Category Archives: Subscribers

Facebook (NASDAQ:FB)

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The Algorithm which gave us combined 5% return in 8 weeks on Facebook stock just generated a short signal, and the proprietary indicator is showing that there could be a healthy correction ahead.  We never like going short as this is the most inefficient path to profitability, however in sideways market conditions we take what the market offers.

This has been added to the high risk/reward portfolio, and the fill price will be Monday’s opening price (regular trading hours).

Rather than shorting the stock outright we prefer to sell June 13 62 calls currently trading around $1.20.  The trade is a winner if Facebook fails to close above $63.20 by end of day Friday.

Trade Review (Facebook) & Outlook – April 30, 2014

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Dear Subscribers,

Here we are, 67 days into 2014, and the S&P 500 has risen a measly 36 points.  And in that time, the index has also had a 161 point swing from the bottom in January to the top at the start of this month.  Investors dislike volatility, and when markets become turbulent, investment capital makes its way to the exits… that is, at least until markets can prove themselves.

We continue to maintain our hypothesis from the start of the year.   In ‘What to expect in 2014‘ we stated:

In our view, the (really) easy money is over.  2013 was the year to front-run this massive shift into U.S. equities, and the market responded in spades.  You could have thrown darts at an index of stocks and done quite well (unless you were a hedge fund).  But after a 30% return in 2013, what does the market do for an encore?

If the S&P were to rise another 30% this year not only would this be a miracle, but P/E multiples would be at dangerous nosebleed levels and we’d all be in trouble.   A more reasonable 10% gain this year would get us to 2,000 on the index – a nice round number, and an area many analysts are calling for.

To achieve a return of any more than that in 2014 will require a little more discriminate stock picking, and that’s where our algorithmic research comes into play.

To wit, on March 13 we warned against taking new long positions – the reason being because our algorithms identified a 2 year profitable trading pattern that finally broke down:

From a quantitative perspective, when cycles break down, the #1 rule in algorithmic trading is to reduce positions or exit entirely, thus contributing the volatility.   In the 5 weeks that followed our warning, markets have moved sideways confounding longs and shorts alike.

Clearly, Global Markets are undecided as to the direction of the next move.  Today, investors sought clues in the FOMC minutes released at 2:00pm, but  they saw nothing that would warrant breakout of the current sideways movement, and so here we are stuck between 1850 and 1880… for now.

We care about the direction of the S&P 500 because, theoretically, this is an all encompassing barometer of risk trends – not only within the US, but world wide.

Since our March 13th warning the S&P 500 gained a mere 1%, where our core subscriber portfolio gained 10%, which puts our monthly gains in the median range of the best performing hedge funds of all of 2014.

While many are staying on the side lines waiting for markets to resolve themselves, we have taken some trades which have a relatively high probability based on some shorter-term trends we have been witnessing (see our past posts) combined with our quantitative algorithmic signals:

March 14: ConAgra Foods:  4%
March 24: Cliff’s Natural Resources: 4%
March 24: Mosaic: 2.2%
April 15:  Compass Minerals: 7%

In the High Reward/Risk portfolio, CCIH gained 16% before trading below our entry point by 8% – a testament to current market volatility, especially in Chinese names.  Our 2 short Facebook trades (capitalizing on momentum selling) returned 1.7% and 1.3% respectively.

In our post 2 Trades to capture interim capital shifts, we called for a down turn in both Oil and Oil stocks, and a down turn we did get.  Oil subsequently dropped to below $100, and both XOM and CVX did have a move down, but the down move was short lived as share buy backs were announce to levitate their respective stock prices.

Going forward we continue to follow the line of our three core themes:

1.  Inflation due to global quantitative easing by central banks on a global scale.
2.  A range-bound US equity market.
3.  A slow, grinding upwardly mobile interest rate environment.

We have also started tracking additional side themes that have materialized, namely:

1. A slow-down in advertising spending
2. Capital flows into independent oil/gas companies.
3. Capital flows out of stocks with high valuations.

On a more positive note, the side ways motion we are seeing in the S&P 500 is good.  As we stated in January:  “What we hope for is a healthy correction.  What we may end up with is a huge short squeeze.“

Markets are definitely on the verge of a break out, and which direction they break still remains to be seen.

Current Facebook Long Trade:

Today we alerted to a Buy signal on Facebook (NASDAQ:FB) – this is in line with a profitable trading pattern going back to the company’s IPO in 2012 and is the same pattern which generated the Sell signals last week for a quick 3% gain in 2 days.

As of today, that algorithm has switched to Long, and we are quite confident as to the strength of the historical pattern.  In fact, since our signal at 58.50, Facebook spiked to $60.40 after hours for a 1.5% gain, and we expect further upside.

Long-term Facebook patterns continue to be profitable (click to enlarge)

Facebook (NASDAQ:FB)

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Update 3: April 24, 2014 – Trade Closed 62.20 AH (1.27% Gain)

Facebook again beat on earnings estimates, but given the recent numbers it is apparent that their growth is slowing.  For example, European users increased last quarter, but European revenues decreased in the same time period.  Those in the know likely anticipated this which is why the stock sold off from previous $70 highs.  In after-hours trading last night the stock traded in a $10 range from $55 to $65 and our 62.20 stop (profit taker) was hit.  FB is currently trading at $64.45 in pre-market.   At least covering analysts downgraded the stock this morning, so some volatility is expected.  We will continue to watch the algorithms and may alert to another entry based on the strong historical patterns we are seeing.

—

Update 2:  April 23, 2014

Facebook is currently down 2% from the Sell signal yesterday.  The stock is now trading at thin volumes in anticipation of the conference call this evening.  The short trade is still Open and we do expect further downside, however we have applied stop loss order (profit taker) to be triggered after market hours with a trigger price of  $62.20 – this is due to the extreme after-hours trading volatility we have seen on past conference calls.    If your broker does not allow after hours trades, it is advisable to exit the trade now.

Further commentary to follow after the call.

April 22, 2014 – Short FB

NOTE: FB EARNINGS CONFERENCE CALL AFTER CLOSE TODAY – HIGH RISK TRADE – READ BELOW

In our quantitative analysis we seek liquid stocks with clean historical trading patterns which can be extrapolated to predict the next move.  For some time, Facebook was one of those stocks, and it was predictable enough for us to launch the Facebook Stock Predictor.  After awhile, those patterns shifted as the stock became subject to some High Frequency Trading shenanigans.  Recently however we have discovered a different long term trading pattern which continues to be in place today which indicates that the trend should continue to be down.

FB Daily custom bars – click to enlarge

Yesterday’s signal game on a second algorithm running on a shorter 60 minute time frame, when it triggered the Sell right near the $63 level.

Yesterday Facebook closed at $63.  After the close we Tweeted “HFTs should run this up to 64 pre-market tomorrow” – and run it up they did, but $63.80 is all they could muster before FB tanked at the open this morning (currently at $62.21).

Manipulation by HFT algorithms is not a bad thing when you can predict it and use it to your advantage, such as like we did with Facebook.

NOTE:  Facebook’s earnings conference call is after the close today.  For the past 4 FB earnings releases, if the stock traded down on the day of earnings, the earnings impressed with the stock trading higher the next day.     If by 3:30 PM today it appears that Facebook will close down, we will likely exit this trade.  Stay tuned for the alert.

We do consider this a High Reward/Risk trade, so it is currently being tracked in the appropriate portfolio.

Long this short squeeze candidate

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4/17/2014 – Long CCIH

We performed an algorithmic scan of 1700+ stocks overnight and some interesting patterns in the market are emerging.

The Algorithm picked up a Buy signal on Chinese internet company ChinaCache (NASD:CCIH) which is a content delivery network, which has negative revenue but could be ripe for a short squeeze with outstanding shorts representing 5% of the float and 44% institutional ownership.

Due to the high reward/risk nature of this trade we are adding this to our separate ‘Aggressive’ tracker (formerly the small cap tracker) which can be found here, as well as under the ‘My Account’ menu on the home page.

CCIH Daily

2 Trades to capture interim capital shifts

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We discovered some interesting themes during our latest algorithmic scans on over 1,000 stocks, translating in to 2 trades which have been added to the trade tracker:

1)  Strong Sell signals on Oil Companies:  Last night we tweeted an observation that oil companies should be sold, and Oil should start to slide.   Oil futures did tumble in today’s session and according to our algorithm, further downside is expected.  WTI Crude oil current has a risk premium attached due to Russia/Ukraine tensions, however fundamentally there is no significant reason why crude should be trading at these levels.

The Algorithm picked up a strong Sell signal on Enerplus Corporation (NYSE:ERF) – this is the same company we signaled on March 24 for a 1.5% gain to the upside.    We like this Short trade for the following reasons:

a) The company has a relatively high Dividend (4%) but is also highly priced, trading at 52 week highs with a blow-off technical top.

b) Company is based in Canada, whose stock market has been inversely correlated to Canadian dollar strength.  Since further upside is expected in the Canadian dollar, this should be negative for the overall Canadian equity market, including this company.

c)  Natural Gas fading:   Nat gas as been trading in a range since spiking over the winter, with further downside expected as a result of seasonality bias (bull typically ends in April).   A good portion of this company’s revenues are from Nat gas production and are exposed to this possible shift in trend.

Enerplus (NYSE:ERF)

2) Defensive Rotation:   For the past week as the S&P 500 sold off, our Weighted Momentum indicator showed that the Basic Materials sector was getting a lift on both the up and down days.  These contain companies such as potash producers and miners which should fare well in an inflationary environment (as per our post How To Play A Sideways Market).  The immediate reaction during sell offs is to rotate into such defensive sectors, and we expect this to continue into May.

Compass Minerals (NYSE:CMP) has been on a strong upward trend this year and is currently trading in the middle of an up channel.  The algorithm will buy this at the open tomorrow, however buy-stop orders should be placed at yesterday’s high of 57.06 for confirmation of trend.  An alternative trade would be Rio Tinto (RIO), however the algorithm favours CMP over RIO.

Compass Minerals (NYSE:CMP)

A note about the sell-off in Momentum Stocks:

Market sentiment is clearly turning negative toward ‘growth’ stocks without earnings which have had tremendous gains in the past year.  Stocks such as YELP, TSLA, and FB, which have confounded short sellers in 2013,  have experienced double-digit drops in price just in the past 2 weeks.

The opportunities to short these stocks is tempting.  YELP for example is at the bottom of the totem pole on the Advertising dollars food chain, but they are not profitable at all and the market believes they deserve a $4 billion market capitalization.

Another company that caught out eye is LIVE – a Groupon clone.  This company is also not profitable and are only active in a few cities in America, but their valuation is 27 times their current share price.   This particular stock has dropped so much so fast that the exchange slapped a short sale restriction on the stock to prevent it from going to zero.

Given the numerous sell signals we’ve seen on the S&P 500 and in our universe of 3000 stocks, it is clear the short sellers are in control and they have plenty of ammunition in the form of naked short positions.    As tempting as it is to join the party, the conditions under which these stocks are being short will likely induce volatile swings back up to test recent levels as many of the shorts cover.  We are keeping and eye on these and include these in our algorithmic scans – once attractive opportunities present themselves we will add these to the higher risk trade tracker.

 

ETF Trades to ride out the volatility

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The start of a calendar year is a time for capital shifting.  Large funds lock in their profit for the previous year to juice their bonuses as well as paint a good picture on the year’s performance for their investors.   This January however is one of the most volatile months in recent memory as a number of demographic, geopolitical, and centralized planning themes create market chaos.

Indeed, the CBOE Volatility Index hasn’t been this high since June of last year, and at this point it is more profitable selling options contracts than to invest their underlying securities.

Emerging Markets currency problems appear to be the theme of the month, and a good part of the turbulence can be attributed to investors weighing in on the impact to Western markets.

For us, our algorithms work on statistical probabilities based on historical events, and when the correlations and historical patterns break down, the number one rule in pattern trading is to wait on the side lines.   As a result, we have been mostly in cash as markets continue to reconcile because, as that super computer in War Games once said, sometimes the only winning move is not to play.

The large fund reporting deadline is still 1 week away but we continue to monitor the feed as early reporters submit their 13F forms.  It is at that time when we will have the best investment picture for 2014.  Until then, the complete picture of what large funds are positioning for is somewhat incomplete.  Holdings for the third quarter of 2013 show large positions in Financials and Emerging Markets, but those sectors are down considerably in 2014.   For the 4th quarter, large funds are either going to double down on their positions, or like John Boehner, as if investors are going to call it a decade and go completely into defensive stocks and other assets such as corporate bonds.

Until we get the big picture next week there are some smaller scale fundamental themes we are tracking which we can capitalize on now with Exchange Traded Funds:

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Trade Updates – 1/27/2014 – We’re UP 6.75% in 2 weeks while the S&P is down 3.2% in the same period

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We’re up 6.7% in 2 weeks while the S&P was down 3.2% in the same period

So far our algorithmic trades are doing quite well, especially when compared to the major global sell-off in the past few days.   As of today we’re up 6.75% on our picks, this after being up as much as 10% as of Friday.  Not bad when you consider that the S&P index lost 3.2% in the same period.

 

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Tanger Factory Outlet Centers (NYSE:SKT)

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Symbol: SKT (NYSE)

Signal:  LONG – 1/15/2014

New LONG signal on SKT based on a profitable trading pattern going back to January 2013.  Vanguard has increased their existing position by .5 % as of 9/30.   This is a retail stock – a sector which has experienced high volatility since December based on weak Black Friday sales figures, however the algorithm is calling for further upside.

Supporting research:

http://video.cnbc.com/gallery/?video=3000235825&__source=yahoo|headline|quote|video|&par=yahoo

http://www.thestreet.com/story/12114484/1/jim-cramers-top-stock-picks-hd-dks-bby-save-skt.html?puc=yahoo&cm_ven=YAHOO

SKT Daily – click to enlarge

Omega Healthcare (NYSE:OHI)

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Symbol: OHI (NYSE)

Signal:  LONG – 1/15/2014

New LONG signal on OHI based on a profitable trading pattern going back to January 2013.  Vanguard has increased their existing position by 2% as of 9/30.   Stock is about to break through a very long descending triangle formed since May of this year.

Supporting research:

http://www.thestreet.com/story/12254207/1/use-options-for-a-chance-to-buy-ohi-at-a-23-discount.html?puc=yahoo&cm_ven=YAHOO

http://seekingalpha.com/article/1870131-omega-healthcare-investors-the-realty-income-of-the-senior-care-market?source=yahoo

OHI Daily – click to enlarge

Xcel Energy (NYSE:XEL)

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Symbol: XEL (NYSE)

Signal:  LONG – 1/15/2014

New LONG signal on XEL based on a profitable trading pattern going back to January 2013.  Vanguard increased their existing position by 1.85% as of 9/30.   Stock is about to break through a very long descending triangle formed since May of this year.

Supporting research:

http://www.usatoday.com/story/money/2014/01/06/heat-is-on-for-utility-companies-in-states-hit-by-cold-blast/4343149/

http://www.forbes.com/sites/kensilverstein/2013/12/06/energy-subsidies-fan-the-flames-but-all-sectors-share-in-the-federal-pie/?partner=yahootix

 

XEL Daily – click to enlarge

National Retail Properties (NYSE:NNN)

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Symbol: NNN (NYSE)

Signal:  LONG – 1/15/2014

New LONG signal on NNN based on a quite profitable trading pattern going back to January 2013.  Vanguard increased their existing position by 2.3% as of 9/30.   A double-bottom from September, as well as a break through of the 180day WMA at $32.45 would make this a very bullish signal.  Hang on to your hats…

Supporting research:

http://seekingalpha.com/article/1941831-no-mud-pie-eating-contest-for-national-retail-properties?source=yahoo

http://www.fool.com/investing/general/2014/01/11/ranking-5-of-our-favorite-dividend-stocks.aspx

click to enlarge

Click image to enlarge

3 very good reasons to move into cash, wait on the side lines

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It happens…

All our trade decisions are based on three factors:  Probabilities, risk, and reward.  In terms of the overall market, at the start of December we started noticing cracks in the fundamentals that drive these factors, and after only 8 trading days into the month those cracks appear to be widening.

Here then, is our rationale to move into cash and wait on the side lines:

1.  S&P at All Time Highs

The fact that indexes are hitting all time highs is not bearish in itself, however indexes have been making new highs all year long, and in order for large funds to realize those gains to make the year end bonus, they are going to have to sell what they’re holding.   The best forecasts are calling for further gains in 2014, but markets rarely go straight up and it is likely that there will be some corrections along the way.

2.  Correlations and Patterns Breaking Down

We scan over 700 stocks daily to determine trading probabilities and overall market sentiment.  Occasionally we see patterns which historically have been profitable in the past, start to break down or even reverse – this usually happens in individual stocks, but occasionally it will happen across the universe of stocks we scan.   The last time we saw this happen was in October, when after we made the call to move to cash the S&P dropped 50 points in the next 5 days.  Last Monday, we noticed this happen again and tweeted the observation , and this morning Zerohedge posted an observation from Deutsche Bank which supports this thesis.

3.  Signs of Selling

Large funds who need get get out of a position typically sell into rallies so as not to negatively affect the stock’s price.  If you manage billions of dollars of other peoples’ money (or in the case of Norway or BlackRock – trillions), and need out of your position, the best way to execute is to take out smaller buy orders with your own sell orders over a period of time.  In theory, your trading will fly under the radar and will not alert the market to your actions.   Nanex, which analyzes such trading patterns, has observed this practice all week with ‘small lots’ being filled at a higher frequency than usual.

Given these reasons above, it’s a good idea to move into cash and wait for market conditions to be more favorable.  It’s not a Buyer’s market by any means.  It isn’t even a Seller’s market right now – it’s simply a time of year where large fund managers are going to enjoy their gains before the markets get a chance to wipe them out.

We will continue to scan individual stocks and post trades that match our 3 criteria, however we are taking existing positions off the table until markets again can resolve themselves.

 

China Mobile (NYSE:CHL)

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Update: Dec. 11, 2013

Signal:  Continue Long – with caution

From SeekingAlpha.com yesterday:

China Mobile (CHL -1.5%) and China Unicom (CHU -1.4%) have been cut to Equal Weight by Barclays. BofA/Merrill tried to temper iPhone expectations for CHL earlier this morning.

In the chart below you can see that the Barclay’s downgrade happened just as CHL was approaching the middle of a long term upward regression channel.  In the past we have noticed that announcements such as this (both bearish and bullish) have happened at key support and resistance points in other securities, so the timing of this announcement is no surprise.   CHL has gapped down the past 2 days and is trading slightly below the algorithm’s entry point of $52.65.   Time will tell (either today or tomorrow) whether this is a corrective move down to re-test the lower end of the regression channel, or if the stock will break through for further declines.

We officially have CHL on probation right now and will sell instantly should the stock not recover.  For now, large buyers are stepping in at the current level and the long-term support channel is holding.

 

CHL Daily (click to enlarge)

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Everest Re Group Ltd. (NYSE:RE)

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Update: Dec. 10, 2013 –  bearish news is starting to come out

Signal:  Continue Short

This morning Seeking Alpha tipped us off to a bearish report by SNL Financial about lower projected renewal rates for insurance premiums.  As a result, RE was unable to break through the 20 day EMA, is down 1%  on the day and is looking to go lower.  Looking at the price action, it appears some large buyers were attempting to prop this up, possibly for the purpose of extending their window to get out.  Still watching this one closely since, even though there is plenty of down side, the trend is still officially ‘up’ so the down move might be considered corrective until a solid down trend  develops.

RE Daily – click to enlarge

 

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Baidu, Inc. (NASDAQ:BIDU)

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Update: Dec 9, 2013 3:45PM

Signal:  Continue Long (entry price = $158)

We hope you have been enjoying the 8.8% run on Baidu since the algorithmic buy signal on 11/26.     This is a relatively new algorithm we are working with that uses dynamic calculations on each bar and therefore does not print a proprietary indicator, but it has been right on the money for us so far including an intraday algo we have running on Facebook.

From the chart pattern it appears that BIDU wants to go higher from here.  It put in a new 52week high and is right in the middle of a strong upward regression channel it has formed since January.   The current stop loss is a ‘disaster hedge’ in case markets completely fail, so it would be wise to tighten the stop to $162.26 lock in profit in case something disastrous does happen..

But we don’t see that happening with BIDU anytime soon.  All China names are being bought this quarter and we’re seeing the same bullish algorithmic patterns in a lot of stocks, which goes to show you how distorted markets have become because last year you couldn’t give away Chinese company stock as everyone thought the whole country was going to blow up, but it didn’t and it put in a bottom, and now all of the really wealthy people who have benefited the most from QE need something else to put their money into so why not into a geo-sector that was so beaten down the only positive fundamental going for it was that it couldn’t go any lower?

We’ll ride this wave with BIDU and our current position with CH, but the portfolio is looking a little China heavy.  We continue to scan all sectors and all countries for additional opportunities, but as we quickly tweeted this morning, “A number of algorithmic patterns that have worked well since June seem to be breaking down across the board. Possible EOY market cycle shift” – this doesn’t mean there aren’t opportunities, it means that new ones will start showing up very soon.  Stay tuned…

BIDU – it wants to go higher

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Wynn Resorts Ltd. (NASD:WYNN)

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Update: Dec. 4 2013

Status: Stop Hit – FLAT

The stop loss on the WYNN short position was hit at 3:20 PM today.  Total loss was the percentage of the stop loss which was set at 3%.   Today is a POMO day and markets as a whole appear to have new legs.  As well, bullish news was released out of Macau today and all international gambling stocks are getting a lift.

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Companhia Energetica de Minas Gerais (NYSE:CIG)

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Update: 11/19 11:40AM  – STOP HIT – Flat Position

The CIG long was stopped out at our 3% risk price level of $8.37.   Heavy selling at the ask brought the stock down from the 20day EMA.  It may find support and put in a base before breaking out, and the proprietary indicator seems to support additional upside, however for the risk parameters of this portfolio we are neutral on CIG until a new signal is generated.

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IBM Corp. (NYSE:IBM)

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— 10/17 – Signal:  EXIT:  +8.32% Profit

Our IBM short trade was right on the money.  The signal came at the top of the current down trend and 2 weeks before IBM announced dismal earnings after market close yesterday causing the stock to plummet 6% in after hours trading.

 

–9/26/2013

Symbol: IBM (NYSE)

Signal:  SHORT

New SHORT signal on IBM, which has reached the top of a large triangle on the daily time period.  We are noticing sell signals on a number of IT services companies, but this one was the strongest.  Profitable trading pattern goes back to 3/09/13.

Related analysis supporting position:

http://seekingalpha.com/article/1664972-ibm-continued-struggles-in-the-cloud

http://seekingalpha.com/article/1628672-is-warren-buffetts-favorite-ibm-really-underperforming

 

Click image to enlarge

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C.R. Bard, Inc. (NYSE:BCR)

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UPDATE: 11/6

SIGNAL: TRADE CLOSED

The algorithm closed its short trade with BCR for 1.24% profit, however the historical patterns appear to be morphing as large funds rebalance their portfolios.  Algorithm is now flat on BCR with no positions.

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