Thinning Out

No, I am not talking about your hairline, though some of you may relate.

I am talking about something I have been noticing as of late, which is that I am finding a plethora of set-ups, but not many of them are performing. The ones that do, don’t move for long. This tells me that momentum trading is thinning out in the near term. Don’t worry, I am not becoming a bear, but I am feeling cautious. I am prepared for a pull back in this market. Make no mistake, I am a still a major bull for 2011.

Today, I blew out of $RBCN, not because it was downgraded, because I found the downgrade to be without merit. The Piper Jaffray analyst lowered the multiple. He didn’t lower his estimates or speak with company management, so although he reduced his price target from $50 to $25, I didn’t feel this alone was a reason to give up on the name. I vowed to watch it for price action and initially it stayed on its trend line and above its base. Not much time passed before it broke down below the 50 day moving average and broke downward through its up trend line. This was my tell and I dropped it.

While I don’t like to trade a stock on another ticker in the sector, leds have been taking some heat lately. $CREE punted and affected $RBCN after hours. I made the right decision.

A name I am stalking in the near term is $UA. It has a nice base around 54.60 and is starting to break out above it’s ascending triangle. As you can see in the chart below, the MACD is breaking to the upside. Some of you may know that I spend my weekends shuttling my daughter to her ski race training and races. I have noticed that everyone on the ski mountains are wearing Under Armour. The ski shops are selling this brand as the best thermal products for skiers to stay warm during icy conditions. While I believe the ticker will be held back this week by options expiration and will not close above $60, the moment it breaks above its 52 week high of $60.14, the sky is the limit. I expect this company to be strong in the coming months.

Another set-up I will be watching closely is $ORCL.
For one thing, I like that they don’t report earnings until March and for another I like the upside in earnings in the sector. The chart below shows a breakout from a falling bullish wedge as well as momentum in buying volume.

Lastly, I am seeing a lot of set-ups in a number of real estate names, so I will be keeping my eye on this sector.

For now, good night and I hope to see some of you trading in 12631’s Pelican Stadium where we are flushing out the best trades available.

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One-two-three
One-two-three
One-two
And now that we’re dancing
Who cares if we ever stop

I am struggling to find the time to get everything done. I have the work of scanning charts and researching fundamentals, the work of fundraising commitments to my daughter’s school, the work of being a parent with a child on a ski team that requires much support and time on the road, the work of keeping my household in check and the work of writing this blog, which I want desperately to do. Never mind that I need to give SOME attention to thehusband, who while supportive, struggles to help with the parenting and household duties himself as he is committed to his own fairly new corporate job in finance and is bogged down by earnings season.

I need a wife!

That said, I would like to share with you the comings and goings of the past week in my portfolio. If you read my last post, you will note that I was dealing the resignation of AMD’s CEO. This was a stock I purchased on a bullish chart with a perfect cup and handle pattern that I also felt confident about fundamentally. I waited until the following morning to decide what to do with this position. As I watched it first thing yesterday morning, I saw it sell off with plenty of volume and decided that the best decision was to sell out and deal with the fundamentals later. As it turned out, it was a good thing I did. I actually made out with a profit and it quickly dropped below my entry point thereafter.

Meanwhile, I have moved on, as is my style. I do not like to wallow in what could have been. When I sell a stock, I move it to the bottom of my screen so that I don’t have to see what it does in the near future. This is not to say that I won’t revisit it later, but I see no point in spending time wondering if I made the right decision. Once I make a decision and act upon it, the right thing is to find the next set-up that will bank me some coin and thus I did.

With the help of chessNwine and Ragin Cajun, I have developed a skill for spotting set-ups on my own. I had long since made a vow to stop following traders blindly into stocks but I am now more confident about leading my own way.

As such, I have plowed into set-ups that have included $KLIC & $BSQR which I bought and sold for huge profits. This is not to say that every set up I find and get into works, but I am quick to get out of the ones that don’t and ride the ones that do. Today, I was profitable in a day trade with $CVD and while I managed to get out right at the peak toward the end of the day, I must admit that this was because of my firm motto to keep pharma and biotech on a very short leash if I get into them at all. It worked well.

I am sitting on some other wonderful gains in $OSK, $MSCC and $ALU and feel both proud and grateful that they worked well as several other subs in 12631 have begun following me into some of these names, which puts the pressure on.

While I find that I am following the great traders of this site into trades less and less, it is only because I am so busy finding and tracking my own, that it is difficult to pay attention to all the wonderful ideas that are being presented.  I will admit that I have taken on some names by other pro-traders, however, not the least of whom is the magnificent Sir Fly, although I did not do so blindly. I joined in the party in The PPT and 12631 in $HRBN, $RBCN, & $IMAX, because frankly, I could find no reason to skip these great set-ups when I saw them, even if I wasn’t the one who found them.

If you saw my quick snow post which I posted earlier in the day, you will note the headline that stated that we have snow in 49 of 50 states. I repeated this headline in 12631 to which Fly responded aptly that snow begets the need for rock salt and he is in $CMP. Indeed the ticker has reached $90 and is now also ripe for a $100 roll. As such, I have determined to stalk an entry tomorrow.

I will also share with you my biggest mistake of the day. If you have been reading my blogs, you will know that I recently made a brokerage change. I have now been trading with TradeKing since the beginning of the week. It takes time to get used to a new platform and much to my chagrin, in my newbie status with them, I made a mistake that was rather frustrating. I hopped back into $OXY for the $100 roll. I did so rather early and the stock pulled back from there. Since I had only bought a very small position and since I have confidence that it will go to $100, I decided to add more at the lower price. Unfortunately, I did not realize that the screen automatically put on a sell order. Apparently, when re-trading a ticker that is already in the port, the program assumes you wish to close it out, so instead of adding to my $OXY, I sold it for a loss. This really annoyed me and I found myself dealing with the brokerage, wasting way too much of my time but vowing never to make this mistake again. A supervisor was smart enough to offer me 5 free trades and a free upgrade to a more efficient platform.  The upgrade was not due only to my complaints, I am sure, but more in response to seeing just how much trading I do. I was relieved to see that they made the effort to keep my business. I have heard horror stories of the same nature from other traders about other platforms. I will spare you the details.

I leave you tonight with a little more insight into my life as a trader, a Mom, a fundraiser, a blogger and a wife who needs a wife. I love this work and I wouldn’t want it any other way. I will see many of you tomorrow in my home on the internet trading the whims of Mr. Market and I promise to get the series of simple fundamental posts finished and posted soon. Stay tuned but for tomorrow…we’ll be dancing.

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Just want to share the headline and this photo.

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I sit at the computer this evening on the heels of the resignation of $AMD‘s CEO. This was a trade I made last week on a combination of fundamentals and a bullish chart. It had everything going for it and was working its way up a steady trend line, just about the way I thought it would. Some of you followed me into this trade and while I don’t think all is lost, we have certainly lost some serious ground.

After a dual upgrade by Nomura and Morgan Stanley, the stock was up over 4% on the day to a close of $9.19. Nomura upgraded to Buy from Neutral and Morgan Stanley went to Equalweight from Overweight. A positive rating also came from Gleacher who reiterated its “Buy” with a $12 price target.

Then, unexpectedly, the CEO resigns. Argh! Suddenly the headline reads, “Goldman Sachs price target on $AMD $5”. Really?? Of course, the stock initially lost all it’s gains for the day. But in a new twist of fate, $AMD comes out after hours and says they expect revenue above guidance. So what do we know from all this? Nothing. We have no way of knowing why the CEO resigned any more than we could have predicted that it would happen.

This is something we have to be willing to accept as traders. No matter how proficient our due diligence, we cannot legally know the inner workings of a company if they do not tell us. Perhaps the CEO has an issue that has nothing to do with the performance of the company. No explanation has been given as yet, so we can only surmise. I am somewhat comforted by the fact the CFO was named the interim CEO. After all, who better to guide the company’s financials? If the CFO is willing to take over, he must have some confidence in the numbers.

Tomorrow I will watch diligently for price action. I do not know if I will sell it pre-market or give it a chance to explain itself as I will have to make that decision when the time comes. Since I pride myself on being nimble, I will be ready for either outcome.

I will post my decisions as I make them in both The PPT and 12631 for the benefit of those of you who may be interested.

See you tomorrow in the great soap opera that is Mr. Market and his minions.

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Before I start, I will point out that everyone has their own method and viewpoint for valuation.  The below is how I see it and while some pros may argue with me for my simplicity, strangely,  we always seem to arrive at the same place in the end.

That said, I have not decided if I will continue down this path. Most of you will either be way beyond this level or have no interest. I will wait to see if there is enough interest before I decide to continue.

You will get used to my old musical references eventually.

A reference to the song Do-Re-Mi from The Sound of Music:

Let’s start at the very beginning
A very good place to start
When you read you begin with
A-B-C
When you value you begin with
EPS
…or Earnings Per Share – in other words, a company’s net income divided by the number of shares outstanding. This is one important piece of information you will need to adequately value a company’s stock. You will also hear the term, Diluted EPS, which will take into account any convertibles or warrants outstanding. These are not included in the outstanding basic share count until converted or exercised whereupon they increase the basic share count and “dilute” earnings. You will find this information in the company’s most recent earnings reports.

Next we will use the EPS to determine the company’s multiple or P/E ratio; that is Price to Earnings or the stock price divided by EPS. This gives us an idea of what folks are willing to pay for a stock in relation to the company’s earnings. If a stock’s current share price is $20 and it’s EPS is $2, the company has a multiple or P/E of 10; that is 20/2=10.

Once you have these two pieces of the puzzle, you will want to check out the company’s most recent earnings report to predict future EPS, or EPS calculated on the next four quarters worth of earnings, and thus forward P/E based on the company’s guidance. This will give you an idea of the company’s expected growth rate. If the company guides earnings of $3 next year, this gives you a growth rate of 50% or a future stock price of $30. But let’s slow down for a moment and go back to our current price of $20 and divide that by our new EPS of $3. This gives us our forward P/E. 20/3=6.67. I mention this because when looking at the key statistics of a stock on Yahoo Finance or Zacks.com, one of the first things I like to look at is forward P/E vs. trailing P/E. If the forward P/E is lower than the trailing P/E, it’s a good bet that the stock is undervalued at it’s current price.

Be careful not to try to predict these too far out. More than a year is too much as any number of unpredictable catalysts can wreck your analysis. Your best bet is to update your numbers each quarter as the company releases earnings.

If you don’t already have a handle on this but would like to, I recommend a little homework. Choose a few stocks that you are watching and figure out the EPS, P/E and forward P/E. Go to the company’s website for a given stock and pull up the press release for the most recent earnings report. You will probably find it under Investor Relations (IR). Everything you will need to do this work is right there. Once you have done this with a few companies, you will not only have a better understanding of it, but you won’t feel like I am speaking a foreign language should we continue down this path in future posts.

I will try not to complicate matters too much as I bring in some other factors that can hinder our basic evaluation.

And as promised, following is a glossary of terms. Many of them we will not use, but it helps to know what they are when you hear them thrown about by the media.  I may update it as we go in case I use a term that I forgot to include.

EPS – Earnings per share

P/E –   Price to Earnings : stock price divided by the earnings per share. Also referred to as the multiple.

P/S – Price to Sales – Stock price divided by the sales per share

P/B – Price to Book – Stock price divided by the value of the company equity, or assets minus liabilities.

DCF – Discounted Cash Flow – Valuing a stock based on a company’s future cash flows.

Cash Flow is the movement of cash into or out of a business.

GM% – gross margin – gross profit divided by revenue or sales

EV – Enterprise Value – Market cap plus total debt minus total cash. The main purpose of which is to define the value of a company if someone were to purchase it. When a company buys another they inherit that company’s debt or cash. The debt lowers the value, and any cash on hand acts like an instant rebate.

EBITDA – Earnings before interest, taxes, depreciation and amortisation. The point is to isolate operational earnings, but folks have all sorts of ideas as to why they want to look at this value. Taxes and interest are not absolute so this allows looking at valuation without them. Depreciation and amortization are “non-cash charges” that some think mask the representation of cash flow on the income statement.

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I feel incredibly lucky to have come through today completely unscathed.  In an effort to document a potentially over-emotional day, I offer the below commentary. Let’s hope I can be so ebullient tomorrow.

I am up half a percent today despite a 75% cash position or perhaps because of it. Luck was certainly on my side today as my longs held up well.

After missing most of yeterday’s parabolic move, today I was rather relieved that the majority of my cash was tied up in a broker move. I had added $AMD yesterday morning based on a very bullish and liquid chart as well as an upgrade from Citi. I joined Chess and the gang in 12631 in $BZ & $BEXP as well. $AMD performed strongly today while $BZ stayed fairly flat.

$BEXP was a roller coaster ride. Fortunately, I hedged the oil play with $SCO this morning which was also a win for me. If you read my “not” oil post in the Peanut Gallery last week, you would know that I believe in the volatility of oil at the moment and recognize that it can go either way in January, so I was ready to be nimble and move with it in either direction. Many in 12631 sold $BEXP when it broke down, but I remained calm during it’s bottom partially because I was out running errands but I still check my positions regularly and saw it’s demize (sic). I could have sold it then, but I chose to wait it out. I was glad I did.  Recognizing, however, that it was no longer a high probability trade, as Chess confirmed, I sold it flat at the end of the day.

I added $CBAK & $CHOP this morning…happily as it turns out. My bank stocks & $MIPS pulled back today, but not enough to cry disaster.

I was also immensely happy to see such strength in $PWER.  This is my stubborn old man trade as many of you know. It seems to like this range now, which is good news for the stock because of its high volatility. This tells me that investors are getting comfortable with this price which means it now has a chance to go higher on better reports through the coming quarter.

My first fundamental post is almost ready. I must admit that I thought I would find it much easier to write a simplification of basic stock valuation. I pray that I don’t screw it up. Stay tuned.

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