FRI. JUN. 27 THOUGHTS

On the last Friday of every June comes a rather unique phenomenon: the Russell rebalancing. The Russell 3000 is an index which tracks 3,000 of the largest stocks in the U.S.; approximately 98% of all investable U.S. stocks are included in the index. The Russell company adds stocks to its indexes on a quarterly basis, but it deletes stocks just once a year. This year, 278 companies will be added. Index and various asset managers try to reconfigure their own portfolios to accurately show the make-up of the new grouping of stocks in the index. Many Russell or small-cap managers in particular are forced to do this reconfiguration by the close of business today. Thus, on the close, volume often surges because of the influx and outflow of monies in the stocks going in and coming out, respectively. Many years, there will be millions of shares to buy on the close of the Russell stocks which are offset by, say, institutions which use the volume to exit positions of stocks that they no longer wish to hold thus stocks rally on the close. In the rare year (and this may be one of them), the desire of fund managers to exit their positions in select stocks outweighs the buying of Russell managers and stocks fall on the close. Most years, it is totally offset because everybody knows everything. All of this in mind, short of entering orders on every stock going into the index, the best strategy for the close is to watch for order imbalances and simply play the biggest ones. The ‘fun’ ones often occur first, i.e. the ones which have 75,000 to buy or sell and they’ve traded 2,500 shares on the day. But the ones that work best are the stocks that have the biggest imbalances because those are hardest to offset so spend time looking for things like multimillion shares imbalances in stocks like Visa (V). And remember to expect absolutely nothing out of it, but definitely hope for the best because it is occasionally the most profitable day of the year for many day traders.

Overnight, markets expectedly followed Wall Street’s lead in finishing sharply lower across the board in Europe and Asia. Oil is at yet another new high in early morning trading. Today is one of those days in which anything can happen. That is the case every day, but really today. There seems to be no fear in the markets right now as measured by the VIX thus the tone really is not all that bad early so the most likely scenario is that we get a little short covering rally ahead of a week in which many people will be on vacation particularly when combined with the Russell rebalance and baseball day at the two stadiums in New York. However, if disturbing rumors envelop a financial or two and/or oil prices spin out of control to the upside, it could be a very bad day.

AEL- crushed yesterday; looking to short below yesterday’s 7.90 low if it gets there.

AXL- crushed yesterday; looking to short below 8.50ish if it gets there.

STAR- has been hit badly last couple of days; looking to short below 12.50 if it gets there.

TSL- preannounced respectable earnings; stock is down anyway. Looking to buy it thru unchanged.

CBL- crushed yesterday; looking to short thru 23 if it gets there.

ESLR- priced its secondary at 9.50. Stock is trading at 10.40 as of this writing. Looking to short below 10.25 if it gets there, particularly pre-open.

MER- rumors of more write-downs and share offerings. Pre-morning low is 31.80; that’d seem like the spot to short it if it gets there.

LEH/GS/MER- watch for contra moves to MER, i.e. if they all open down and one of these pops through, likely a buy.

ANDE- way up on earnings; likely an A-B-A2 of some sort.

PAYX- decent earnings; stock traded higher last night. Likely a short thru unch if it gets there.

KBH- atrocious earnings. Stock not down all that much in pre-open…possible A-B-A2 to long side and even better thru unch if it opens down.

Good luck today.

THURS. JUN. 26 THOUGHTS

“It is a tale told by an idiot, full of sound and fury, signifying nothing.” For all you literary fans out there, that is a quote from Shakespeare’s “MacBeth.” For all you day traders out there, it was the refrain for the net performance of the Dow Jones Industrial Average yesterday. However, particularly in the advent of some wild intra-day action, it is worth noting that there was a very firm tone to the market yesterday (which will reverse totally today). This is brought up to show the effect that raw numbers can have on the uninformed. Boeing (BA) was down over 5 points yesterday. As a member of the Dow, it brought that benchmark average down by over 50 points. All afternoon, it was so very whippy, but mainly on the long side because there were actually five stocks up for every two down thus many (certainly not all, but many) day traders lost money shorting stocks in the afternoon in not being aware of what was really going on with the same ratio of up to down volume on the NYSE (again, on an intra-day basis) simply because of the distortion of a very outdated number. So, please be aware of the underlying tone of the overall market as well as the easy way that numbers can take on different meanings so that your trading doesn’t turn into a Shakespearean tragedy as well.

Overnight, markets in Asia were quiet, Europe started higher, but things in the States are not good. Oil prices are back up on a renewed weakening of the dollar, but the important thing here is the continued destruction of financial stocks as well as RIMM posting terrible earnings. The most astounding fact of all is that Goldman Sachs (GS) issued a “sell” rating on Citicorp , but also issued a ‘short sell’ rating; it is hard to recall a time that has happened. So, the market is in line to get crushed this morning to new year lows.

VNDA- positive phase III data. Stock traded up to 6 and back down to 5. If the stock gets negative, it is a short.

OSK- warned badly. Likely A-B-A2 to downside.

CEDC- did share offering. If it gets through unch, it is likely a buy.

SQNM- did major share offering 15.50. it is a short below 15.50 or a buy thru unch.

RIMM- abominable earnings. Best to stay away.

NKE- terrible earnings forecast. Likely A-B-A2 to downside.

LEN- bad earnings and announced they applied to do a convertible offering. It is a buy thru unch if it gets there.

FTI/RSG- on Cramer’s show last night

BUD- rejected bid from AmBev. If stocks stays negative in pre-open, it is unequivocally a buy thru unchanged…want the thing to stay negative pre-open though but it is tradable even pre-open if it does the move then.

ITWO- preannounced to upside. Likely A-B-A2 one way or another.

C- likely very difficult day trading vehicle today…probably better to short than not, but very very hard. Best thing to do is likely to steer clear.

Good luck today.

REPOST of A-B-A2

This was originally written up on Monday June 2. The video version is found here:

The A-B-A2 Pattern - Online Video Tutorial

The written version from the Monday June 2 post is here:

Frequently, a pattern occurs which has been referred to in this space as an “A-B-A2” action. As this blog gains a bit of a following, this pattern- particularly in this market- should be explained further. Many times, a stock which has major news whether it be earnings, the resignation of an officer, or anything else, a stock will gap significantly higher or lower from the previous day’s close. For instance, Costco (COST) opened up about 60 cents from the close at 73.83 on the day it reported earnings (Thursday May 29). This open would be point A. The stock fell to a low of 73.28 shortly thereafter (point B). When the market began rallying that morning, the stock went back to 73.83 (second time at point A, i.e. A2). Within a couple of minutes, the stock rallied 80 cents from 73.83. Many many times, this pattern works. The reasoning for this is as such- continuing to use COST as an example- the stock opened higher on respectable earnings, fell as some people got rid of their shares, but immediately turned on a decent up day for the market. When it got to its opening level, many people who were short got nervous and covered as they did not want to hold through the previous high of the day. Thus, the stock spiked back through its opening level. About an hour or so before the market opens, it certainly is not a precise science to figure out the exact numbers at which this type of action will occur; however, it does occur a lot. So, hereafter, make this A-B-A2 pattern your friend; it is one of the major tools used in effective day trading.

WED. JUN. 25 THOUGHTS

Building a bit on the theme of yesterday, just as a torrent of news can affect stock prices, a paucity of news can affect stock prices just as well given the circumstances. Often-times on Tuesday mornings in particular after a bad Friday and a neutral/bad Monday, a rash of margin calls can be issued as Tuesday morning progresses. Furthermore, people tend to wait on bad news to come; well, Tuesday post-open is not typically a time that news is leaked about much of anything. So, after getting absolutely drilled for a few days, the selling pressure began to dry yesterday morning in the financial sector, at least in the immediate-term. Thus, a number of entities- whether people or funds- began to cover their shorts. If a major fund was short, say, 100,000 shares of Citicorp from the middle of last week at 21 and no news has come out between the end of the week and a Tuesday morning, what often happens is that the fund takes a little if not all of the position off simply because no news has occurred. And a vacuum of buying is created as a few shorts cover and some bargain hunters come in- simply because nothing bad happened and sellers have stopped selling. Thus, stocks like C rallied from 18.40 to 19 and STI from 35.50 to 37.50 in a mere 20 minute time span yesterday morning. Things like this often happen during this time of year- and these two weeks particularly. So, same as yesterday- go with the trend, but please be careful of sharp sudden countertrend moves.

Markets in Asia were quiet overnight, up in Europe on rumors of a UBS deal, and all other markets are quiet ahead of a Federal Reserve meetings this afternoon in which the Fed is almost unanimously expected to keep interest rates unchanged.

MON- beat earnings, but lukewarm guidance. If stock opens higher, it is an immediate short thru unch. Other than that, it is an A-B-A2

DRI- good earnings. Looking for an A-B-A2 to the upside.

PRXL- good earnings. Ditto. A-B-A2 to upside.

SLAB- broken record. Good earnings. A-B-A2 to upside.

OII; GTI- on Cramer’s show last night.

KEQU- Very thin, but looking for short thru 11.30 when/if it gets there as 11.30 was yesterday’s low.

SONC- A-B-A2 of some sort; likely to upside. Company reported weak earnings, but stock has been notching higher from the depths of yesterday afternoon’s lows.

IPI;POT/other fertilizers- will likely track MON. Especially like a countertrend trade here/relative strength type action, i.e. if MON is trading down, say, 2-3 points and IPI opens down a dollar, buy IPI thru unch.

After-hours to monitor: BBBY, NKE, ORCL, RHT, RIMM all out with earnings.

Relatively slim pickings. Good luck today.

TUESDAY JUN. 24 THOUGHTS

Around this time of year, it can get fairly hairy. Many people take off the July 4th week; it is the full week of the summer vacation for the kids in the New York City area plus it is oftentimes one of the slowest news periods of the year. This year, Independence Day falls on a Friday so Wall Streeters get a rare 3 ½ day weekend (Thursday the 3rd is a half-day). With family and friends in town and the sun shining outside along with the sounds of ice cream trucks going by for those taking ‘staycations,’ it is a period of anomalies for the market. This can be a bit disconcerting for day traders as well. Keeping things totally relevant, with the way the market has fallen in the last few weeks, there will be a massive tug of war in the next few days. With so many people out of town next week, there are a group of people holding things like Citicorp (C) who are scared. But, there are also many hedge funds who are short these type of things. What often happens in a time period like the one we’re in the midst of now is that if no news comes out, stocks bounce in a vacuum-particularly next week- the week of the holiday. People do not want to worry about trading while enjoying the sunshine so many of the funds will likely cover their shorts in the absence of news. However, to create said vacuum, in the absolute immediate-term, it is more than a little disconcerting that stocks just did not bounce yesterday. As day traders, we have to be aware for rather bizarre spikes in particular in selected stocks next week, but must worry more than most are already about further declines in financial stocks in particular for the next few days. There just has been no bounce. So, the theme is the same with one variation: watch the financials, watch oil, go with the trend, but keep all eyes glued even more so than normal because things can get wild very fast.

Overnight, Asian markets were quiet, but things became weak in Europe amid reports of more financial woes and rising oil prices. This trend has extended state-side as well with futures well down again in the early-going.

CSE- major share offering at 11 harking back to last week. It is definitely a buy above 11 as the news will have been factored in. other than that, it is a difficult A-b-A2 unless the market’s decline truly accelerates.

PDO;MXC;ROYL- all tiny oil companies which have exploded again in recent days (PDO in particular). If oil trends down, look to short any of these thru unch assuming they all open higher. If they open a lot higher, likely A-B-A2’s to the downside off of the open.

UPS- warned. Do not know exactly what the trade is here, but noteworthy because the CEO of the company called the American economy “anemic.” Probably an A-B-A2, but if the market goes down a lot, It really really can collapse.

ISIS- received a huge milestone payment from GENZ. Stock bizarrely down. If it gets thru unch, it is a buy. Conversely, a big-time, A-B-A2 to the shrot side if it cannot get going.

HK;IPI;BTU;BHI;APA- all oil companies that should open higher with the same theme as the smaller oils. If they open up and get thru unch, they are shorts.

All financials- should open lower. There are going to be mini short-covering spikes here (witness STI on Friday afternoon). When and if any of them get to unchanged, they are buys thru unch with C already worth noting due to a $3 billion capital infusion from a Kuwaiti entity.

Not much newsflow again; will be a slow period newstime for individual stocks for the next few weeks so a tough environment, but a volatile one. Good luck today.

MON JUN 23 THOUGHTS

This has the possibility to be one of the most interesting weeks of the year. Admittedly, the scheduled news flow (earnings and such) is going to be relatively slow all week and today of course is a Monday in June. But, the next leg of whatever financial crisis/panic the market is going to face is certainly underway. And this is the most dangerous phase of it because not only are most people not paying attention, most people are not cognizant of the real dangers out there. Stocks like Washington Mutual (WM), Downey Financial (DSL), and Ambac (ABK) are indicative of the washout in that all are approaching zero. Zero. On Friday, oil was up in the morning and dwindled down all day; the market ignored it. Full focus on financials. Furthermore, even a tiny whiff of good news is enough to spark short covering right now; witness the performance of Suntrust Financial (STI) on Friday afternoon when it popped 10% merely because they issued a statement indicating that they were not going to cut their dividend. We are approaching a phase where something is going to happen where people are going to stop and take heed. In the interim, it is a ripe environment albeit a dangerous one for day traders as financials are totally in focus right now.

Overnight, markets in Asia were slightly lower, but things shifted to a positive note over in Europe. The oil market ignored the Saudi increased production news in trading higher in the early going. There are a few mergers announced this morning, the biggest of which is in the agriculture sector with the futures indicated higher in the very early going. So, there is a firm tone and a seemingly ready environment for some quiet short covering today as long as no major news hits the financial sector.

BCE- up after they won a court appeal forcing them to indeed be bought out. Likely A-B-A2 here, preferably for a trader from the short side.

OCN, AGO, HRB, WTBA, XL- all weak on Friday; if they open higher and go negative, looking at all of them as short candidates

WAG- missed earnings by a penny; should open lower thus it is likely a buy thru unch.

HOO, JRCC, GCO- all strong on Friday; if they open down and go positive, looking at them as potential long candidates

BG/CPO- BG buying out CPO for $56/share. Looking to buy CPO above 56 (highly unlikely) because it’d imply a higher bid is on the way and/or some sort of A-B-A2 playing off of the strength in BG.

DMRC- received a cash offer for its main division. Looking at an A-B-A2, preferably from bullish side.

GDI/BQI- Cramer

DAN- weak on Friday; looking at it as a short thru Fri’s low

Not much newsflow; not the easiest morning to day trade. Good luck today.