Sunshine Trader

New Blog URL

noreply@blogger.com (Michael Arold) — Sat, 14 Nov 2009 13:30:00 +0000

I moved my blog to Wordpress, so please use the following link in the future:

http://michaelarold.wordpress.com/

Dollar and the US Stock Market

noreply@blogger.com (Michael Arold) — Sun, 08 Nov 2009 13:42:00 +0000

There is this famous inverse correlation between US Dollar and the stock market. If you believe the relation will keep up being strong in the future and that the Dollar is driving stocks, you might just analyze a chart of the Greenback to get some clues on where stock prices might be going. So here is a plot of the US Dollar Index:

From a purely technical standpoint, the Dollar is moving down in a nice trend channel. With a little stretch, you could argue for a "declining wedge" and "MACD divergence" in the last months, which usually would be a sign for upcoming reversal. The wedge doesn't show up very strong, so I wouldn't bet the bank on a change in direction yet.
Bottom line: based on the Dollar chart, I have to be bullish on stocks FOR NOW.

Some Nice Swing Trading Setups on the LONG Side

noreply@blogger.com (Michael Arold) — Fri, 06 Nov 2009 09:04:00 +0000

Despite all the chatter about market weakness and expecation for a major correction, we can identify some nice short term swing trades on the LONG side. Check out the following stocks for a quick trade if the market behaves well after job numbers:

BTU: Entry @43, Stop@41, Target@50 = risk/reward 3.5
TUP: Entry @45.5, Stop@44.5, Target@50 = risk/reward 4.5
ABT: Entry @51.6, Stop@50.8, Target@54 = risk/reward 3

The Small Cap Sell-Off

noreply@blogger.com (Michael Arold) — Thu, 29 Oct 2009 06:53:00 +0000

It was quite interesting the last days to observe the nature of the recent sell-off: large cap stocks held up quite well. While the Russel 2000 was underperforming for quite a while, its decline really accelerated this week. The lower curve on the following charts depicts the ratio of small (Russel 2000) to large cap (DJ) stock prices. While the ratio was declining for the entire rally, it shot up in the last four weeks:

So the decline is one one hand a sign for risk aversion, but might also be an indicator for a healthy longer term rally: we are seeing a normal sector rotation from risky small caps to more conservative large caps (who BTW benefit from a weaker dollar, because large companies tend to be more export oriented.)

In any case, I don't expect the decline to be over. We propably will see a bounce soon due to oversold conditions, but I expect stocks to be under pressure for some time because of missing catalyst. The wild card, though is the Dollar. The chart shows us a stable downtrend so far, you might could argue for mild momentum (MACD) divergence as a sign of stabilization:

Anybody Interested in Joining a Virtual Trading Group?

noreply@blogger.com (Michael Arold) — Wed, 28 Oct 2009 09:00:00 +0000

I would be interested in establishing a "virtual trading group" in order to have more targeted interation with mind like traders and bring our trading "to the next level". Check out Dr. Brett's post about the topic. I think it would be great to form a group of 3-5 investors with similar style and experience. The group would regularly (2-3 times a week) discuss trades, the markets, successes and failures. In order for this to be beneficial to everyone, it would be important to have similar backgrounds/philosophy.

So here is what I'm looking for:

- Trading US equities on a short time frame (2 days - 4 weeks)
- At least three years experience and solid knowledge about technical analysis, risk management and trading psychology
- Style influenced by Alexander Elder (not a must)
- Located in Europe (makes it easier with the time difference, not a must either)
- Part time traders OK (or even preferred, because that's what I am)

So if you are interested, shoot me a mail.

S&P 500: this chart makes me nervous - VERY nervous

noreply@blogger.com (Michael Arold) — Fri, 16 Oct 2009 11:47:00 +0000

As traders, we are constantly questioning our own positions and looking for signs why we might be wrong. Despite the fact that I am (was) very bullish recently, I have to acknowledge that the S&P 500 chart doesn't look bullish at all. You might be surprised, because a superficial look tells you that prices keep going up. Let me focus your attention on some observations:
I would like refer you to a tool, which was introduced by Dr. Alexander Elder: the Force Index (FI). The FI is basically price change multiplied by volume. I use this index to visualize divergences between volume and price action. Higher prices without participation of volume indicates upcomming trend reversals.

Lets look at this relationship for the last 8 months: we can identify three distinct periods:

- Marked with (1) on the chart: right after the ultimate low in March, the market put in a strong reversal and kept climbing for almost two months on declining volume. Look how nice the divergence shows up in the chart.

- (2): The divergence (1) indicated upcoming weakness. In fact, the S&P went through a consolidation phase in June. Note that we actually had a bullish divergence during phase two (green lines).

-(3): The market responded after the bullish divergence (2) with higher prices. Upside volume has become increasingly weak and divergence (3) has been shaping up.

- (4): This is the point that concernes me most: during phase (3), we had three minor pull backs. Each of the pull backs was stronger in size and volume, as you can see when looking at the Force Index (4). So it looks like the bears are gaining strength on every dip. Divergence (3) shows that bulls are running out of steam. The big price jump beginning of July was triggered by the beginning of the earnings season. Guess what: Q3 earnings season just started and the chart looks to me more like prices getting exhausted.
I'm really contemplating closing all my long positions and start going short. S&P price target at least 950.

Buy Semiconductors After Intel's Quarter?

noreply@blogger.com (Michael Arold) — Wed, 14 Oct 2009 09:11:00 +0000

Intel reported a blowout quarter yesterday evening and the question arises if one should buy semiconductor stocks in anticipation of more positive earnings news from companies in this sector.

Let's take a look at what happened in Q2, when Intel kicked off the semiconductor earnings season on July 13:

We had a similar situation: Intel surprised to the upside. It was a profitable trade to buy into the momentum and trade a semiconductor ETF (IGW). Even if you got in at the new relative high around $39, you were able to book a 10% gain after three weeks. Since market conditions are comparable, I think we could see a similar move now. The risk reward ratio is the compelling feature of this trade: even if you did put a stop at the breakout point around 38, your ratio would have been 1:4.

BTW, I prefer the leveraged version USD for this trade.

Market Acting Tired

noreply@blogger.com (Michael Arold) — Tue, 13 Oct 2009 08:10:00 +0000

Despite my bullishness, I have to recognize the fact that the market is acting tired. Divergences all over the place. Earings really need to kick butt to keep the rally alive.

Weekly Game Plan Oct 12 2009

noreply@blogger.com (Michael Arold) — Mon, 12 Oct 2009 09:04:00 +0000

It seems like the most common question these days is "what the heck is going on with the market?" No one is understanding, why we keep going up despite questionable economic numbers. A nice quote I read the other day summarized the current state: "stocks will go up until nobody is surprised anymore that stocks go up". It is only two and a half months until the end of the year and a lot of money managers have been sitting on too much cash and are jumping in on every little pull back. This game can go on for a while.

But there might also be a fundamental reason: we are at the beginning of earnings season and many market observers state that "top line results have to improve to further fuel the rally". I do not agree: stocks can go up if companies keep beating earnings on cost cutting. The catalyst here is that analysts simply underestimated how much costs companies are actually able to cut. They are using technology to replace processes, which were predominantly executed by humans. Or why is the techonogy sector so strong?

So with money managers being underinvested, strong earnings season comming up, a lack of investment alternatives (besides maybe gold), the prospect of additional stimulus packages and a recent up tick in housing prices (potential housing bottom) in some areas, there are plenty of reasons for the market to run up until the end of the year.

The game plan remains simple: stay on the long side, buy the dips & sell the rips.

Swing Trade Idea: RIMM

noreply@blogger.com (Michael Arold) — Wed, 07 Oct 2009 10:14:00 +0000

I generally like to trade stocks AFTER they reported earings. One "surprise factor" has been eliminated and we can sometimes exploit the overreaction of the crowd. (As I keep repeating like a broken record: to a certain extend, you need to bet against the crowd to be succesful in short term trading).
So RIMM reported on Sep 23 and earnings outlook disapointed. To make that clear: they presented a positive outlook with future Q3 revenue to be around $3.6 -$3.85 billion. Analysts expected $3.9 billion, though. So the company is still projecting significant growth.
Looking at expectations explains, why the stock came down so hard: out of 44 analysts following the stock, only one had a "underperform" (not even a sell) rating. 66% of the analysts rated RIMM a "buy". A classical case of too much optimism, which sets up for disapointment. From a fundamental stanpoint, RIMM is trading around 18 times earnings, which is cheap when considering a projected earnings growth of over 35%. So we have a positive long term fundamental picture. Since we are looking for a short term trading opportunity, we need to take a look at price action after the event:
Price came down to a major support level at $65, which gives us a nice landmark for a stop-loss of our swing trading postion. Next we need to find out, if RIMM is likely to brake that level short term or if buyers are coming back in. let's take a look at a 15 min chart: We can observe two developments: first, price tested the $65 level succesfully three times, which is quite bullish. Second, we can identify a "falling wedge" chart pattern, which indicates declining selling pressure. Should we break this wedge to the upside, we will likely see more upward momentum.
So here is the trade:
- buy RIMM either on a break of the pattern or another succesful test of the low@ $65. Based on current dynamics, we expect the break to happen in the next two trading days.
- Once you are in the trade, you put a stop - loss slighty below $65 and sell half of your position around 69.50 to cover your costs.
- Final price target @$72, which roughly gives you a risk-reward ratio of overall 2:1 and makes this an interesting trade.

Update - Sector Watch: Financials Look Interesting

noreply@blogger.com (Michael Arold) — Mon, 05 Oct 2009 12:41:00 +0000

Just a quick note: Goldman came out this morning with positive comments about US banks. So here we have another explanation for the technical picture I described in my last post. This is a very interesting lesson: technicals often lead fundamental events, such as upgrades and you need to monitor both to put the puzzle together.

Happy trading

Sector Watch: Financials Look Interesting

noreply@blogger.com (Michael Arold) — Mon, 05 Oct 2009 10:07:00 +0000

OK, the market has pulled back for the last two weeks, but at this point I consider the recent decline just a correction of an uptrend. Analyzing relative strength of major sectors reveals some interesting insights into the current mood of the stock market. Please note that I compare relative prices of major sector ETFs for this analysis:

(Chart of 6-month relative stock market performance of major US sectors)

Particular interesting is the raise in relative strength of the Financials (red line): uptrend is a little choppy, but they have been quite strong for the last three months. I actually expected Financials to lead the market decline, due to the difficult situation in US consumer financing, defaulting loans, housing demand, etc.
The steep Yield curve is probably reason for the strong Financial sector. It will be very interesting to see if they can lead the market higher if we should see a rebound.

Defensive sectors (grey dashed lines) have been on the rise for the last two weeks, but I would expect more strength if the recent market decline would have been more than just a correction.

The analysis shows how important it is to visualize any kind of financial data. The human brain is generally strong in pattern recognition (and BTW weak in number crunching, computers outperform us here).

Bottom line: I'm still bullish, but looking out for warning signs.

Swing Trading Portfolio Snapshot

noreply@blogger.com (Michael Arold) — Sun, 20 Sep 2009 17:21:00 +0000

Just a quick review of my current swing trading positions. In general, we are incredibly overbought. So at this point, I'm looking to scale out of or even close weak positions. Please note that I currently own LONG positions only.

AAPL
Had a very strong move on high volume last week. A little bit surprising without any news. I plan to stay in this trade until $200 and then re-evaluate.

ARO
A IBD100 stock. Nice move, but declining volume. Time to take some profits on this one. Broke strong resistance @ 38. Keep ARO on the watchlist to get back in after some consolidation.

CSX
Railroad stocks are hot right now, CSX consolidated the last two weeks and moved close to key support level @ 44, which prompted me to add to my position last week.

ETFC
Upgraded from Goldman last Friday, gaining momentum the last four weeks. Strong resistance @ 2 bucks. I think ETFC will break that level soon and move quickly to $2.3, where I plan to take partial profits.

Gold
Next two weeks will show if the move above $1000 was a false breakout or not. I think it will move higher. I just own a small position of UGL (2X ETF) and I would like to add more.

LEN
Homebuilder, short squeeze play. Reports next week, we'll see if we can get another boost in the stock price.

MA
Very strong move last week, similar to AAPL. Plan to take profits @ 240.

NTES
My most speculative play in the portfolio. Chinese gaming stock. In a consolidation zone for two months, looks like it might break out soon. Not to late to get in.

OII
IBD 100 stock, a little bit weak recently, need to monitor this one.

PCLN
Very strong uptrend. Looking for consolidation down to $155 before I add to my position.

RKT
Paper stock, hot sector, but this one is consolidating. Keep it as long it trades above $47.

Oil
Interesting technical pattern, similar to what we saw with Gold some weeks ago (symetric triangle).
It is just a question of time when Oil will break out and march towards $80.

My Take on Gilead

noreply@blogger.com (Michael Arold) — Fri, 11 Sep 2009 08:00:00 +0000

The market is hot right now and it becomes more difficult to find interesting opportunities. Note that we are in a momentum environment, so trading has to be completly different then let's say half a year ago.

One of the stocks I like is Gilead:

Totally overlooked in recent weeks. Obama's health care discussion mess is masking some of the stocks in the sector. Gilead is a large cap swin flue play and Jim Cramer is all over that company (Don't know if that is good or bad, though :-) ). Swine flu headlines will come up in a couple of weeks. Gilead could benefit from Tamiflu sales, one of the few treatments for the disease.

The monthy chart looks very clean:

Strong uptrend for the last 10 years, some consolidation in the last 12 months, but forming a nice bullish wedge.

The behaves pretty choppy on a daily basis, so it actually doesn't look like a stock I normally would swing trade:

Since we got a potential catalyst coming, I would give it a try. Note that that GILD has totally underperformed in this rally (lower curve since April).
If you want to trade this: Stop @ 44. First target 53 creates a compelling risk/reward ratio of 3.5. Once the stock reaches the target, take off half the position if the stock shows increasing momentum. If the move is weak, close the position.

S&P 500: Technical Picture until EoY (Update)

noreply@blogger.com (Michael Arold) — Thu, 10 Sep 2009 08:47:00 +0000

Yesterday, I wrote about the technical possibility that the S&P 500 could run up to 1125 points until mid November. Since we identified the technical picture, we now have to look for potential catalysts that could move us higher. Here is my favorite one:
Q 3 earnings season will start in a couple of weeks. I expect especially multinational companies to issue positive economic outlooks and raise their guidance for the next year, since we recently have seen encouraging economic numbers. In addition, the declining Dollar will help export oriented companies to improve their earnings. I do not think that Q3 earnings is fully priced into stocks yet.

So let's assume we would see a strong earnings season and more signs for a V shaped recovery would emerge. What'll could happen mid/end November? Since markets are a discounting mechanism, they could start to focus on a FED exit strategy. Rising rates and elimination of "quantitive easing" will be a critical moment for the economy and create fear among stock market participants.

Of course, you can entirly scratch the scenario described above if new developments are coming up. For example, I'm observing the developments in Iran. Oil could easily march towards $100 Dollars if Israel starts to get nervous; a development that would send stocks downward. The outlook for a potential war in Middle East is definetly not priced into stocks yet. BTW: this scenario is one of the reasons, why I started to build a LONG position in Oil.

So that's the nature of speculation: you create a thesis about things that the markets don't see yet and make your bets on it. Once you see these themes unfold, you start closing your trade. Buy the rumor, sell the fact. (I apologize for pounding this point so often).

S&P 500: Technical Picture until EoY

noreply@blogger.com (Michael Arold) — Wed, 09 Sep 2009 07:59:00 +0000

I'm not a person, who thinks that you can predict market moves using Technical Analysis alone. Nevertheless, it's sometimes interesting to see where markets could be heading and then look for additional factors outside TA to make investment decisions.

This morning, I took a look at the weekly chart of the S&P 500 and extended it until December 2009. Some very interesting observations can be made:

We basically have three "technical" phenomena in the chart:

1) A falling trend line
2) Fibonacci retracements (watch the 50% retracement)
3) A rising wedge, which usually is a bearish sign

If you extend all the lines until the end of the year, you can see that they all come together at one point (4). So based on this analysis and the assumption that the current move is just a bear market rally, we expect the S&P 500 to top at 1125 around mid November.

Granted, this prediction is almost too accurate to become true since it also includes a date. The convergence of three different technical bearish patterns is an interesting phenomenon and we'll need to watch the markets very closely at that point. One conclusion we can draw at least is that there is a lot of overhead resistance around 1100.

At first, the S&P has to make it through the 38% retracement, though.

Maybe a Simple Reason Why Gold is Moving

noreply@blogger.com (Michael Arold) — Tue, 08 Sep 2009 07:13:00 +0000

Looks like Gold broke the 1000 level this morning. Let's see if we can sustain the move in the afternoon. Dollar weakness seems the driving force since EUR/USD made a new high this morning as well. We can see a quick move if EUR/USD manages to blow through 1,45.

Remember, we had some positive economic numbers from Germany yesterday. So it looks like we are recovering relatively well (at least in Europe).

So here is a possible thesis for a LONG Gold trade:

Economists have been underestimating the speed of the recovery and are behind the curve with their interest rates. The low interest rate level will create inflationary pressure sooner than we thought.

Remember: this is not a prediction, just a thesis for trading (of course, you should have a thesis for every trade you're doing). I'll watch out for supporting arguments in the next days/weeks.
The market is a discounting mechanism, who tells us today what will happen tomorrow. Sometimes it is not clear, what the market is saying, because it'll take a while until you are able to see the facts. But that is the nature of speculation.

My 11 Most Important Trading Rules

noreply@blogger.com (Michael Arold) — Mon, 07 Sep 2009 11:36:00 +0000

Thought I just list them here as a reminder. I initially had ten points and came up with a eleventh one, which I didn't want to scratch:

1) Buy the rumor, sell the fact
2) Buy when the crowd sells and sell when they buy
3) Before getting in, know when to get out
4) It's all about the odds, there is no certainty in speculation
5) Be disciplined
6) The market is always right
7) What works today, will probably stop working tomorrow
8) Never ever stop learning
9) Be open to the idea that you might me wrong
10) Know what your edge is
11) Never chase the market

Summary of GOLD Arguments

noreply@blogger.com (Michael Arold) — Mon, 07 Sep 2009 09:07:00 +0000

I'm currently trying to understand the recent move of Gold, so I digged into various resources for arguments. Here is a summary of point that support/don't suppport the current move. Hope that helps you to pick your side of the trade:

Aguments why Gold should continue to rise short term:

Technical breakout from consolidation
China recently adviced people to invest in Gold
Seasonality: September has historically been a good month for Gold
Negative trend for the Dollar could push Gold prices up
Supply in longer term downtrend

Negative factors

Everybody seems to be behind Gold: contrarian argument
Falling jewelery demand
Inflation fears overblown: might become an issue in 2 years
De-hedging: stock markets become stronger around the world
1000$ resistance is very strong

It seems to be difficult to assess what's behind the latest move. Volume has been strong, though, and I wonder if "someone knows somehting". Despite the fact that I own a small position in UGL, I expect Gold to NOT break the $1000 level this time.

Time will tell.

Relative Sector Performance Review Sep 6

noreply@blogger.com (Michael Arold) — Sun, 06 Sep 2009 18:43:00 +0000

I often find new trading ideas by monitoring relative sector performance. Here's the chart for the last six months (proprietary method to calculate values):

Some things we can learn about the state of the market:

Defensive sectors remain weak on a relative basis, which is a bullish sign for the market
Financials actually have been the strongest sector in recent weeks. This might change, since
many banks behave a little bit toppy. I'll monitor them closely next week.
Energy is catching up since over a month. The sector has potential to lead the market
in the next weeks if oil resumes its march towards the 80 level.
Tech, the former leader, is stuck in the middle ground. Looks a little bit like it
doesn't know where to go.

Overall, we might see a sector rotation from Tech to Energy/Industrials. The range of sector
strength remains tight (35 - 55%), so we are missing clear leadership. I would like to see a range like earlier this year with values between 30 - 70%, which would make it easier to spot opportunities with unique trading themes.

Feb 27 2007: What can we Learn from History?

noreply@blogger.com (Michael Arold) — Thu, 27 Aug 2009 08:32:00 +0000

The current market reminds me a lot of the beginning of 2007. At that time, the market was moving in a similar fashion: climbing the "wall of worry" on low volatilty.In fact, it took the market seven months to move up about 18% from the bottom. On February 27, the market finally declined over four percent in a day. The move was triggered by a big decline in Chinese stocks and negative economic numbers in the US (Check out the CNN market report of that day).

Prior to that decline, experts were warning of a significant pullback for months due to economic expectations. We are in a similar situation right now with several analysts predicting stocks to decline. Yet, the S&P continues to make new heights on low volatility.

Was there a way to predict the date of the selloff from various (sentiment) indicators in 2007? On the chart I plotted several curves, such as NYSE Advanced/Declines, New Heights/New Lows, VIX and MACD. None of them predicted the selloff. You could maybe argue that the momentum divergence of the MACD showed decelerating upward drift. However, the MACD accelerated again in Jan/Feb and thus gave you a false signal (As you might know, I consider these classical technical indicators quite useless anyways). Bottom line is that none of these indicators predicted the downturn. Drawing trendlines or Moving Averages also didn't help.

So let's assume, you were a short term oriented trader at at that time and you would have known that stocks will sell off at some point in the future. What would have been a successful strategy?

a) you could have gotten out of the market during the uptrend and simply waited for the sell off to re-enter. This strategy would have been profitable if you would have sold after November, so almost three months before the sell off . Psychologically, you would have had a tough time between December and February: you needed to watch the market go up from the sidelines and be disciplined enough to not get back in.

b) you could have played the price swings: buy after a pull back and sell on a new height, which is actually my style. Problem with that strategy: You might have bought the days before Feb 27 because the market actually dipped slightly. In order to play this strategy successful, you should have sold everything in the morning of Feb 27 and aggressively opened short positions to play the downside momentum. That day was actually a trending day, so you had a good chance to get back some of your losses of the last swing.

A third, more advanced option would have been to use options to hedge the portfolio and benefit from rising volatility/premiums.

So, here we are two years later. I think that we will see a similar selloff before the end of the year. It is totally unpredictable when exactly that will happen. As we have seen in 2007, trends can run a long time and it is impossible to pick the top.

I'm leaning towards strategy b), but there will be days in September when I cannot monitor the markets all day, so I will probably move to strategy a).

Some Trading Themes

noreply@blogger.com (Michael Arold) — Fri, 07 Aug 2009 06:48:00 +0000

Just briefly wanted to list some themes I try to benefit from in my trading:

- Dollar Decline leading to rising commodity prices. Looking to trade metal & agriculture stocks.
- Inflatation fear. I'm watching gold, but still don't believe it will break $1000 despite compelling fundamentals. I keep observing. Might either change my mind soon or even short it.
- Natural gas: straight decline. Looking for signs of bottomning. Compelling Oil/Gas price ratio.
- Financial outperformance: see my last post. Favorite since last week: Citigroup. Glad to see Cramer finally got behind that as well :-).
- Germany: (I'm a little bit biased, since that's where I'm living: looks like recovering faster than US as a result from export orientation of the country. Stock market so far has not outperformed the US. I might buy into an ETF after some consolidation. Could put more pressure on Greenback BTW.
- China: play the long term up trend.
- Solar: sector out of favor and quite rocky, so I'm careful.

Please note that I'm not holding positions YET in every one of the themes. Looking for good entry points.

Visualizing Sector Rotation

noreply@blogger.com (Michael Arold) — Thu, 06 Aug 2009 06:59:00 +0000

I regularly look at relative sector performance as part of my weekly routine to detect shifts in market sentiment and themes. Each industry gets assigned a relative strength value between 0 and 100%; some smoothing is also applied. It is a quite interesting exercise to look at a chart of these values: When you look at the tech sector (green) for the last half a year, you can observe that stocks in this area have been quite strong. However, Tech lost its leadership in recent weeks. Financials (red) and Technology seem to play a dual role: if one of them is weak, the other is strong and vice versa. In fact, the rise of Financials to become the leading sector started almost two months ago. We are in a momentum market and it looks like that the hot money is moving from Tech to Bank stocks. It doesn't make much sense to me, but as a momentum based trader, you need to follow the money flow.

Case Study: How I Find new Trading Opportunities

noreply@blogger.com (Michael Arold) — Wed, 22 Jul 2009 09:56:00 +0000

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.

Buying Goldman ahead of the Quarter?

noreply@blogger.com (Michael Arold) — Mon, 13 Jul 2009 12:43:00 +0000

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.