stockbee

Magnitude of moves

2013-05-16T05:55:00.001-04:00

Good Bull markets are characterized by explosive swing moves. In last 3 or 4 days we saw some of that on a narrow set of stock. In many good bull market this kind of action is more widespread.

These kind of explosive moves in a short time period of 3 to 25 days are the momentum bursts. Stocks make such momentum bursts and go sideways, pullback , or reverse. Next set of stocks then breakout. This kind of rotation is characteristic of bull moves.

The number of stocks up 25% in a month and 50% in a month help you gauge the magnitude of moves happening in the market. In last 3 days those figures ticked up in this long running rally.

That can also be an indicator of final blow off stage. Or it can be indicator of more normal market action. These numbers have dramatically picked up in last few days. Last time we saw these kind of numbers was in August 2012.

This rally has been characterized by low magnitude moves. But in last few days that is changing.

Stocks move in momentum bursts of 3 to 5 days. These momentum bursts last only for short duration but can be of 8 to 40% magnitude. Smaller stocks tend to make bigger moves. Bulk of the swing trading methods have eveloved to capture these kind of momentum bursts moves.

Red hot momentum

2013-05-15T08:32:00.000-04:00

The market continues to exhibit red hot momentum. Such conditions are ideal for breakouts and pullback trades.

The participation of stocks in the rally has started to improve in last 3 days. More sectors are breaking out.

The rally so far was characterized by lack of explosive moves. Explosive moves are moves that are 25% plus moves in a month. In last 2 days the number of stock making 25% move and 50% move has ticked up.

Momentum continues

2013-05-13T08:55:00.000-04:00

Market continues to show good momentum. New sectors continue to breakout. At this rate we will son be approaching extremely bullish readings on T2108. But excessively bullish readings by itself is not a cause for becoming bearish. Markets can remain extended for extended period of time.

Breakouts continue to find buyers for next day or so, but big follow through is missing. We monitor daily number of stocks up 50% in a month. That figure in current market is 8 , which is very low. In bull markets readings above 20 on this are common and readings above 50 are not uncommon at this stage in rally.

This remains a small moves market. Moves of 10 to 15% dominate the action.

Magazine cover indicator

2013-05-09T13:17:00.002-04:00

Stocks in play and PEAD

2013-05-08T08:55:00.005-04:00

Stocks in play are stocks with fresh news after the close or before market open. Fresh news leads to fresh moves.

Everyday hundreds of stocks release news before and after hours. These news releases can lead to stock making big move for the day.

When news is released either it is already discounted by the market or the market is surprised by it. The stocks can either go up or go down.

A heavily shorted stock on good news can lead to short squeeze. A heavily favorite of fund stock similarly on surprisingly bad news can tumble.

Announcement related to earnings in either as guidance or actual earnings have potential for starting or ending multi month moves.

This phenomenon is called PEAD or Post Earnings Announcement drift. It is considered a market anomaly.
In a perfectly efficient market a news should get discounted immediately and there would be no way to profit from it.

So let us say a stock releases significantly better earnings. If such earnings is going to lead to doubling of the stock, then at open it should gap up to the double price and there would be no way to profit from the new information.

But markets are not efficient. What happens is the new surprise gets priced in over time. This is what the PEAD phenomenon is about.

When companies announce earnings, if the earnings are significantly better or worse than market/analyst expectations then the company stock goes up or goes down for next couple of months.

Post Earnings Announcement Drift or Pead is 40 year old discovery.

Ball and Brown in 1968 first documented the PEAD anomaly in their ground breaking study that challenged efficient market hypothesis.

What does the study show. it shows that if you form 10 portfolios of stocks ranked by their earnings surprize then the portfolio of stocks that are in top 10% by earnings surprise outperforms the 9 other portfolio and similarly the bottom decile portfolio under performs the nine other deciles.

This is the most researched topic in financial field. Every year at least 50 new papers are published on PEAD and is persistence.

Stocks react vigorously to earnings acceleration.

After a few quarters of earnings acceleration, every one notices it and the reaction is more muted as the earnings get discounted.

While there is a vast effort by many speculators to anticipate such earnings acceleration and take positions in anticipation, even if you react to earnings and enter after the earnings announcement, you still can catch bulk of the move.

Typically first earnings acceleration is followed by more earnings acceleration or the improved earnings continues.

The structural factors which contribute to earnings acceleration do not disappear in one quarter. That is why earnings trends persist and price trends persist.

PEAD phenomenon is more pronounced in thinly traded stocks.
PEAD phenomenon is more pronounced in stocks with no analyst coverage.
PEAD returns persist even after one quarter.
PEAD is more pronounced on stocks with revenue surprise in addition to earnings surprise

While day traders look for one day moves on earnings day, for position traders or swing traders the PEAD phenomenon can offer longer duration picks.

After the day trading frenzy is over in these stocks , in many cases, they pullback and setup and go up after a breakout.

PEAD was relatively unknown phenomenon among retail traders around 6 to 7 years ago . Now everyone is aware of it and as a result many PEAD stocks tend to move big on earnings day often going up 20- 40% and then spend several weeks pulling back .

Buying after earnings is less risky as the news risk is out. However companies use the good news to time secondaries and this can lead to stocks with good earnings dropping aster few days of rally after earnings.

Secondaries for growing stocks are not a big problem as long as the money is used for expansion. Secondaries where the owners sell aggressively can be rally killer for a stock with excellent growth.

KORS is a poster child for this. After every good earnings announcement the owners have aggressively sold stocks in secondaries.

Buying after earnings is good strategy for position traders.

In a market driven by growth , you will find small companies offer best PEAD opportunities. In inefficiencies are greater on them.

When looking at earnings news, you also need to look at guidance. If the guidance is not in line with expectations, stocks can drop on earnings even if earnings are good.

Same way a stock with bad earnings will make big move if the guidance is good.
Larger companies are masters at manipulating investors earnings expectations through forward guidance and pre announcements. Genuine surprises on large caps tend to be rare. But when they happen they can signal significant shift in underlying business dynamics.

Best opportunity related to earnings is in small unknown company that suddenly starts growing rapidly.

When a small company with say below 50 million revenue starts growing suddenly in increments of 250 millions per quarter then you get explosive situation. This kind of growth happens in new segments or consumer products.

For example NTRI , CROX and HANS (now MNST) during the 2004 to 2007 periods became billion dollar plus companies in span of 4 to 6 quarters and correspondingly the price of their stock went up milti fold.

For a consumer product company with hot product , it is easy to grow rapidly as US has 300 million plus hungry consumers and if a product becomes hot must have product , it is easy for the companies to just plug in the product in existing distribution channel. Besides that most consumer products tend to have high margin.

For position traders finding such extreme growth situations should be top priority. A hot growth company if it takes off can make very explosive moves.

While such moves are not common in this market, there are market periods when such stocks dominate the market. This happens when new industry is being created. During the intenet expansion from 1990 to 2000 you had several hundred such companies. In the bull market of 2003 to 2007 the growth in BRIC countries and in commodities created hundreds of such extreme growth situations.
Become an extremist

Look for extreme earnings growth (just starting out to grow)

Look for extreme sales growth (just starting out and of magnitude likely to make the company a billion dollar company)

Look for extreme price strength ( just starting young trend with explosive first leg)

Look for extreme neglect (multi year , low float, low volume

You have to be first to find them as early as possible and not when everyone knows about it...
That is where big opportunity is in reading news.....

Big moves need big catalyst

2013-05-07T09:07:00.001-04:00

8 to 40% move in stock is common and requires no catalyst.

But a 100% plus move is not common and it requires some catalyst...

When a stock doubles, there is some major reason behind the move...

If you want to catch big moves , look for stocks that doubled and then pullback or consolidate for few months...

Those are proven horses....

Something is going right for those stocks....

Catalyst that can lead to big moves

Earnings growth

Sales growth

New orders

Shortages

Govt policy change

Sector

Valuation

Turnaround

Drug approval or rumor of approval

in this market big moves are few. Unlike other market periods where at this stage there should be lot of big moves, we are stuck more in small moves market. That is largely due to lack of good growth stocks.

Range breakout

2013-05-06T09:02:00.000-04:00

Market had established a wide range for couple of month. On Friday the range was broken to the upside. More follow through for next couple of days will confirm the breakout.

The breadth has improved in recent week. The Worden T2108 indicator that tracks % of stocks above 40 day simple moving average is now at 71.56. Zones above 80 are extremely bullish zones.

Range bound action was characterized by sector rotation. That continues to be the theme.

Small caps under pressure again

2013-05-02T06:50:00.002-04:00

The bounce from a minor correction was relentless. But in one day most of the gains on small caps were wiped out.

Will there be another attempt at bounce. Repeated failure to make convincing high on small caps is sign of weakness.

Large caps still in good condition as of now. We continue to have the divergence on large cap and small cap.

What we have learned in this market is selling attracts V shaped recoveries on low volume. Which is lading to range.

Will it be different this time?

Furious sector rotation is another underlying theme in this market where money quickly rotates between sectors. But longer term trends on sector are few.

As of now unless we see another bout of 300 plus down day the range is more likely scene.

Range bound 2 month

2013-04-29T08:37:00.000-04:00

Can the market convincingly break the two month range this week. The first attempt was a failure. But market bounced back from the pullback quickly.

The underlying breadth continues to deteriorate as lower and lower number of stocks continue to lead the advance.

The larger cap stocks continue to lead the action. But in last one week the small caps are showing some improvement in breadth.

This is not a market very conducive for breakout buying as many are failing.

In sector trends homebuilders look attractive, they are making new high after brief pullback and also have earnings growth to support further advance.

Which stock will move big today

2013-04-26T07:38:00.002-04:00

Fresh news creates fresh moves

Stocks release news post and pre market. Analyst upgrades tend to happen in the morning. In earnings season lot of news is released post and pre market.

Such news often leads to one day move on day of news. Sometime if the news is significant it can lead to multi week or multi month rally.

For day traders and short term swing traders news catalyst can offer a range of opportunities.

Such stocks with fresh news are called stocks in play or story stocks.

News that can affect price:

Earnings
upgrades/downgrades
govt policy change
FDA decision
Natural disaster
Political instability
Insider buys
CEO/CFO change
New product launch
New order

There are many free sources of news. If you want to catch intraday moves you need to build process loop for tracking news ...

At first you will feel every news is important , but soon you will figure out what is consequential news and what should be ignored... This kind of skill building requires months of regular practice....

There are several sources of news. Some like briefings.com are paid and some are free. Some paid sources like Bloomberg are ultra fast.

Make this a habit

2013-04-24T08:34:00.000-04:00

First thing in the morning spend few minutes developing Situational Awareness. Write it down. Make it a habit. It takes six weeks for a habit to become part of you.

Look at questions on market like :

Where are we in longer term multi year trend.

Where are we in current bull or bearish phase (at start or near top)

What is driving this move

What is the predominant theme (growth, turnaround, value, junk)

What are the breadth trends telling us...

What is the likely 5 day scenario from here

How should I position myself accordingly.

How aggressive should I be in chasing breakout.

Should I wait for a short setup to develop...

Should I tighten stop...

Should I go in capital protection mode...

These kind of Situational Awareness you need to develop as part of your trading skills development.

Only way to do it is to do it daily. First few days you might be bad at it, but if you persist and do it for 6 weeks or more, it will become part of you. Instinctively you will do it first thing in the morning.

if you really want to improve your SA skill, put it in public domain for others to critic....

Situational Awareness (SA) is a US Air Force term coined during Vietnam war. It means pilot should always be proactively aware of their surroundings and other planes in their vicinity and accordingly adjust their flight paths.

What should you do today to improve your trading

2013-04-23T08:52:00.001-04:00

Run your process loop...

Process loops are series of well defined steps based on a setup.

If you want to trade earnings, run earnings process loop.

If you want to buy pullback run pullback process loop...

If you want to trade options , run options process loop..

If you want to trade ETF run etf process loop...

If you want to day trade , run day trading process loop...

Unless you have set process loop you will flirt from method to method and setup to setup.

Process loops develop procedural memory...

The benefit of running process loop will be apparent after 4 to six months...

Doing same thing again and again and again develops expertise...

Throughout the day or after close run your process loop.

Depending on your setup idea and timeframe of trading process loop will vary...

Running same process loop for extended period of time will make you an expert on a setup...

Stick to few setup and do the same shit everyday till you become expert on that setup...

Another bounce attempt

2013-04-22T08:48:00.004-04:00

After a few days of pullback market is attempting a bounce. The selling was on big breadth so any recovery will need big breadth.

If market on small caps can take out the high , it will be sign of strength. Large caps are still not much damaged and may recover quickly.

Bounce failure on small cap would clear the way for 8 to 10% correction.

Situational Awareness

2013-04-18T08:09:00.003-04:00

Situational Awareness (SA) is a US Air Force term coined during Vietnam war. It means pilot should always be proactively aware of their surroundings and other planes in their vicinity and accordingly adjust their flight paths.

SA is similarly useful in market. It allows us to reduce or increase our exposure depending on market conditions.

Market were rallying for some months on low breadth compared to historical breadth trends.

They were increasingly finding it difficult to make big moves.

Breakouts were failing on several stocks.

Large caps or the generals were leading while small caps were laggards.

In last 3 days we have seen big distribution days. A 900 plus day on breadth to negative side . This was followed by another big down day yesterday. That kind of breadth figures show big speculators selling.

At this stage we have not had a meaningful correction and breadth has not reached extreme. Historically at this juncture there tends to a weak bounce of 3 to 5 days, that ultimately fails and more downside follows.

That kind of action sets up lot of stocks for shorts as they also rally on weak volume after having first down leg. Then that bounce failure becomes good short setup.

In the meanwhile stocks that have held up well also start to correct.

One of the things to keep in mind is Fed action has distorted some of these patterns and the market has bounced back without reaching breadth extremes.

Is this the start of big bear market, unlikely. But it is most likely start of a 5 to 10% correction in the overall market. The small cap might have bigger correction.

Change in character

2013-04-17T19:06:00.003-04:00

In last few months there has been a constant buying pressure on any weakness. The buying has not been strong enough to get big move going . The small caps have struggled for a month or so.

The big selling on Monday was followed by another round of aggressive dip buying on Tuesday. Today however the dip buyer could not muster much of a rally.

Individual stocks continue to breakdown. Breakdown in sector has been happening for weeks, however money kept rotating in smaller and smaller number of stocks. Now the last 3 days of action has resulted in more breakdowns.

Every time the market has been down in last few years the Fed has aggressively responded by changing the policy. Expect same thing this time. That puts the floor on depth of correction. Good corrections are good for the health of the market as they create new leadership and create constructive buy points. However constant Fed action has changed the character of the market.

Eager pullback buyers

2013-04-17T08:34:00.006-04:00

This market has had a bid underneath it for some time. Every pullback gets bought aggressively. We saw that yesterday where buyers wasted no time in falling over each other to buy the dip.

However the big drop on Monday may have changed the dynamics of such move. Small caps had one of the biggest down day supported by breadth on Monday. That kind of damage is difficult to heal. It will require lot of aggressive buying.

As of now this puts the market back in wider range.

Hunt in the morning for Stocks in Play

2013-04-15T08:55:00.001-04:00

Many stocks release news in the morning. Brokers upgrade/downgrade stocks. If you want to day trade or swing trade such moves spend at least 2 hours in the morning hunting for stocks in play.

Look at stocks up pre market find catalyst. Look if it is a good setup. Look for related sector stocks.

Short term big moves in stocks often have a news catalyst. If you are looking for short term swings or day trade then systematic analysis of daily news offers you daily candidates roaster.

Stocks release news after hours and before market open. This kind of news can move the stock immediately and in some cases start a multi month or multi year rally.

News that tends to move stocks big often is of following kinds:

earnings surprise to either side
earnings guidance
brokerage upgrades/downgrades
CEO/ CFO change
insider buying
new product/service launch
analyst conference
new drug approval
govt policy change
SEC action
IBD front page story
IBD New America highlight
Seeking Alpha mentions (which can be sometime pump and dump)

If you want to catch good day trade moves focus on these everyday. Become an expert in reading and analyzing news. Everyday at end of the day look at stock that went up big for the day and look at what kind of news precipitated that move. If you do it for 6 month plus you will understand what news moves the market and what news to ignore.

There are many paid sources of news like Bloomberg, Briefings, Fly on the Wall and several others that give you news as it happens. Many free sources like Marketwatch, Seeking Alpha , Benzinga and many others are free.

A good news paired with good setup can often lead to explosive moves. If a stock already is setting up well and news comes in it is best setup.

Spend early morning hours pre open looking at price moving news. Compile a watch list and then focus on those stocks during the day.

Carpe diem !

Situational Awareness

2013-04-12T08:21:00.002-04:00

Situational Awareness or SA is an aviation term. Pilots are trained to maintain SA all the time to ensure flight safety.

SA concept was developed in Vietnam war to overcome the problem of large number of plane crashes and incidence of own planes shooting each other or colliding.

SA involves being aware of your environment and adjusting strategies accordingly.

In the market the concept of SA can be used to adjust our trading, position size, risk exposure, profit target, and kinds of setups traded based on market conditions.

Currently the market is in multi month bull move that started in September. The few dips so far has been bought.

One distinct character of the market move has been low magnitude moves compared to past bull moves. Stocks breakout but they do not make very big moves.

Smaller stocks and technology stocks have lagged and not been major participant in move. Large cap stocks have lead the advance.

Breadth based trends have not worked as good as they work in most market circumstances. Excessively positive breadth corrects by market going sideways or having rotational pullbacks.

Every market has a dominant theme . The bull market from 1990 to 2000 was about technology stocks. The 2003 to 2007 market was about emerging markets and energy/commodities. Several hundred stocks doubled, tripled or went up 500% during that period based on their earnings/sales growth.

The predominant theme in this market for last 4 year has been Fed action. Every rally has started with aggressive Fed move and it has ended with either pause in Fed policy or on finding that in spite of Fed action the stocks earnings are not growing.

Currently we are in earnings season, that tends to lead to day to day action being dominated by earnings releases.

Overall from SA terms look for smaller magnitude moves.

A good rebound

2013-04-11T08:19:00.003-04:00

A rebound in the index after job report induced gap down, at first was tentative, accelerated yesterday. This sets the market for another high in near term. As of now the lagging index is small cap and Dow Jones is leading.

The underlying setups are of many extended stocks with minor pullbacks. A fresh set of stock should breakout in coming days/week to broaden the rally.

Some of the stocks setting up for possible b/o in next few days are:

dgi

omi

bgfv

rock

angi

ppc

meru

cbk

How to look for sales acceleration

2013-04-09T09:14:00.001-04:00

During the earnings season the focus is obviously on earnings. But really good and explosive opportunities can be found by focusing on young unknown companies that have gigantic sales acceleration.

A small company that starts growing sales rapidly will have rapid price increase even if the earnings are not great. This happens in case of new categories. For example if you have a company that has done say sales of 38 million last year and then this year it starts big sales acceleration and grows sales to 213 million and next year it becomes a 568 million company, what do you think will happen to the stock price.

These kind of extreme sales growth happen in new companies that come out with new product or service and that catches the public fancy. For example the figures I showed in paragraph above were for NTRI during the period of 2003 to 2005. And as you can see in chart below during that period stock went up dramatically.

Similarly from 2003 to 2008 MNST grew from sales of 110 million to a billion dollar company. And as you can see in chart below during that period its stock price had explosive move.

When a company becomes a billion dollar plus company starting from small sales base you will find it will have dramatic share price appreciation.

The earnings season provides an opportunity to find such growth stories right at ground floor level, when they just start out to grow dramatically. Look for companies that start growing sales dramatically from small base. If a company grows sales to 100 million in quarter from a base below 20 million same quarter last year and if this is its first or second such big quarter then that is the stock to focus on.

I am always looking for companies likely to become a billion dollar company in 1 or 3 years from today. Only a handful of companies grow that dramatically in most years, but they are likely to be the explosive winners in market. In some market circumstances you will see lot many companies grow like this. This tends to happen in secular bullish trends like during the emerging market build up or during internet buildup era.

This kind of growth is also possible in consumer product or services. If a hot product or service catches on then it can quickly grow due to explosive consumer demand . For example CROX grew from 10 million sales to 800 million sales in 3 years or so once its product took off. The share price correspondingly multiplied many fold.

During the earnings season look for such sales outliers. They can make explosive moves. Especially if you have small account and want to grow it dramatically look for extreme sales/earnings growth situations. That gives you tremendous leverage.

If you have small account and looking to grow it dramatically make it your mission to find every such dramatic growth story. If you can just catch 3 to 5 such growth stories in next 3 years you will have big account.

How to profit from earnings surprises

2013-04-08T08:45:00.001-04:00

This week is the official start of a new earnings season. Alcoa will kick off the season. Over next 6 weeks bulk of the companies will declare their earnings.

Earnings drives stock prices. Especially if there is surprisingly good or surprisingly bad earnings. After such big surprise stocks go up not for a day but sometimes for months or year or more. This phenomenon is well known and is called PEAD.

PEADS stands for Post Earnings Announcement Drift. PEAD is a well known and heavily researched market anomaly. PEAD stocks show tendency to drift up or down for next 60 days.

Such earnings surprises can result in big move as a result entire industry and ecosystem has developed to predict earnings. Analyst try and estimate earnings. Trends in analyst earnings estimates itself leads to many stocks rallying or dropping in anticipation of earnings. Inspite of best efforts of analyst earnings surprises happen every season.

Especially for small cap stocks earnings surprises are common. These stocks most often are neglected and have no analyst coverage or little coverage. When they come out with blowout earnings, it can result in explosive rallies. Small caps also tend to have more volatile earnings. For a company with small earnings or sales base a small improvement can lead to big surprise.

The earnings season offers speculators opportunities on both long and short side. Look for big earnings surprises on small stocks. Especially if the stock has not been rallying in to earnings and has been trading quietly for months pre earnings, it can make explosive move on earnings.

If you want to find potential market leaders and future growth stars play close attention to earnings season. A unknown company that suddenly starts growing rapidly comes to notice during such season.

There are several free sources of earnings. The key is to look for the earnings outliers. At times an earnings surprise can lead to 100 to 500% plus move in next few months, so stay focused during this season of opportunities.

Resolution

2013-04-04T09:13:00.000-04:00

The breadth divergence that was building up for few months is now resolving. Three back to back negative days have driven resulted in most market leaders having sharp pullbacks.

Any short term bounce here is unlikely to lead to new high on small caps. It will take time and level for market to setup again on bullish side for broad based rally.

The large caps still look ok but we will see how long they hold up.....

Divergence

2013-04-03T08:48:00.001-04:00

Divergence between small caps and large caps developing. But no big drop in breadth figures so far. Small caps continue to struggle while the 30 stock focused DJ30 continues to make new high. Divergence can take long time to resolve.

Implication is to focus on large cap and Index components. Larger the stock better are its current prospect as of now.

Small cap under pressure

2013-04-02T08:45:00.001-04:00

12 days of gains on small cap stock index were wiped out yesterday. The market showed split personality with the larger stocks holding up well but the small caps experienced selling. Small caps are the stocks capable of making explosive moves. They have had trouble making new high for last 2 weeks and were first to turn.

The key question is will there be follow through selling. The individual setups on many stocks look extended and there are signs of breakout failures and reversals after new high.

At this stage risk of correction in small caps is increasing and that is something to keep an eye on.

Earnings season arriving

2013-04-01T08:57:00.000-04:00

The market has been grinding higher for few months, now we are approaching earnings season. The earnings season always leads to some surprises.

When companies announce earnings some have huge surprises either to upside or downside. Such surprises can lead to start of big moves if that earnings is not priced in to market. This is called PEAD or Post Earnings Surprise Drift.

Earnings surprises are more pronounced on smaller stocks. Many of these stocks are not actively followed by analysts and the only time they come to limelight are during earnings season. This is how new leaders in market arise. Often unheard of companies and market segments become star of an earnings season.

Tracking earnings can help you find some big moves.