On the long side, I am still looking at buying ACIA/BABA pullbacks.
The trade ideas for the day are below. Buying weakness (oversold stocks) has worked well in the past and I intend to continue in that direction. However, I will probably try more short positions, especially since we are approaching earnings season.
The idea behind shorting the market is a concern about valuation distortion due to Nirp refugee liquidity. Such liquidity has been centered on liquid ETFs and the most liquid US stocks. Stocks offering a dividend have also attracted money. Since some money is probably also flowing into stocks that offer low or no dividends and display selling pressure, there might be some shorting opportunities in such stocks.
The Effective Volume tool is a good tool for detecting the stocks that are attracting sellers while bouncing. Below is a list of such stocks. I built this list from the short ideas of last week. I then discarded those whose forward P/E is lower than 13-15 or those that offer a dividend higher than 1%. This left me with the stocks shown in Yellow.
It is important to note that a strong negative EV pattern indicates that large investors are selling, but this does not necessarily indicates that the price will follow down. Large investors might sell for many reasons. However, what I noticed is that in the current market, when a company "beats", the price hardly moves 5% to 10%. Often, profit taking is strong simply because of the "sell the news" type of attitude. However, when a company misses, then the price falls by 20%. Hence, I believe that opening a few 1/2 short positions in different stocks could lead to some surprise gain. I will focus on those stocks with a negative EV pattern.
For such a strategy to work, it is important to use loose stop levels, or instead or stops, use hedge either by buying calls or by being long an ETF such as QLD.
I show below the Pyramid data for VECO, CNX and UPS. VECO is a supplier of diodes foundry equipment (capital investment business model, which could be hurt if rates increase.) CNX has surged from the death. It is a coal miner. Its future probably hangs on Trump winning. Finally, UPS is a strong leading stock. UPS offers an attractive dividend and is good candidate for the Nirp refugees. Hence, if the general markets continue higher, UPS will just follow the flow of money.
One final note: the stop levels that I show are always "virtual" stops. I only use fixed stops when I am away from the computer, for example on a trip. I would always consider the EV pattern and the general market before exiting a position. If a position goes through a stop, I would be "flexible" on the position and eventually not respect the stop if the EV pattern does not confirm the price move. Although stops are a prudent investment tactic, using stops could become a "portfolio killer."
Let's take the example of GPS: I indicate a stop level at $23.7. Why not $24.5? Both levels are "good" stop levels, because they are above a consolidation area.
If we reach the stop level 1 but I detect that large investors are still selling, then I would probably raise the stop to the level 2. Another important clue for placing stops can be seen on the Supply Figure for GPS.
As you have read in the book "Value in Time," the supply level represents the probability that investors will offer shares for sale as the price moves up or down. I have calculated that a supply level lower than 10% indicates that sellers are exhausted. On the above Figure, we can also get a view of the Active Boundaries levels. When shorting a stock, it is important that the price stays below the NB (Neutral boundary). This is the price level at which the average price gain on the issued shares is 0%. Once you go higher than that price, this indicates that investors on average start to earn money. This implies that greed will continue surpassing fear and hence, price could move higher.
Once we are below the NB, usually fear is stronger than greed. Today, GPS is below its lower boundary. This indicates a strong probability that the price will move lower (unless we get an unexpected earnings beat.) Free money from central banks has made the use of these Supply, Active Boundaries and Effective Volume figures more difficult than in the past, because free money hinders the price discovery mechanism that is based on value analysis.
Earnings season is when price is suddenly rediscovered. This will be my focus for the coming two months.