard Lindzon I will throw a pineapple at your face.  The answer is Jack Dorsey, some software engineer who did what every other software engineer wish they did- simply create a giant chatroom and SMS-messaging-of-the-internet technology.  See!  You’re smarter already.  In February 2009, Twitter ranked 3rd in social networking sites, trailing MySpace (2) and FaceBook (1).  I’m pretty sure they’re #1 now.  FaceBook was founded by Mark Zuckerberg… his last name is much cooler and easier to remember.  I wonder why.

Can They Be Profitable?

I do have a twitter (“thehawaiitrader”), but not a FaceBook, so maybe I’m biased here, but I think Twitter actually has a better chance at making revenue than FaceBook.  The problem with Twitter though is that it’s all just a game to many people.  But to me, within the game, I see Twitter accomplishing what Google’s Search Engines cannot do… accessing consumer demand on the spot!  That’s very valuable content, and if Google doesn’t understand that, they are behind the curve.  Google matches ads with a user’s search, but Twitter has the ability to match ads with user’s conversations, thoughts, and other streams of conscious.  Here are some examples…

• Let’s say you tweet, “I’m hungry”, you could get a number of replies from local restaurants with links to their latest deals, special of the day, buy-1-get-1 free kind of stuff.  There’s actually a lunch wagon in LA that serves Korean-Tacos, and they tweet the location of their wagon every night!  Crowds of people flock there.  It’s hilarious, but we’re all jealous.
• Let’s say you tweet, “Was Taken a good movie?”, then NFLX can send a response telling you when the movie is available and if you want to add it to your cue.
• Customer relations:  Every company in America will soon have their own Twitter account, with some PR girl in charge of sifting through tweets to find people talking about their products, then proceed to offer assistance.
• Content is probably the most valuable thing here.  If you use Twitter analytics you can track what people are talking about right now.  What’s on their minds, what they hate and what they want.  I’m sure companies, and even Google, could profit from that.

(this is the lunch-wagon that tweets their location!  sheesh.  Go Kogi-BBQ!)

What about FaceBook, can they be profitable?  I’m just not convinced with them.  It reminds me of Ringo, or MySpace.  In fact, it reminds me of a photo-album.  Posting pictures of families doesn’t tell a supplier much.  It’s not quite as ground-breaking as YouTube, so if any of the big boys were to go shopping, they’ll probably pick Twitter over FaceBook.  Then again, I could be wrong, it looks like there already is some shopping going on for the Face…  Digital Sky Technologies of Russia, offered about $200 million for some p-stock.  Russia?  What’s in Russia?  I thought all they have there is snow and snow and, more snow.  A bunch of profile pictures of fur-hoodies and ear-muffs.

Threats, Evil Threats

Both Twitter and FaceBook have the daunting task of staying as a perceived necessity, and not fade into the background as a trendy item of 2009.  This is real hard to do, I mean look at Napster.  Great product, but bad managing and PR, and AAPL just came along and stole their idea and gave the world iTunes… a monster sized cash cow for Steve.  That copy-cat threat exists strongly for FaceBook; Twitter has to worry about fraud, fake Twitter accounts (like “KanyeWest”), and spam.

With that said, if Twitter ever goes public, don’t expect it to be an instant home-run, but looks worth a try.  Shoot, I’d buy.  More importantly, I do think this social-media phenomenon we are experiencing is what will change the face of consumer activity drastically in the near future.  You can be sure companies everywhere are tuned to that.

Aloha!

http://twitter.com/thehawaiitrader

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First off… Internet Explorer is gay.

Second, I have to clean up all these pineapples on my yard, so its time to make a drink.  Try a “Surfer on Acid.”  It’s good for both crowds.  Bulls drink in celebration, bears drink in remorse.  

1/2 oz Jagermeister® herbal liqueur
1/2 oz Malibu® coconut rum
1/2 oz pineapple juice

Anyway that was a nice rally on the tech side.  It sent a lot of bears shorting that sector covering.  I had to cover energy plays.  Got squeezed out of YGE early, stopped out for a -6% loss from Friday’s swing, but played SOL for a daytrade hedge to keep things from getting out of hand.  Boy that was a nice squeeze in YGE!  I should have flipped the trade, especially seeing how much volume piled up throughout the day.  To illustrate, it felt like I was paddling out towards a huge wave that was about to break, but I couldn’t turn around in time to catch it.  I was looking out for sharks when I should have been looking at the waves.  In other words, I was in the right area, but I just missed it.  Yeah, I should have got aggressive in YGE from the morning.  

Making some changes here… with consumer confidence high again I am going back from bearish to neutral on retail.  It was a play on break of support, but we’ll have to revisit it later.  I’m still bullish on retailers that have a focus on game-changing technology or intuitive products.  For example, companies like NFLX, GMCR, are making a name of their own quietly.  I used to think ISRG would be one of those companies that would set the standard, but because America is broke now I’ll have to adjust their timing.  Keep an eye out for those companies!  And no, FaceBook is not one of them.  Speaking of FaceBook and social media, I have a question for you…

If Twitter had stocks, would you buy them?

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Yeah, you know what I’m talking about.  That’s for 2 players!  And yes, everyone knows that “Spread” is the best gun, especially against that giant eye.

Anyway, the video-game industry is one great place to trade stocks.  Everyone everywhere plays games.  It’s a way where we can break down barriers, overcome racial prejudice… because when you’re playing Halo 3 online, it doesn’t matter what color your skin is, you just want to make sure that dude in some other country has got your back.

Everyone plays video games, even up at the Royal Palace.  Queen Elizabeth just got a golden Wii.  I’m not kidding.  It’s a pure pimped-out gold plated Wii, something you’d expect maybe in Jay-Z’s, Rob Dyrdek’s, or Danny’s living room. [source]

But yeah, that’s the old lady’s Wii.  Hope she doesn’t break a hip playing Rock Band.

Anyway, a couple of gaming stocks are coming to life again, so let’s get these video-game stocks back on our radars, because there definitely is some action going on now and in the future.

First off, since we are talking about Wiis (that looks funny when you pluralize it) let’s check out Nintendo’s chart…

NTODY.pk …. poor thing!  With all that sales, this stock just doesn’t get any love.  This stock is ripe for a trade though, I mean look at that steep triangle.  It’s either break up or down big time.  If you can, try play a strangle.

Here’ a gaming company you probably never heard of, but has a very trade-able chart.  I picked it up from The PPT.  SGMS has a nice trend line going up, but it’s been pretty common in almost all beat-down stocks.  Short under the trend line, long over it.  Why short under it?  Because it might start looking like GME’s stock..

Next up is GameStop, which does not look good…

Look at that nasty volume on that sell-off.  The question is, was it warranted?  Disappointing results as stock gets knocked off below the trend-line.  This will be a target for bears, so watch the shorts come in on a re-test of the trend-line.

Next up is TTWO.  Which, is approaching a heavy resistance point.  I like this company, but not the stock.  TTWO has talent in the gaming industry, but the problem on the investors’ side is that the trade is just too crowded.  It kind of reminds me of XMSR and SIRI… interesting and unique products, but bad stock.  I like this as a short above 10.

But not all gaming stocks are ugly.  The best gaming-related stocks are…… in China!  Yup, China, our wonderful fortune-cookie play on the market.  Did anyone decipher the second fortune cookie btw?  My two favorites had great earnings.  SNDA and NTES.  All you need to know about SNDA is that they have the Massive-Multiplayer-Online gaming industry cornered.  You figure China has 90 billion people, so if they each spent one dollar playing World of Warcraft that’s $90,000,000,000 in revenue!  Work with me here…

Beeeee-you-ti-fullll!  SNDA’s chart slaps a threatening depression in the face.  The world needs video games apparently, more than it needs houses.

… yes, yes, yesssss.  I’m feeling evil looking at these charts.  Volume is great, momentum is great, and this stock just keeps breaking to the upside.  You may be a little late here, but the dips look worth buying.  NTES is an online community provider in China.  So naturally, it kicks Yahoo’s butt.

But don’t let all Chinese gaming companies fool you.  Some tap into the MMORPG (that stands for “massively multiplayer online role playing game” for you old folks) by providing expansion packs, which is like a me-too kind of company.  My favorite one to look at is WebZen (WZEN), which dangerously trades on America’s stock market.  It’s almost a ten-bagger lately. Lol…

So there you have it… a quick lesson on the gaming industry and some ideas on how to trade it.  I like going for strength in the sector, and shorting breakdowns.  Keep it simple. China’s GDP should be bigger than United States so if we’re going with volume here, then the gaming industry in China has a long way to grow.  Let’s go with this for now… short American gamers, long Chinese gamers.

And yes, I do have a Wii… not gold-plated, but still a great toy to high-jack a party.

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VIX jumps 10% today after dipping into the 20s earlier this week.  The game is changing.  Whenever the VIX gains volatility in itself, this usually leads to a bottoming or topping process in the broad market a few weeks later.   One more thing I would monitor are the inverse ETFs, like SRS and SKF .  Both of them trade near the lows of the year, so we are looking for a reversal with huge volume in them, which usually occurs before the market moves down. I bought puts in 2 strikes on FAS on Tuesday, just so that on my screen I can see how much people are willing to bid up and down the 3x ETFs.  I usually get a good sense of investor sentiment there.

What does this mean for today’s tape?  At this point it is not a good idea to add to longs, in fact you should be trimming them.  On the short side, you should not be getting aggressive just yet.  What is happening is just more news that is shaking out the weak and late longs.  In other words, the foundations are being shaken but the building has yet to fall.  What we do have is a ton of stocks, hundreds of them, that have rallied up to or slightly above their 200 MA (remember, for swing traders, the best stocks to short are the ones that have fallen under the 200 MA), and now the more bad news you have near this resistance point, the more easier it is for longs to rationalize a sale.  Not exactly the best reason to short this sell-off.

Instead of rushing into shorting everything, or trying to buy the dip, what you should be doing here is screening for the stocks that have rallied to the 200ma on low volume and wait for a confirmation drop below it.  Some stocks do breakout of that resistance area, but many will not.  Try to keep a list of these stocks that are getting shutdown at the 200ma; you should see an increase in volume as they sell-off.  It’s almost like a bear’s playground out there with all these ugly stocks rallying up to resistance, but you have to know how to play it.

On the other hand, what I do like about this whole relief-rally, is that even though everyone is looking at the stellar movement in the ugly stocks that have bounced, there actually has been some (very very few) nice and fresh new leaders that have risen from that capitulation period.  These stocks have small caps, so they are in their growth stages.  Money can be made shorting retarded tapes, but the real money comes from these smaller cap stocks that are born from the fire.  They are “the next” APPL, MSFT, GRMN, SBUX, GOOG.  When our economy gets everything fixed and this whole bank debacle becomes a memory, then these “the next” stocks will be the leaders of a “true rally.”  Until then, this is a traders market.  Trade accordingly.

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Fear, what fear?  It’s almost as if the stock market is saying, “My bad America…. world …. nothing happened.”

This is quite misleading though!…

Remember, the “numbers” that print on the VIX are not as important as the magnitude of a given move in a short period of time.  Fear and greed are short-term emotions so what matters most to us is when they are at conspicuous levels making a lot of noise, kind of like a lie-detector.  I keep referring to this as a “vix-spike”, and if you’ve studied the Vix, it could spike either way.  So, what do we have then with the VIX under 30?  Same thing we had when it got under 34- an overly complacent tape, but regardless, that doesn’t give us a clear signal of a major reversal because there hasn’t been any spikes down on the VIX to signal greed.  Sure, there’s a lot of dumb money getting sucked in, and a lot of laggards coming to life, but when you take a step back it’s not as surprising:   Seeing how severe we sold off in a matter of months does not surprise me too much to see the Dow rally over 2,000 points back.  Hey, we were once at 14,000 right?  Pull out a 5-year chart and you’ll see we only rallied out of capitulation levels when we broke down under 9,000 – 10,000 range. I want to call this an epic-rally, but the more I look at the multi-year chart of the indexes, it just looks like a giant melt-up… a rally brought by hesitation and lack of institutional backing.  But that doesn’t matter, what does matter is that these melt-ups are real bear-killers and although they are more common in ugly beat up individual stocks, it happened to an entire market.  For that reason, I have HUGE doubts on this rally.  If I ignore all news, and treat the entire market as an individual stock, then it has the same traits as a chart pattern of a company that had bad business practices and which creditors and investors bailed out sending the company’s stock price down.

Anyway, now that we are at medium-term extreme levels on the Vix, I am in search of a very valuable spike down on the Vix.  That would be a great spot to search for a major market reversal, and a much better spot to short aggressive, or move your portfolio more to the short side (like 70/30).  I’ve been keeping things at no more than half-size because the overhead gap is gigantic!  In theory, just above 10,000 is not impossible, although improbable in the near term.

One last thing, and it’s an important lesson for those shorting the market in shorter time frames.  If the VIX is trending down as market inches up, and there is no spiking action down, then you have a confirmed melt-up pattern.  This is a real bear-killing occurrence, so you better study it and not get caught heavily short in the middle of it.  If you are, then chances are you are trying to catch “the top”, which never works.  Look at what has happened in the past 20 days…

– In a matter of 20 days, the VIX “trickles down” more than 10 points!  This is bullish.  What would be bearish would be if the VIX drops 3 points one day, then 2 points the next, then 5 points a few days later… once again, its not so much the # on the VIX, but how fast it gets there … again, let me emphasize this, because fear and greed are relatively short-term emotions and can easily taint historical data.

So far, all of my shorts are still good thanks to averaging in and out using the VIX (I used <34 as 1st entry point to start shorting)… ZNH, OSTK; while keeping with “what works” by staying long GMCR since the 30s and 50s, and bailing out casino plays like FLWS when it didn’t immediately take off (momentum trading basics).   Other than that, I’ve just been keeping an eye out for everyone else keeping tabs on sectors that are currently leading (ags, education, medical, farms), and which are acting strange (gold, oil, retail).  Once again, using the VIX 20s rule, I’m downgrading gold based on market sentiments (fading not gold itself, but the safe-haven trade).  Finally, remember as volatility drops, money is being made on swing set-ups, not day-trade set-ups.  Trade accordingly!

Sorry for being verbose.  It’s been a while since I used the VIX to explain the broad market, and since everyone on TV is cheerleading the fact that it’s now under 30, it’s probably a good time to make sure we know the real story the VIX is telling.

Aloha!
-gio-

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