The Stock Surfer

EA Gets Sacked; Will Disney Get The Cheese?

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Electronic Arts (ERTS) continues to disappoint, this time giving a big fat profit warning for 2009. As I've written before, they have no one to blame but themselves. There are winners and losers in every video game cycle, and this time EA is a loser. The 3-month chart tells the story (click chart to enlarge):

Of course, all of them are "losers" according to stock price, but ERTS has been especially bad, only outdone by dismal THQ (THQI), whose survival is in question. On a relative basis, the winners are Nintendo (NTDOY) and Activision (ATVI). Nintendo Wii sales more than doubled over the Thanksgiving holiday week, and Activision is doing a nice job diversifying its business into online gaming with the Blizzard combination.

Speculation is growing that EA will be taken over. The Wall Street Journal's "Heard On The Street" column suggested that Disney (DIS) might make a bid, and it makes sense to me. Disney owns ESPN, and EA specializes in sports games. Very interesting. But this is nothing more than a rumor.

Barron's has a good rundown of analyst comments following the profit warning today. Speaking of Barron's, the thoroughly enjoyable publication suggested it was Game On for Electronic Arts' Shares just before this profit warning. Ouch! I don't mean to single them out, it's been a tough market for everyone, myself included. Let's face it, reasoned arguments for owning stocks have not been working in this environment--we are now in the realm of the technician and the psychologist. And on that basis, I find myself interested in ERTS. Today was a 52-week low on huge "capitulation" type volume (6 times more than usual), and perhaps sellers will become exhausted in a few days. On a move back down to the 15s, I might consider a speculative shot and hope that the House of Mouse comes to the rescue...

Disclosure: No position in ERTS or DIS. Long NTDOY and ATVI.
See more at www.thestocksurfer.blogspot.com

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Starting To Hedge The Holiday Cheer

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It's the Santa Claus rally, the S&P is at 900, and I'm ambiguously hedging my holiday cheer. On one hand, we're up 20% from our lows and could run to 1000 before major resistance. On the other hand, we're already up 20% from our lows and I seriously doubt that this is anything more than a bear market Santa Claus oversold looking-for-a-sucker rally. Here's a 3-month chart with some key levels to remember (click chart to enlarge):

As you can see, we're in between the lows (741) and the highs (1007), and nearing the 50-day moving average (930). Hence, my ambiguity. Right now, we're in the middle.

I'm bearish and grinch-ish, and eager to go short. I want to throw out my longs, tie antlers to a dog, and steal the joy from Cindy Lou Who.

However, wise traders know you need to trade the tape you have, not the one you want. The tape we have is one that is going higher in the face of high unemployment and disaster in Detroit (both the automakers and the 0-13 Lions).

So, I've got a smattering of longs. The two best so far have been the utterly beaten Ultra Oil & Gas ETF (DIG) and the "I'm gonna buy my kids a present even though I'm underwater on my house" play, Nintendo (NTDOY). Toss in some steady-as-she-goes biotech, and I'm looking at something resembling a portfolio.

But even Santa needs a hedge. Today I started very small positions in the Ultra Short Real Estate (SRS) and Ultra Short Financials (SKF), both of which are within shouting distance of their 52-week lows, despite making 52-week highs only 11 trading days ago. They have red noses so far, but will come in handy if the weather gets foggy. Look at the 3-month chart below, as a reminder why you can't buy and hold anything, even a short, in a bear market. Wow!

Disclosures: Long DIG, NTDOY, SRS, SKF
See more at www.thestocksurfer.blogspot.com

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Reflecting On The Volatile Waves

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Surfers are philosophical by nature. I'm not sure why that is, but I haven't met a surfer who doesn't think of catching a wave as a profound experience. Each wave is a new opportunity for the perfect ride, and each wipeout contains an important lesson. The same goes for stock market traders (although traders tend to be a bit more hyper, due to the faster pace, extreme levels of coffee, and lack of time in the sun). But here is the key commonality: The journey is more important than the destination.

[Note: Todd Harrison of Minyanville says this all the time, so I want to take one sentence to again remind everyone how insightful Minyanville is not only in terms of financial education, but also in personal and professional attitude. They just won an Emmy Award, and are more than deserving.]

Back to stocks and surfing and my point. The point is, the ultimate destination (making money) is not unimportant, but you'll never get there if you don't concentrate on one wave (one trade or investment) at a time. The waves are bigger and badder than usual in the current stock market. For many investors, sitting on the beach in cash is the safest approach. For many traders, however, this is an exciting (though challenging) environment.

Coming into the week, I was open to the idea that the lows for 2008 are in. But the truth is, that view doesn't affect my trading very much. I think most people have it backward--the long term is more uncertain and less knowable than the short term. Who knows what will happen by January, or by 2010, or over the next 5 years? We know there will be an ocean, but we can only see the next few waves forming, and we can only ride the one we're standing on.

THE WEEK IN REVIEW

After Monday's drop, stops were hit and some long positions were gone. On Tuesday, the market showed strength and I jumped back in, riding to some nice gains. Wednesday extended the gains, but by the end of the day I was growing cautious, and bought a short ETF at a reasonable price. Yesterday, with an eye to the upcoming jobs report, I got more short and less long, locking in gains and preparing for the probability of dismal news. Today we got that dismal news and the shorts are working.

I'm not explaining this process so anyone will copy it (everyone's style should be unique), and I'm certainly not boasting because not all my trades were perfect. I'm simply trying to explain the journey, why I can be bullish on Tuesday and bearish on Thursday. It's not meant to be confusing or contradictory. My overall message is that the waves are fast and furious, and on days that I can't manage risk and move in and out of the surf, I'm on the beach. I will likely cover many of my shorts by the end of the day and head for Margaritaville.

There will come a time when the stock market will offer longer, smoother rides. For now, it's important to simply be careful out there. Enjoy the weekend and check out this guy's journey!

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Enjoy The Holidays, But Prepare For A Cold Winter

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Last week, I was warming to the idea that the low was in for 2008. With 20-some days to go in the year, anything could happen, but there has certainly been resilience in the face of bad news. Friday will be a huge test, because bad news in the jobs report is the baddest news of all. I would not be surprised to see some selling pressure ahead of the number. But IF, and it's a big IF, we rally on a bad jobs report, shorts could get squeezed and we'd have a significant continuation of the holiday rally.

Despite Monday's scary drop, many technical traders consider it a textbook "50% retracement" move. What that means, basically, is that it's not surprising to see a move in one direction pull back in the opposite direction by half before it resumes. Indeed, expecting a retracement is one of Gartman's rules:

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

The red line is the 50-day moving average, and right now it sits around 950. Also, it should be noted that the rally pulled back just before the S&P reached 900, so 900 will act as resistance as well.

How am I playing it? I'm sticking with the biotech names that have showed good relative strength, like AMGN, EBS, CELG, and GILD. But as we get closer to resistance, I'll be placing stops to lock in gains. I don't know when the next leg down will occur--maybe this month or maybe next year. But I'm convinced there will be another leg down and don't want to be caught by surprise.

An important indicator on my screen is the real estate sector. Many have mentioned that commercial real estate is the next big shoe to drop, if it hasn't started already. It's easy to track "real estate fear" by watching the Ultrashort Real Estate ETF (SRS). (click chart to enlarge)

As you can see, SRS is still in an uptrend. The volatility in SRS is crazy, so please handle with care if you trade it, but even if you don't trade it you can watch it for signs of a market meltdown. Recent support has been just below 120, and if SRS gets close to 115 or so, I'll be looking to buy. The point is, we should have a plan for the next leg down even if that simply means selling some longs and raising cash. Enjoy the holiday rally while it lasts, but don't get stuck out in the cold when it's over.

[Note: After writing this, SRS did get to 115 and I started a small position.]

Disclosures: Long AMGN, EBS, CELG, GILD, SRS.
See more at www.thestocksurfer.blogspot.com

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Avoid The Illusion Of Relative Returns

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Investors are being disabused of many conventional notions this year. If the first giant to fall was "buy and hold", the second should be the idea of relative returns. Relative returns make us feel good, but they can be quite dangerous. Here's why.

Mutual fund companies have sold us the idea of relative returns because it makes them look good. They want to show that they can beat the market (although they remind us that this is only for professionals). So they take a market index like the S&P 500, and use that as a measuring stick for their fund. If the S&P 500 is up 10% in a year, a mutual fund wants to be up more than 10% in that same year. And I would agree, that's a good return. But the situation is not so rosy when the market is down. If the S&P 500 is down 42% (as it is this year), a mutual fund might brag that it is only down 35%. Sure, they beat an index fund by 7% (not including loads and fees, of course), but so what? You're still down 35%! Down 35% is not a good return.

I'm not saying it's easy to get a positive return. Most people, including me, are down this year. But in a bear market, relative returns can't buy you a cup of coffee. It's time to think from a different perspective strategically. It's time to think about absolute returns.

Focusing on absolute returns helps an investor's psyche because it doesn't play the game of chasing winners or holding losers. If I'm worried about relative returns, I might be inclined to carelessly chase a rally even though I know it won't last, or stubbornly hold a loser as long as it's doing better than the Dow. I might avoid taking profits (i.e. making money) because I want to beat the market.

If I don't care about relative returns, I can simply focus on making money. When I make a trade, I'm looking to cut my losers so I don't lose money. If a trade is working, I'm looking to maximize gains in my account, not on paper. I think most people tend to run their portfolios like a mutual fund because they've absorbed the conventional wisdom of buy and hold along with relative returns. I used to do this. But I think there's a better way. I'm still learning about absolute returns, but here are some initial thoughts to get started.

HOW TO GET ABSOLUTE RETURNS

Cut losers quickly. This is rule #1. Absolute returns is all about avoiding big losses. If you are holding a stock and waiting for it to come back, ask yourself this question: Of all the investments available to me right now, is this stock the best opportunity for me to make money in a reasonable timeframe? If the answer to that question is no, sell that stock ASAP and put your money where you can get a positive return. Why hold Citigroup (C) when you can buy Amgen (AMGN)? (click chart to enlarge)

Look at the big picture. Absolute returns means you need to look at more than just your stocks. You need to look at overall net worth. If you are holding debt at 7%, and making market returns of 5%, that's a return of -2%. You may not be able to avoid all debt (if you have a mortgage, for example), but if we've learned anything from this crisis, it's that profits are fleeting if we can't handle our debts.

Consider alternative investments. Perhaps you are comfortable with mutual funds or stocks. That's okay, but we've also learned that stocks around the world have provided very little benefit in terms of diversification. Stocks of every size, shape, and nationality have been going down. Exchange Traded Funds (ETFs) make it easy to try different asset classes. You can buy the dollar (UUP) or gold (GLD) or natural gas (UNG), or you can short those same assets. You can also short the market through ETFs like the short Dow (DOG). The point is, being long a bunch of different stocks may not help get you absolute returns, but there are other options out there for your money. (click chart to enlarge)

[Disclosure: Long AMGN.]

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Monday Observations

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After a bullish run to end November, the markets welcomed December with a big, fat meltdown. Many traders have become more constructive, but today shows why risk management is still the key. You may be tired of my saying that. I don't blame you, I'm tired of thinking it. I'd like to see a bull market where we could talk about taking risk rather than managing it. But alas, this is the market we have.

It remains to be seen whether this is the beginning of a new leg down, or a sharp pullback in a bear market rally. It doesn't really matter to me--I have stops that tell me when to get out of my positions. Many of them were triggered today, but 2 positions remain on my books: Amgen (AMGN) and Emergent BioSolutions (EBS). Frankly, I'm barely comfortable holding these, but the relative strength today has kept me in the names for now. Here's today's chart of AMGN and EBS compared to the S&P 500.

I was actually looking to buy the Ultrashort Real Estate ETF (SRS) today, but didn't get even the slightest pullback to do so, nor was I at my computer at 3pm when it really started to roll. Holders of SRS made 35% today! Something to consider: In a bear market, isn't it better to be consistently looking for short entry points rather than long entry points? Here's a chart of SRS from the past 5 days. However, it's notable that even with the move today, SRS is not back to where it was last Monday. Timing is everything on these ultra ETFs.

Disclosures: Long AMGN and EBS
See more at www.thestocksurfer.blogspot.com

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