By: Pej Hamidi
The desk I run is an Institutional LongShort Equity desk which tries to maintain a “market neutral” book. This does not mean “buy 1000 shares of IBM and 10 puts”. What market neutrality means is that one need not be concerned about the overall direction of the market, as momentum traders are, but rather have long positions as well as short positions comprising their overall book. You will never catch a market neutral trader with positions pointing only in one direction. So with that said, let me share some of my ideas with you:
Aside from the macro backdrop that may or may not be causing a pending market correction, there are several trades popping up on my proprietary models on both sides of the market. There are NO excuses to be purely directional when you are proclaimed to be a market neutral Long/Short trader. On the macro front, I am generally in-line with the coordinated re-inflation of global economies via the debasing of their respective currencies. Therefore, I am bullish long-term on things like Oil, definitely Gold, Dry and Wet Bulk Carrier fleets, Railway stocks, and Silver (perhaps more than Gold). But I am not bullish on base metals that go into manufacturing, such as copper, aluminum, steel, etc… There’s WAY TOO MUCH production capacity or acquisition debt added to the top of the bubble, and the adjustment, although already taking place, is going to be a painful one. If you want to be truly market neutral here, you would be long the producers, oil futures, gold futures, and silver futures, while short the steel producers, copper, and base metal producers in general.
SHORT TRADES
- ADI: Has moved way above all of its major averages on consistently declining volume: negative divergence #1. Money Flow turned down on Friday’s new high: negative divergence #2. Momentum Oscillator failed to make a new high relative to the new high made in early December ahead of this consolidation. The Secondary Trendline is around $34 while the 10-period daily EMA is at $31. So there are actually two ways to play this: If there is a fall in the market early in the week, pick up a small lot near the $31 level and use the 10-period as your stop. The other way is to short the stock as it approaches the $34 level.
- ATHR: This telco play is directly on its all-time highs, which haven’t been broken since November after a series of six tests. This is the seventh (lucky number perhaps)? The only odd thing about my model on this is that it shows money flow collapsing while the stock has been rising for the past several sessions. That could be a false signal due to holiday trading, but it’s worth keeping in mind. On the other hand, all momentum indicators have turned up sharply. I never buy stocks after they’ve rallied several sessions, so a pullback to $30 should be followed by at least one more attempt at a new high. I don’t think we’ll see a break above $35 on this move, so there’s no rush. If the stock does break above $35, I’d be a seller, legging into my short position, with the intention of covering at or near $35. $30-$31 is a great entry on this stock.
- CRM: Although I rarely suggest stepping in front-of a runaway train (i.e. bull market), Salesforce.com appears ready for an extremely short term pullback, ideal for the daytrader. The prior breakout high was 67.72, which directly coincides with the 10d-EMA. But remember, this stock is in a bull market, so when it’s time to close out that short, consider reversing and flipping long instead of just patting yourself on the back. The actual trade here is on the long side, but the MACD, Doji, and declining volume create three powerful negative divergences.
LONG TRADES
- AMZN: Going into the Christmas season, Amazon’s channel checks were bringing back some unbelievable results. In other words, their sales went through the roof. Now we won’t know the extent of the returns they’ll face, but historically, Amazon has been one of those stocks that doesn’t react to the “item returns” line in their following quarter. The 10p-EMA just crossed the 24p-EMA on Wed. Don’t let the declining volume on Friday fool you, with what appears to the “technician” as a Doji. This is classic chart painting for those that follow technical analysis like it’s their dogma. Friday was a ghost town on Wall Street, so one could have pretty much done whatever they wanted in terms of end-of-day chart painting. That’s why I don’t believe in Technical Analysis as a valid tool in understanding market theory. If anything, it must be used within the context a much larger plethora of quantitative tools. With regard to Amazon, the stock spent the past 2 months consolidating the move from $92 to $125. Above $140 it’s a potential buy, using the 10p-EMA as your stop.
- BCS: As I said before, I’m not a huge fan of Technical Analysis, but that doesn’t mean I’m not going to make myself an expert at it. It’s just another tool in my arsenal. Barclays bank, if it hits $15, will have corrected 40% since its’ October highs. Remember, this is the ADR so it’s thin. Not a daytrading stock at all! I think $15 is a low-risk entry point, perhaps risking $0.70 to make about $3 to $5.
- BRCM: Something tells me this stock wants to test $35-$36. For a long position, use the 10d-EMA, leg into your long position, and leg out as it approaches the whole number.
- CEO: Something of an anomaly in China, with a P/E of 16 and an EPS $9.57 per share, their 5-year growth rate is phenomenal but their most recent numbers aren’t all that great. But which oil producer didn’t suffer this past year? The anomalies lie in their TTM growth rate of almost 56% while their debt to cover ratio is 2.6 with their peer group being closer to 1.26! I wish American companies were run as tightly as this CNOOC. Their costs of revenues have shrunk while their income has stayed relatively flat in spite of the dramatic collapse in oil prices. As a long-term position, I would start building a line around the $155-157 level and hold it until at least $200. However, during that time, you should always trade around your core position to lock in Alpha. Here are some ratios for CEO:
- CP: Watch the $55 level. Having closed $.25 below it, I’m fairly certain it will bust through $55 in order to clear out the stops resting there, then will fall back down below to nail the ensuing protective stops established on the prior buy through $55. Nonetheless, the stock is in a powerful long-term uptrend which will prevail for the foreseeable future, if not the next several years. For short-term traders, the $55 level will provide for rapid trading on both sides, for the long-term swing/position trader, wait to see what happens. These stocks don’t move like tech stocks, although last year a few did. I actually look at this stock, and the sector, as a growth sector. So for them to have low double digit P/E’s while paying out dividends makes this a solid play, especially with the macro backdrop I mentioned. Lastly, as the Great Sage of Omaha likes to say: “Does it generate cash that ends up in their bank accounts? If it does, I’d like to take a look at the stock”.
- CSX: Another railroad breaking out to new 52-wk highs. Everything looks good here except the fact that the market broke above the 52-wk high on the day after Christmas, which means a lot of stops were just cleared out and the next step is likely down before ultimately resuming its uptrend. So if you’re a daytrader, feel free to trade short side and then reverse. All you others out there, keep an eye here and go long when you see the whites of their eyes.
- CYOU: I’ve included a snapshot of the daily chart of that CYOU. Remember this Chinese stock went public in May of this year. Once the majority of lock-ups expired, insiders cashed out, as expected. Now, the 28-30 has become a major accumulation zone and the stock appears to be about to break out. Yes we were on Christmas schedule last week, but the Chinese are communists. First upside target is $40.
- DRE: Duke Realty bottomed around $12 in March and after regressing back to the $10 level where it should have been if there weren’t a liquidity crisis, this seems poised for an extended up move. All of my models have triggered on this one, which is rare and actually makes me a tad more cautious, rather than feeling the impulse to go all-in. However, the stock has had 7 green sticks in a row, so be patient and buy it on a test or break below $12 and keep legging into the trade until $11.
- EQIX: This is the trend followers dream stock. Every single metric is growing at an impressive pace, and the company is throwing off cash by the truck-load, with almost all of it is being plowed right back into the business. Obviously, the stock has the benefit of every single moving average below it, with the most consistent being the 10d-EMA (as always). Since $100 is a whole number which has yet to be tested following the recent break above that level, I’d like to buy it around $100, legging into my position as always.
- ESLR: Another potential high flier when it gets wings is Evergreen Solar. The chart below shows a very sensitive and potentially explosive move. However, although I put the odds in favor of an upside breakout, there is a chance for a quick spike down to shake out the weak hands, so be careful and watch.
