Churning the Noise

Many of you read my post entitled “Jack be Nimble” in the Peanut Gallery. At first the post seemed to be about analyzing the price of oil until I eventually stated that my point was to wait for price action. Some of you teased me for churning up the very noise I suggested that we ignore, but I feel there is a place for that noise. Some of you prefer to make only short term trades based on price action alone and feel overwhelmed by large amounts of data and I respect that completely.

Personally, I enjoy looking at both styles of stock trading in order to get a bigger picture. I have a value investor/fundamentals background and in one of my other posts I also mentioned that what I had noticed was that even if my analysis for valuation for a stock was correct, I still didn’t feel I had a strong sense of where to get in or out of a stock; I would guess at a bottom, worse I would often sit on a stock and ride it down into a grotto of losses waiting for it to return because I was sure I had the value right.

Once I started getting the idea for getting on and riding a trend-line and looking for triangles, my trades became more efficient, but I was still strictly value investing, which has it’s limitations.
When I decided to add in shorter term trades based solely on technicals, my ability to bank coin grew exponentially. And so my current style is to do a combination of both. I use technical charting to know when to get in and out of a position and I use valuations to decide how long I am willing to stay in a position. This is not to say that I value every stock I get into to. There is no point in spending extra time to value a stock that I am in just for a breakout.  I won’t stay in a stock for very long unless I am comfortable with the valuation. I do find that I will be more cautious about a stock whose value I am concerned about, but is presenting a bullish chart. If I get in, I do so with a short leash.

As I am now using Worden StockFinder to screen for bullish patterns and have learned to train my eye to spot the patterns, I have become pretty good at stock picking. In addition I have learned to look for buying volume to let me know when it is time to pile in. I am currently studying the candlestick patterns in order to take my technical analysis to the next level, but I digress as I have learned much of this from chessNwine and Ragin Cajun and must give absolute props to the amazing trading room and educational tools that have been developed in 12631 by Fly, Chess, RC, and Jeremy.

For this reason, I will focus my posts here on sharing with you the decisions I make when I make them, but I will also do a series of posts I will call, “Fundamentals for Dumb-Me”. While we have excellent value investors who post and blog on Ibankcoin, they tend to give their analysis rather than teach valuation skills.

There were some excellent posts last year by @robert that discussed stock valuation, but these were fairly complicated. I must give full props to @robert for his pieces are truly educational and exceptionally well written if not a bit advanced for our purposes. If you wish to take the time to read his posts and do the homework that would be required to fully understand them, you would acquire a good buy-side view of fundamentals. By no means will I suggest that you will be able to do full fundamental analysis from my simplified versions, as there are too many pieces to the puzzle but I hope to give you some ideas on how to look at the bigger picture. Basically I intend to take some portions of what @robert taught us last year and simplify it.

My first post in this series will include a glossary of terms as it will not behoove you to have to look up each set of initials while trying to understand their context. Certainly there are plenty of sites on the internet where you can find these, buy my goal is to put it all here for you in one place.
Please feel free to ask for any specifics as we go along. Happy trading and learning.

First of all I would like to thank you, my readership, for reading, and commenting on my posts and ultimately voting me into the position of King of the Peanut Gallery. It has been a great pleasure sharing what I have learned and truly rewarding to hear from so many of you that you are finding my ideas of some value.

I look forward to sharing my work with you over the next month.  I find that my own knowledge and trading improves when I articulate it and answer your questions. This is a great exercise in focus for me, so I will enjoy learning with and from all of you.

My portfolio consists of two parts, my long term port and my short term port. While my long term port tends to remain invested, my short term port has a varying cash position. As of yesterday, my short term port is now 75% cash. I went to a large cash position for two reasons (other than taking profits). One is the uncertainty of the market action for the start of 2011. Those of you who know me, know that I am bullish with regards to 2011, but I recognize that we can easily see a correction and I prefer to wait for the price action before deciding how to allocate that cash, but I have another reason as well. I am moving cash to a new broker, separating my long term holds from my short term holds by brokerage.

As this will take a few days, my trading will be limited for the first week of January, but don’t worry, I still have lots of ideas and set-ups that I will share with you when the time comes.

Meanwhile, I will let you know that my current holdings consist of the following.

In my long term port : $VZ, $FTR, $NZT (yes I know there is a theme), $WWE & $PWER.

Stocks that I am watching for entry to add to my long term port for 2011 include $GNK and $MU.

In my short term port, I make a combination of day and swing trades. These can last to anywhere from a few minutes to a few months. I tend to allocate very small positions initially so that I can be nimble and liquid at all times.  My short term port includes : $TRLG, $F, $MIPS, $RF, $HAFC, $ITUB, $NARA. Again you will notice a theme in small banks coming into 2011, but certainly this is not the first place you have heard this. Many of us took The Fly’s directive to heart when he suggested we look at small banks; I still like the set-ups in these and I will be watching the price action closely in the coming days.

I will leave it there for now. I am excited about the coming month and a lucrative 2011.

And a very Happy New Year to all !

As the year comes to an end, I wanted to share some thoughts on couple of my current positions and lessons I learnt from them:

Qwest Communications (Q)

I have had this position for a month that has gained substantially not to mention a sweet 5% dividend yield. Q has been the second highest performing stock in S&P for 2010. However, lately its various valuation ratios are gradually reaching saturation levels. It is now getting to the point of being a bit too rich for my taste, at least for the short term. The company seems to have a very effective leadership with an equally solid presence in its industry. Also, recently the management announced that the company reduced its debt by about $3.3 Billion since February. May not be good for bond holders, but a strong point for equity investors. Overall, I feel that Q continues to be a good bet for long term investors. But from a short term perspective, I am playing it safe. I shall be out of this position by next week, one way or the other. May think of re-entering on pullback.

Akamai (AKAM)

I suffered a lot on this position. Big lessons learnt:

1. Should not have doubled down on a losing position:

   I bought the first batch on December 1^st. On December 9^th, management didn’t update its Q4 guidance starting the intermediate downtrend that is still continuing. I thought there was way too much fear and bought more. On December 21^st, I doubled down further to average down my purchase price still believing that AKAM would come up as the fund managers chase a 2010 top stock in December. Both tactics backfired. The management making such a negative decision played a far more important role than the performance chasing strategy. Besides, the short float for the stock was very thin. So AKAM could not have gone up solely on its own.

2. Bet on growth but look for cheaper competitors:

   Prior to this one, I have had trades with AKAM, all of which were profitable. My thesis for the last two years has been the gross underestimation of the growth in content delivery services. This thesis worked in my favor for the better part of the period. However, I clearly neglected to be mindful of the emerging competition. More importantly, AKAM’s valuations compared to LLNW for instance, are inferior. If I believe in the explosive growth of the sector, I should have bet on just that. Instead I ignored the cheaper and less risky means to bet on my thesis and continued with my infatuation with AKAM.

AKAM still has a good long term growth story but with meaningful competition around, its current stock price is no longer that attractive for short term. My bet is if AKAM goes below 35, it could become an attractive buy out candidate. For now, I am going to get out of a majorly losing position in the first week of January, hopefully with some dead cat bounce.

I have a few more positions I am going to review and see what I want to do with them in 2011 including starting with some fresh stock picks. I am hoping to share those with you. Today, I bought some calls in SPY expecting the market to be higher in the first week of January. As always, I continue to post my trades close to real time on Twitter.

Good luck and a prosperous 2011 to all of you,

StocksRider

Thought I should tell you this. The stock market is open for the full day on December 31^st.

Here is the holiday schedule for next year from NYSE.

New Years’ Day (January 1) in 2011 falls on a Saturday. The rules of the applicable exchanges state that when a holiday falls on a Saturday, we observe the preceding Friday unless the Friday is the end of a monthly or yearly accounting period. In this case, Friday, December 31, 2010 is the end of both a monthly and yearly accounting period; therefore the exchanges will be open that day and the following Monday.

When it comes to consensus, the obviously smart thing to do is try to be a step ahead of it. There are times when it is feasible to guess what the herd is doing and take a contrarian stance, albeit with a bit of practice and experience. There are times when it is not.

Let us look at some of the main sentiment indicators:

• AAII Investor Sentiment Survey: This is at a record high with 63.3% bulls. You have to go back all the way to 2004 to see a bullish percent greater than the current reading. So for 2010, we are in unchartered territories. But it is possible for markets to continue going higher in spite of multiple recent readings of above 50%. Here are my two big reasons:
  • Judging by the studies and mutual fund inflows, the number of retail investors appears to have substantially decreased in 2009 and 2010. So it is quite possible that this indicator may have lost some of its predictive value.
  • Even if this indicator was considered a solid means to show where the market sentiment largely lies, it won’t necessarily signal a top. Remember the crowd is wrong at the change of a trend. It is usually right in the middle of a trend. Is the trend changing?
• Investors Intelligence Bull/Bear Consensus: This is where about 140 financial newsletter writers give their feedback on where the market is heading. This too is standing at a record high over 55. Between the AAII survey and this one, I give more credence to the Investors Intelligence survey in order to follow a contrarian strategy. This is clearly nearing its top in terms of bullish sentiment. Slightly concerning.
• CBOE Equity Put/Call Ratio: Getting close to its lows of the year sitting at 0.53. Many folks are pointing out this low value and signaling another reason why the top is here. However, the indicator is nowhere near how low it can go before signaling a possible top. Case in point – 2010 has seen this ratio dip below 0.4 in mid-April for a brief time. In other words, should the momentum continue, the ratio can continue to dip further.

There are several other indicators like the FC Market Sentiment, Market Vane consensus, Consensus Index, The Total Equity Put/call, ISEE sentiment index, etc. I will spare you the details because they are telling more of the same (i.e., most of them are nearing their extremes). Of course we all know and sometimes painfully so, that these indicators can remain in extreme conditions for longer time than you and I can remain solvent. While the top cannot be called solely based on the current status of these indicators, the fact that many of them are near the end of their ranges, should be paid heed to, especially for an intermediate to long term trader. For short term trading, the equation looks different as in – keep backing the truck!

Current Positions

I am still long the market but with some selective hedges. Most of the below positions are not new compared to the last time I posted them on the blog. You can follow me on twitter where I post close to real time trades.

Long – Q, NFLX, NTAP, CREE, AKAM

Short – WFR, ALY, TINY

StocksRider

Few days ago, Reed Hastings posted his views at Alphaville website responding directly to the most famous NFLX short seller and the official Grinch for 2010 Christmas, Whitney Tilson. The skeptics ripped Mr. Hastings apart for writing on a blog site largely meant for traders, and being so overly concerned about the stock prices. They said it was not a respectable and good use of a CEO’s time. The supporters on the other hand hailed it as a refreshing and honest move on part of a company’s CEO who had to come out and say something. The loyalists also defended him by saying he was after all talking about his company in as strategic manner as possible.

It is true that Reed did try to explain his company’s strategy and address fears of direct competition to a certain extent. But let me not mince any words and take off the masks of cult believers by saying that at the end of the day he was most certainly worried about the company’s stock price. And yet, I think it was a brilliant move for a very simple reason that was surprisingly not covered much by either skeptics or supporters.

The biggest thing Netflix now needs is infusion of fresh capital. And it seems to be chiefly so for three reasons – (1) International expansion, (2) More content acquisition, and (2) Fend off competition by maintaining its razor sharp focus on what it does best – content streaming subscription and user experience.

Where do you think Netflix is going to get its infusion from? Yes genius, from its very own stock price. If Netflix was to make a secondary offering, would it help if its stock price was already tanking to the south of $150? Heck no. When the secondary offering itself most often dilutes the price of a stock, it is obviously helpful for a company to do one when its stock is at a peak and not tanking downwards.

So I submit that Reed Hastings’ primary reason to write was to defend the stock price of the company and that in turn may have largely to do with a possible capital raising venture next year. Of course it did serve the secondary purpose of defending the company on strategic terms.

As a side note, when you have two executives coming out in a short interval of 2 weeks or so warning not to short the stock, you have to pay heed. Even if it is out of desperation, here is the thing about Silicon Valley. Unlike Wall Street, Silicon Valley execs rarely stick their neck so far out unless they are incredibly confident of what they are asserting. These execs have their integrity and reputation at stake here. And nothing can be riskier in Silicon Valley.

Current Strategy on NFLX

Long time readers know I have been long NFLX since $153. Right now valuations are lofty. But the huge short float provides a major floor to the stock price. Until the short ratio dips, I will continue to remain long. I will sell or go short when the short float becomes shallower. I will go back long NFLX after the stock dilutes in case of a secondary offering or a major sell off.

In other words, strategy now is Short term Bullish (2-3 weeks), Intermediate term Bearish (3-8 weeks), Long term Bullish (8+ weeks). Things can change and so will I and so will my posts and twitters.

Merry Christmas,

StocksRider