Give a Short the Good Olde College Try

Good Evening and Happy Mother’s Day. I believe the short thesis I’ve been tossing around here is coming to a head this week. I’ve marked up some weekly charts of the DJIA, S&P 500, Nasdaq, and Russell 2000 since the start of this bull market in 2009. Given the price action over the past couple of weeks, the mid-February rally across the indices has cooled into a consolidation. Maybe it’s stalling. Given the (contained) pullback, I’m stalking price action in the indices to monitor a potential move back up – a move I’d like to attempt to short. If you’ve read my posts recently, I think May has the potential to turn quite negative.

I’ll be back tomorrow with my favorite short ideas. I’m also looking for some longs/hideouts/rotational beneficiaries to keep myself honest and avoid leaning too far in one direction.

Stay nimble.

As the dollar has weakened over the past few weeks OA, Ragin, and Lord Fly point out (iBankCoin is really all you need),  gold has gone into hyperdrive and many of the miners have gone parabolic. After an increasingly large green candle sprint into Friday’s euphoric squeeze, supply has sharply rejected price on Monday (Fly pointed out an interesting divergence between the dollar and commodities) and Tuesday, and miners have been smacked down. But, here’s the thing about getting rocked after a momentum-inducing inflated sense of invincible gorilla-self run: after you get leveled for the first time, you get up in disbelief, stunned, dizzied, and frantically make a second push to recapture that imperturbable, primal dominance. Am I really conflating gibbon and hominid aggression with parabolic price action? Isn’t that some sort of violation of a cognitive bias paraded by the mendacious angel self-help culture? When it comes to parabolic short setups, typically the first drop is tough to catch, unless you scale into the short on the spikes (which really only sometimes works) and mitigate risk via a mental stop (the squeeze up can blitz the shit out of you, induce agida (extra meatballs), etc…). But after the first drop (I covered my $GDXJ short yesterday), typically there is a shortable snapback to the highs that you can catch to scale into for a short. When price marches back up (if you’re real quick, you can play this move up), observe the speed of the price rejection as it approaches prior highs. The move can put in a lower high or equal high, but the speed of the rejection is crucial to watch. If price takes out the prior high, observe the reaction to price exploration above. This will dictate whether we squeeze higher or if the run is over in the short term. Whatever you do, avoid shorting a consolidation at the highs; chances are, buyers are supporting price and another pop is coming. In all, this is an imperfect science, but if you stay with this price action hawking approach, you may be able to snag some quick, handsomely rewarding gains on the ultimate failed move higher and subsequent retracement. I will be closely monitoring this price action for the rest of this week and next.

Here’s the thing that complicates this setup in the intermediate term. The Greenlight annual letter posits gold as a safe haven in this stage of global monetary policy experimentation (Einhorn is long) and explicit drive to hit inflation targets. If ‘the storm’ is coming, will rotational capital continue to flow into gold/miners, and bid prices skyward)? Haven’t gold/miners rallied along with the market since mid-February? When does this classical correlation kick back in? What gives? In the short term, these are some very overextended charts, and signs of weakness (green-to-red price action, failed retest at the highs, lower high, sharp supply dump, etc…) should be monitored for a potential short entry. Below are some of my favorites (above 10 bucks). If there are moves back to the highs, I’ll be hawking. You could, of course, go nose clamming for $DUST/$JDST. One note, $GOLD reported dismal earnings and is gapping down below a rising channel.

• $ABX
• $NEM
• $GG
• $RGLD
• $GDXJ

Bulls getting drubbed today, as Fly reiterated the calendar shift and subsequent manifestation of his many, many warnings. I’ve written about the tepid May outlook here and here, and have looked into some lower beta parking spaces and a potential rotation into the airlines to ride out this storm (was early to this rotation, today looks good, could be a place to hideout). Again, the indices have covered a lot of ground since mid-February, and with the laundry list of bear theses floating around, some credence should be warranted to those perspectives. In the cyclicality of this multi-year bull run, bears need moments to be engaged and feel winship, if only fleeting. Many headline risks have been floated about casually and viscerally throughout this run. The running trend has been: insert fear-driven, sell-inducing, bear-parading thesis here __________________. Fear needs to be packaged and stocked on aisles for market participants to gobble up. It’s not a war if there’s only casualties on one side.

As the week progresses, I think this weakness will turn into a bounce of sorts that should be your spot to snag a short. Russell leading down today is not a good sign. Use a chart and do some price level voodoo (I do!). May should kick out the hedgies to the tune of a ‘good riddance’, go away and stay away. I doubt they will be bailed out with a May run-up to sell into before departing for the Hamptons, especially given their ineptitude and underperformance; should be a salt-in-wound rubout. With presidential election implication chicanery, June rate discussion (hike unlikely), Brexit referendum, and any number of bear thesis to be rolled and avalanched at market participants, the road should be bumpy. By mid-June through the summer, we should get for some great trading conditions (sign-up for OA’s Boot Camp to arm yourself with a plan for rotation/picking stocks), just enough to screw with the Wall Street vacationers, induce FOMO, and lead into a bumpy Fall in time for the elections. Again, this is merely a mental exercise exploring a possible map scribbled in the schoolyard with chalk on the stray hypodermic needle riddled throwback pavements of Brooklyn (home).

In the meantime, I’ve moved into $AAPL on Friday, $WFM yesterday (impending earnings this week, not sure if I’m holding) based on a discussion of some of the potential movers in this space I shared yesterday, $TEVA (multi-week support, earnings next week), and in a similar space to the great call by Raul on $MNK and some $UAL (already long $DAL) today. I’m still holding $TLT, and am getting poleaxed in solar (long $SPWR, $VSLR added 2^nd half today, $SUNEQ), some long term housing stocks (long $TOL and $BZH), and of course the penile-guillotine $TWTR. I’m about 40% cash. (I share all of my swing/positions trades realtime on stocktwits/twitter. See the running trades here.)

Stay nimble.

After running my weekend scans, I noticed a number setups in the supermarket and food space are trading at significant reference points making for easy to manage trades (sans those reporting earnings) in either direction. The following tickers are worth watchlisting. Some are scheduled to report earnings this week, and some are carrying high short floats. I’ve marked up the charts of the tickers listed below for your perusal.

Supermarkets: $WFM (earnings 5/4 AMC), $CASY, $SFM (earnings 5/5 BMO), $KR, $SVU (earnings last week, traded down)

Food: $HAIN (earnings 5/4 BMO), $CALM, $CORE (earnings 5/10 BMO), $UNFI, $SPTN, $SYY (reports 5/2 BMO)

Short Float (~10% and over): $WFM, $SFM, $HAIN, $CALM

Stay nimble.

Weakness and volatility unseen over the past month materialized in the indices yesterday. Since last week, I’ve been looking for the markets to lazily drift higher over the Passover holiday (with some opportunities in burritos) before shifting into a mode of distribution and subsequent May backfilling peppered with minor volatility spikes (nothing severe like August 2015 or January/February 2016). I’ve outlined this here and here.  I’ve also been looking for bifurcation in risk-on/risk-off assets regarding the DJIA/S&P vs. Nasdaq/Russell. Up until yesterday, the Russell has been a clear leader over the past week, before finally surfacing chinks in the armor to the retreating tune of over 1%. Even so, small bombs continue to pop on a daily basis, maybe the last fluttering and  twittering (no @jack) poop (extra @jack) rising to the top before we top in the intermediate term. The Nasdaq has faired the worst of the pack, while the DJIA/S&P look to be backing off their ascent to test ATH.

Within this context, I’ve been contemplating where to allocate capital in my swing/position trade account for the upcoming month. My initial thinking has led me to favor lower beta versus higher beta, but it’s too early to fully commit to this line of thinking with the Russell’s recent resiliency. In this account, I currently sit in ~50% cash and hold a mixed bag of positions emblematic of various risk appetites. (Note: Some positions in this account have overstayed their welcome and can be disguised as longer term holds, but they are really of the shameful bagholder variety. $TWTR from ~26, $LNG from ~45, $BZH from ~13, $TOL from ~34, and $SUNEQ from ~1.50.  Go ahead, point and laugh). Coming off a solid stretch of wins see spreadsheet, this week has been nothing short of a bumpy ride, and I can sense a shift in this market. Currently, I’m long some $TLT, short a mid-size oil player via $CLR, short $BETR, and long $SPWR (whacked yesterday off $FSLR earnings, although chart isn’t broken yet). I picked up a $DAL long on Wednesday that’s nearing my stop. I got stopped out of a $QLYS long Tuesday before it subsequently bounced back into its consolidation and ripped higher yesterday (before fading into the close). I contemplated these cybersecurity stocks as a potential tell on market direction, and whether this group will rollover or be the beneficiary of rotational capital going forward. And, I was stopped out of an $AMBA long on Wednesday, before it ripped back into its range by Wednesday’s close, and yesterday took out Wednesday’s high before fading into yesterday’s close. To sum this week up for me in one word: ‘frustration.’ To sum it up in one phrase: “something feels different.”

But I’m actively taking an inventory of market changes as they unfold: price action in various sectors/groups, volatility, the frequency with which breakdowns/breakouts stick or fail which translates into range-bound action versus trending, and how price action, news flow, and the narrative context of this market plays mass market engagement psychology and dictates positioning of bulls and bears. For me, this approach helps me stay nimble to pass in and out of technically manageable setups that may benefit from rotational capital. Throughout this multi-year bull run, the best setups have come from staying ahead of this rotational curve. Over the years, OA has demonstrated his genius at this craft, which is why you need his Boot Camp. I’ll be there.

Surveying more unsexy setups of the lower beta variety trading at price levels that are easy to manage, particularly focusing on those with earnings already out of the way (trying to avoid some of the portfolio bombs going off recently), has led me to the airlines. Oil and oil stocks have been on a rampage of late, but what does that mean for the airlines? Is the longstanding oppositional binary correlation between oil and the airlines still in play? Correlation coefficients can be generated and graphed ad nauseum, but suffice to say, historical correlations only matter when the narrative calls for it – to reinforce a dominant mode for market engagement that acts as a proxy for a reference point OR to screw with the minds of market participants. I prefer to look at the price action and psychology. $DAL, $UAL, and $AAL have already reported earnings, and are sitting at some interesting technical levels that are easy to manage. The airlines etf $JETS is getting 2x its average volume today (trains thin). Keep them on your radar.

Disclosure: Long $DAL @43.64

DJIA/S&P are grinding in a holding pattern right below ATH, with the Nasdaq/Russell in consolidation mode further off ATH. $TLT (long since mid 128s) continues to dump back into support, indicating a lack of appetite for safety. The standout, as OA pointed out earlier today is the $IWM, which is in rip-mode, indicating preference for risk. All the indices have covered quite a bit of ground since mid-February, and the action here will indicate whether giddiness forms among bulls during this light volume holiday week for a bust out frothfest, or if a shift into distribution and flight to safety materializes. Market participants are staring down some big earnings as well. Will $TWTR earnings finally meet the narrative so many shareholders (myself included) have bought into? Will $FB earnings (tomorrow after close) maintain the growth story and justify the premium? Other notable earnings this week include $AAPL (today after close), $FSLR (tomorrow after close), $CELG (Thursday before open), $AMZN, $GILD, $AMGN, $BIDU, $LNKD (Thursday after close), among many others. If a good chunk of the fan favorites can beat and trade up after earnings, how might that effect bullish sentiment and market direction? Do bulls continue to laugh in the face of negative news flow (tinder is needed to stoke the flames) and bid up the indices for a blow off or breakout move? Fear and greed index is sporting a not-too extreme 71, and Barron’s Investor Sentiment readings don’t scream euphoria either. What to do?

I ran some scans for boring, slower moving, lower beta stocks to park at least a portion of my swing/position trade account during this period of relative uncertainty, the month of May. Here are some of the intriguing technical setups I’ve found below (some are weekly, others are daily charts). At some point, the negative news flow will matter, whether it was tech overvaluations/earnings disasters in March/April/May 2014, China in August 2015, or the Fed Dot Plot/Global Growth Story Decimation/Extreme Oil Pain earlier this year. The market is rotational, and the stocks below, which have been marking time/consolidating or ignored may be the beneficiaries of that rotational capital. Unsexy plays include: $COST $TEVA $NKE $QCOM $CTSH.

Stay nimble.

I was always of the mindset that before Obama leaves office, a nice bow needed to be tied on the housing sector (topped in 2006). Remember, it’s all about the retrospective narrative that will be attached to the president that picked up the pieces after what media historians deem the worst presidential terms in office in history (Dubya), littered with epic fails the media packaged and relayed to Americans – sure to be written into the history books – culminating in the bon voyage 2008 market collapse.  The Great Recession, implication of the banks (assigned faces of evil manipulators), the destruction of the housing market (assigned faces of innocent manipulate-ees), etc… is still impressed in the minds of many. But wait, Obama the savior, en route to his final months in office has restitched the very fabric of America, threading (in)tolerance throughout society, improving employment and job prospects through robust economic foresight (hard to type this without laughing), and the return of a strong stock market, having recovered the gains lost since 2008 and then some to march the indices to all time highs.

Of course I’m being facetious, but the narrative that is scripted during and post- events needs to fit the promulgation of a vested American identity on which subjects within a society stake their perceptions, thoughts, and behaviors; it introduces an element of predictability into our matrix. See Baudrilliard regarding simulacrum and Althusser regarding ideology. Herodotus prefaced his “Histories” with the notion that the job of the historian wasn’t about uncovering and disseminating what’s true in the stories passed down in oral tradition, or from the stories preserved as part of our culture; rather, the job of the historian (and our job as traders) is to question, “What truth can we extract from those stories?” For us, it’s about reverse engineering narratives to collect data points (among our other methods/approaches, none of which can be weighed too heavily) to see what fits. The trial and error is painstaking, but over time, we get better at deciphering the code as it’s being written.  It’s like Nolan’s Batman…”people deserve better than the truth, they deserve to have their faith rewarded.” Even if that faith is in…anyway…the narrative is perpetuated, the status quo is maintained, etc…The game is always the same.

The monthly chart of the $ITB shows some base over base action, with multiple attempts lower being rejected/bought in January and February. At the moment, the midpoint of this compressing range is holding. I’m watching some attempted moves lower today in individual builders, like $LEN $TOL $DHI and $PHM to gauge if buyers step in and defend. $LEN looks like an easy-to-manage long here, trading at a significant price level; you can use a stop at today’s low if electing to get long. Into year-end, I will be watching to see if faith in the housing market is perceptually  restored.

Disclosure: I am long TOL (see here).

Within the context of the potential May bearish outlook I articulated here and here  my read was that this week and next will begin to surface some stalling in the Nasdaq/Russell (risk-on), while the DJIA/S&P (risk-off) maintain the veneer of relative strength in the face of ATH. In recent downturns, such as March/April 2014, the market bifurcated into 2 stratified groups: the bellwether, blue chip, low beta stocks viewed as havens for stability and yield (potential parking spaces for this year’s ‘sell in May crowd’) vs. the high beta, high p/s, no earnings, high forward p/e companies carrying debt and overvaluations in competitive spaces. I am of the mindset that components of this latter group will be the early targets for bears in this potential April-May monthly handoff and shift. One catalyst to nudge components of the latter group over the edge is earnings. From this latter group, the play that fits the bill for me to gauge/test this thesis is $PFPT, a stock I recently shorted before being stopped out at breakeven. Earnings were released after the bell yesterday. The company beat, guided up, traded up after hours, looks to be gapping, and is in the midst of upgrades. I marked up a weekly chart below.

The question is will $PFPT hold its gap today fueled by demand for risk, or will overhead supply prove resistance and reject price as market participants shift to lower beta alternatives. I’ll be watching price behavior around the 56-57 level for clues. I’m managing a $QLYS long (among others) in my swingtrade account, a competitor in the same software/cybersecurity space as $PFPT. Within this space, $CHKP reported this week and was met with selling. $FTNT and $VDSI report next week, and $FEYE and $CYBR the following week. Big player $PANW should be watched as well, and $SPLK attempted a breakout yesterday before fading a little. Some players in this space are better positioned than others (correlations among the group don’t have to run high), but in general the $HACK (pattern on this ETF still looks good) group should be monitored for the market’s appetite for risk. It’s another data point in the construction of an approach and thesis to this market. This space should be in play as rollover candidates OR the beneficiaries of a rotation if we continue to drift higher.

Stay nimble.

Caught a cool mention on MarketWatch (iBC Peanut Gallery in the building!) for a piece about a potential bearish May setup which I’ve further contextualized here. Just wanted to say thanks to Fly for the opportunity to share with the iBankCoin community.

While the market lazily lulls loafers into a serene spring sedation, the spring portfolio cleaning, especially in bull markets, often gets pushed further down the daily operations priority list. We succumb to internalized voices coaxing us into inaction. “The market is ripping…ATH’s looming…just hold on a little bit longer and it’ll all come back, break even. Don’t focus on the duds. That one’s a long term hold, remember? This one’s a legacy position, right? It’s not your fault.”

The origin of said positions are the banes of our portfolio and approach to the market. They spread like a cancer in our account and burn us from the inside out. We let them fester, thinking “I’ll average down, and down, and down”, or, “They’ll come back, eventually.” Sometimes the market falls so precipitously and positions blitz us in a blink that in order to cope and maintain some semblance of put-togetherness, we force ourselves to deny the severe implications of the price action. At the same time, our processing speed can’t catch up with speed of the deathdrops. Take tech/software/internet/social media stocks in March/April 2014, oil/gas stocks mid-2014 to early 2016, basic materials stocks late-2014 to early 2016, 3-d printing stocks, or the recent blow-ups in $VRX, $SUNE, $CHK, $LNG, $TWTR, and $FEYE. Many times, we console ourselves with pseudo-calmness in the face of a relentless onslaught, waiting for a bounce to sell into, THAT NEVER COMES. When we should be frantic and take action, we are instead numbed, cemented in the mire. As a result, these positions become permanent fixtures we face daily when we fire up the trading turret (or avoid logging in, because the loss hurts too much to see). They are sources of angsty frustration and imprison us in the could’ve, would’ve, should’ve feedback loop. Utter regret.

How should we view these positions productively to limit their (re)appearance and frontload the pitfall catalysts to avoid relapse? They are representations of blown stops, mismanaged entries/exits, misallocations, the omnipresent potential PTSD gapdown, nasty visceral price action that we didn’t/couldn’t adapt to, and the botched handoff between planning and execution. What’s worse than the monetary scarring (wait, there’s worse?) is the rattled, mutated mindset. The perpetuation of fallacious thought, crumbling logic sequences irresponsive to market context, and a legitimization of our faulty actions since we believe we can still ‘make it’ despite stage 4 terminal bagholding. We lie to ourselves when we should embrace truth and reconstruct. 

Trading is a relentless performance art (backed by an imperfect science) requiring a nimble approach to adjust on the move – deciphering when to stick to your guns, when to change sides, and when to sit out. The field of behavioral finance explores the way market inducing stress physiologically changes us through a feedback loop with the brain; subsequent thought constructs, hormone releases, and behavior are all linked, inculcated, and restructured. Talk about conditioning…the unforgiving Multivac market works to make you the cattle – stagnant, predictable, unevolved, and left behind. A shadow.

The question remains, do you really want to succeed at this? Or, will you concede being a marionette trapped in syllogistic schemas and emotional paradigms? Because at the end of the day, shouldn’t this matrix of monikers and avatars stand a fighting chance against the house?

P.S. In my swingtrading account, I’ve been trading around some bags over the last few months. I’m looking to lighten up and mitigate future visits to this turd factory. What bag will you be spring cleaning?