Facebook (NASDAQ:FB)

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

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)

Flashing Facebook Quotes

On April 22nd we witnessed large orders appear then quickly disappear on the Facebook NBBO.  This behavior seems to be in line with what Nanex describes in this post re: Facebook Liquidity.

The depth of the order book is used by humans and machines alike to gauge sentiment and determine how well a market can absorb a large buy or sell order, however when quotes like this are ‘flashed’ often enough, markets can be distorted.

Note that the Market Maker in this case is DirectEdge, whose CEO is a proponent of High Frequency Trading.

All three snapshots of the NBBO were taken within the same 30 second period…

Facebook (NASDAQ:FB)

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.

Facebook: key up channel broken

This is a screen shot (click for full image) of our trading screen showing a very simple regression channel with a few standard deviations (10 min line-break bars) which has defined Facebook’s upward trend since August.  This channel was officially broken yesterday morning (11/25) which, not withstanding a retest of the $46-47 range, should indicate further declines from here.   This is how we would make a human-based decision based on probabilities, but our Facebook Stock Predictor algorithm is typically more accurate than us and ultimately makes the final call.

FB 10 min linebreak chart – clear regression channel dating back to August has been broken (click for larger image)

The Facebook Stock Predictor – now a premium service

We first launched the Facebook Stock Price Predictor as a public service to showcase our technology to potential clients, and hopefully help out a few investors along the way, including some of our friends and family who were invested in the stock (against our recommendations).  We have had great feedback from our followers and we have enjoyed sharing the signals and exchanging ideas.

It is with mixed feelings then that we are announcing our decision to transform the Facebook Stock Predictor into a private service for paid subscribers.

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Facebook: Exactly how many active users have a pulse? we may never know…

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The Facebook Stock Predictor algorithm generated a SELL signal late in the regular US trading session on 11/6 and we notified our email list members immediately. This was after a Neutral position was maintained for the past 5 trading days – a demonstration of computer-grade patience as the market resolved its slow grind.

Last night our team exchanged bearish ideas as to why the stock price might go lower from here.  One of our programmers told a story about how is 80 year old mother sent him an invite to ‘connect’ on LinkedIn:   This elderly lady unfortunately fell for a well known trap where LinkedIn logs into your email account and collects all of your contacts and indiscriminately sends every one of them an invitation to ‘connect on Linkedin’. You can read about this unethical practice and the class action law suit at the New York Times.

Social Network users:  Quality vs. Quantity vs. Non-Existent

Linkedin no doubt counted this 80 year old mother and each one of her vulnerable, elderly contacts who clicked on an Invite as an actual ‘user’, even though she won’t use the site again (and neither will her contacts). Users acquired under such unscrupulous circumstances would explain the sky-high user numbers Linkedin and Facebook reports each quarter, and would also explain their high valuations.

Facebook also uses similar tactics to increase their user base. Their approach isn’t quite as aggressive, but it’s equally unethical.

This raises the question: What is the actual number of ‘quality’ Facebook’s users?

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Opinion: Facebook Valuations, Analysts, and Monkeys…

It’s easy sometimes to get caught up in market opinions and forget one of the most fundamental reasons for investing in any asset: buying now with the expectation that someone will want to buy it from you in the future at a greater price.

Beware of analysts pushing stock… and monkeys

It sounds simple enough, but what’s easy to forget is that the price of any asset (real estate, antiques, etc.) is set by markets, not by what you personally believe it’s worth.

Financial instruments such as stocks, commodities, bonds, and their ETF proxies should also be approached with the same level of diligence – that is, to understand what the current drivers are behind prices, and to know how much other investors will feel they are worth in the future.

To answer such questions we rely on a number of widely accepted indicators, such as corporate earnings, advertising, our own greed and instincts, or perhaps what our peers and family members happen to be buying at the time. Many fortunes have been made by this method, and many more have been lost. More disturbingly, a good number of analysts exploit this and write up feel-good stories to convince people into thinking assets will appreciate in the future, right or wrong.

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Facebook Q3 Earnings Commentary: ‘If you can’t get rid of the skeleton in your closet, you’d best teach it to dance’

How it all began

Facebook’s earnings conference call last night reminded us of that scene in ‘The Social Network‘ when Mark Zuckerberg and Eduardo Saverin argue over  introducing advertising to Facebook..

EDUARDO: It’s time to monetize the site.
MARK:
What does that mean?
EDUARDO:
It means it’s time for the website to generate revenue.
MARK:  I’m asking how do you want to do it?
EDUARDO: Advertising.
MARK: No.
EDUARDO: We’ve got 4000 members.
MARK: ‘Cause the Facebook is cool. If we start installing pop-ups for Mountain Dew it’s not gonna–
EDUARDO: Well I wasn’t thinking Mountain Dew but at some point–
MARK: We don’t even know what it is yet. We don’t know what it is, we don’t know what it can be, we don’t know what it will be. We know that it’s cool, that is a priceless asset I’m not giving it up.
EDUARDO: When will it be finished?
MARK: It won’t be finished, that’s the point. The way fashion’s never finished.
EDUARDO: What?
MARK: Fashion. Fashion is never finished.
EDUARDO: You’re talking about fashion? Really? You?
MARK: I’m talking about the idea of it and I’m saying it’s never finished.
EDUARDO: Okay, but they manage to make money selling pants…

Zuckerberg ultimately got his way, and things haven’t changed much since then.

The price of Facebook’s shares are directly related to the company’s speed and ability to turn their users into products for advertisers.

While Facebook’s ability to productize their users is not an issue (they have the means and the lack of ethics to do so), the company’s timing is what made the stock swoon during the conference call last night after market hours.

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Facebook: Sell signal generated, but wait for the trend

After nearly 5 months the Facebook Stock Predictor has generated a Sell signal.

The Sell signal means that, based on historical trading patterns dating back to the stock’s IPO in May 2012, the algorithm has assessed a high probability of further declines from today’s levels.

This algorithm has had a high degree of accuracy to date so we have every reason to follow it, however in this current euphoric upward trend, it would be wise to use caution.

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Facebook: who’s buying?

Update – Nov. 15 – Goldman finally files their 13F for the quarter, and reports that they sold off 1.8 million shares.  You can read their filings on the SEC web site here.

Update –  Oct. 29:  Goldman still hasn’t filed a 13F for the past quarter.  The 45 day deadline is November 17th.  Looking at their past history they typically file at the last minute, likely to avoid moving the stock against the positions that they are taking. We continue to monitor the filings as they come in.

We have been crunching statistics based on the recent 13F filings that have been trickling in for the July-September quarter.

13F is a regulatory form that institutions must submit once each quarter disclosing their positions.  Filers have 45 days after the quarter to disclose, and we are on the 21st day so as the filings are submitted and posted, we are starting to see a better picture of which ones are buying, selling, and standing pat on their positions.

NASDAQ shows this data on their site, but it’s not as thorough as proprietary reports (such as Thomson or Factset), so we fill in some of the blanks to get a more complete picture:

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Facebook: One more short squeeze for the road

Those who have been following our Facebook posts know that our projections have been correct, and our Facebook Stock Predictor has stayed with the trend since June. The algorithm’s long position did not get shaken out on those price drops along the way to today’s levels, including a $5 plummet we experienced last October 8th and 9th which has nearly been erased, climbing back up to the $50 level as of this morning.

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