"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
-
Sun Tzu

Wednesday, July 22, 2009

Case Study: How I Find new Trading Opportunities

Yesterday's action in Chinease solar stocks was a nice example on how I find new trading opportunities. My strategy is based on identification of major trading themes, which of course change quite frequently.

Yesterday, the Chinese government announced that they would run high subsidies for solar projects. It is likely that Chinese companies will benefit. Let me walk through my selection and decision making process:

- First of all, solar stocks have been out of favor recently, so I'm a little reluctant going into that sector. Nevertheless, market sentiment can change quite rapily, so we need to keep monitoring relative sector strength.

- I looked at major Chinese solar stocks for short term trading opportunities. These companies included: LDK, STP, TSL, CSUN, JASO.

- Note that even though I'm trading short term, I'd like to have positive, or at least improving fundamentals for potential short term catalysts. A very quick way for me to get an idea about the fundamental picture is to look at analyst ratings. I assume that these guys analyze company numbers, such as debt situation, earnings growth,etc. quite intensivly. I'm not interested in any paricular analysis, rather in the general analyst concensus and trend. The situation for Chinese solar stocks:


"Analyst Trend" indicates if analysts became more or less bullish in recent months.


- First of all, I'm reluctant to get into a stock when analysts are too bullish, so for example when 90% or more submitted a BUY rating. In that case, there is more room for down- than for upgrades. In the case of Chinese solar stocks, analysts are obviously not overly bullish. So there is some room for positive surprises.

- Next, I want at least some analysts to have a buy rating. Otherwise, there might be some real issue dragging the stock down. We can see that LDK is in that situation. Reason for the negative outlook is the company's very high debt level. The most interesting candidate seems to be Trina Solar (TSL). 50% of analysts have a buy rating, so that leaves room for further upgrades.

- There are other numbers that I look at for short term trading catalysts, such as Short ratio or date of next earnings announcement. I also look at underlying developments that might influence the stock price. In this case, the value of oil.

- Finally, I pull up a chart to see where I could find a good entry point. In the case of TSL, we can see that the stock is trending up nicely, despite the weakness in the solar sector. Trina just broke out to new hights. In order to swing trade the stock, we need to wait for a little consolidation period before pulling the trigger. So I placed TSL on top of my watchlist for the next weeks.



Monday, July 13, 2009

Buying Goldman ahead of the Quarter?

There has been a lot of talk last week about Goldman Sachs' upcoming quarterly earnings release. The company is supposed to beat there numbers significantly when they report on Tuesday after the close and received a couple of upgrades in the last days.

I was interested to know if it would make any sense to buy Goldman ahead of the quarter for some short term trade, so let's take a look at the last releases, when they were actually beating analyst's expectations.

First of all, Goldman came out ahead of estimates five out of the last six quarters, so odds are pretty good, that they beat their numbers again. (Based on the assumption that a company has a tendency to beat future's earnings if they were able to beat them in the past).


In five of the last six events when GS came out ahead of estimates, you were able to make a profit from the trade, if you bought the stock two days before the release and sold on the close of the earnings day.
On the other side, GS tends to fall during the days after earnings: buying the stock on that day and hold it for 1 or 5 days wouldn't have given you an edge. This example illustrates a classical "buy the rumor - sell the fact" event. Granted, my sampling size is fairly small with six events, but the data suggest that even a fade after positive earnings might be a interesting trade.

Wednesday, July 8, 2009

Cramer's Boeing Call

On June 5, Jim Cramer was recommending to buy Boeing at $50. The stock tanked after the call and has lost over 20% of value since then. The rationale for the trade sounded compelling: Boeing will come out with the 787 soon, the plane will be a game changer and pull up the stock. Unfortunately, Mr. Cramer forgot that the 787 didn't even take off yet and suffered from many delays of its maiden flight. It wasn't too surprising that Boeing anounced another delay shortly after Mr. Cramer's call.
Let me comment that generally, I like Jim Cramer's approach of coming up with logical rationals for his stock trades. He is doing a great job educating private investors on how Wall Street works.

There is only one small problem I have: there seems to be no accountability with his calls. A bad investment like Boeing can happen. In fact, it happens all the time to every trader. (Remember that Cramer is a trader, not a long term investor). The key when trading is to track your performance statistics: win/loss ratio, average return and so on. Even the best traders of the world are right only 60% of the time.

Why doesn't CNBC publish Cramer's statistics? If I would invest my money based on his recommendations, knowledge of his historical performance would be an absolute requirement. An even better way would be for him to sign up for an account at Covestor.com.

One last comment: I do not WATCH the Mad Money show. As a motivated private trader, you shouldn't have time for that.Instead, I READ the summary of his show, which only takes me 2 minutes in the morning.


Be careful of all the stock gurus out there who do not publish their performance records.

Sorry for the rant & happy trading

Tuesday, July 7, 2009

Some Random Market Thoughts

S&P500
Obviously didn't break out of its trading range yet. Support @ 880 getting stronger with each succesful test. Let's see if initial claims or Alcoa's earnings this week can push down the market. Positive data point: NYSE Advanced/Decline divergence:


Gold
IMO Overrated. Forget any inflationary pressure for the next 12 months. Could be a nice short trade if Gold breaks 920 to the downside. Target 880 in that case.

Oil/Energy
I missed that move to the downside. Too late to chase it.

Some LONGS (AAPL,STAR,MFE...)
...still show nice uptrends. Candidates for swing trades on the long side after this pullback.

Some SHORTS
Everything tied to consumer spending (besides AAPL): TIF, GET, JWN, LVS, RTH.
I'm looking for good entry points in the next weeks.