Hi, these are just ideas not recommendations, sometimes I trade my ideas, sometimes I don’t.
Always remember, yours is the responsibility for your trades,
Good luck,

Sunday, October 31, 2010

On Relative Strength, shorts and others

“Buy that which is showing strength - sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to "buy low, sell high", but to "buy higher and sell higher". Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.”
From Richard Rhodes' Trading Rules

I interpret this rule in regard of the relative strength of the different sectors of the market. Investor sentiment shift over time, and the sectors that 15 days or one month ago were hot could be lagging the market now, you have to be constantly probing the sectors to get ready to adjust your investment or trades.

15 days ago and for the last three months to that date, industrials were leading the markets and the tech sector was behind, then a change of sentiment started to move money out of industrials and into technology. I set out to find some stocks in the tech sector to buy and at the same time to look for some industrial stock to short. Screening with various criteria I found the following companies that picked my interest.

Thermo Fisher Scientific, Inc. (TMO), is a technological company that provides analytical instruments, equipment, reagents and consumables, software, and services for research, manufacture, analysis, discovery, and diagnostics. Thermo Fisher serves pharmaceutical and biotechnology companies, hospitals and clinical diagnostic labs, universities, research institutions, government agencies, and environmental and industrial process control settings primarily in the United States, Germany, and England. It has a collaboration agreement with Proteomics Researcher. The company was founded in 1956 and is based in Waltham, Massachusetts.

Arrow Electronics, Inc. (ARW) The company operates in two segments, Global Components and Global Enterprise Computing Solutions. The Global Components segment offers semiconductor products and related services. It provides passive, electromechanical, and interconnect products comprising capacitors, resistors, potentiometers, power supplies, relays, switches, and connectors, as well as computing, memory, and other products. The Global Enterprise Computing Solutions segment offers enterprise and midrange computing products, services, and solutions to value-added resellers. It also offers access infrastructure, security, and virtualization software solutions, as well as midrange servers, storage, and software solutions.

AboveNet, Inc. (ABVT), together with its subsidiaries, provides high-bandwidth connectivity solutions to corporate enterprise clients and communication carriers primarily in the United States and the United Kingdom. The company provides communications infrastructure and global Internet protocol (IP) network to various companies, such as commercial banks, brokerage houses, insurance companies, investment banks, media companies, social networking companies, Web-centric companies, law firms, and medical and health care institutions.

IDEX Corporation (IEX) engages in the manufacture and sale of an array of pumps, flow meters, other fluidics systems and components, and engineered products worldwide. Its Fluid & Metering Technologies segment designs, produces, and distributes displacement pumps and flow meters, injectors, and other fluid-handling pump modules and systems; and provides flow monitoring and other services for water and wastewater.

I am going to evaluate the different tech companies and the industrial one to see if there is some merit in buying or shorting.

Relative strength
For the past 15 days the tech sector is showing strong relative strength against the market, the industrial sector is lagging the SP500, our three tech stocks have a positive RS vs their group. Of course a favorable RS does not mean your stock is going up, it only means that the stock or group is favorable among the complete stock universe.

Insider Transactions
In the last 12 months insiders sold 294,169 shares of IEX, more or less a 24% of shares in insider’s hands. ABVT insiders sold 961,532 shares in the last 12 months, a worrying 16% of their net holdings approximately. TMO insiders bought 70,898 shares in the last 12 months increasing their holdings in a 7% approximately, and ARW insider’s net transactions in the last year of 241,709 shares, incremented their holdings in an 8%.

Short Interest
ARW and IEX have more or less the same short level with 3% of the float shorted, I don’t want to short a heavily shorted stock but also I don’t want to buy it. I prefer low short interest either to buy or short. ABVT has a 8 days cover ratio, to me it means that short sellers (very sophisticated and well research traders) have a down sentiment on the stock.

Market Cap

Put Call Ratio
When the market is very bullish, the volume of call options will be much larger than the volume of put options because traders are optimistic about future price movements. ARW and ABVT have put/call ratio of 0.2 and 0.3 respectively.
The volume of call options will be smaller than the volume of put options, when the market is very bearish because traders are pessimistic about future price movements. TMO and IEX exhibit a ratio of 1.88 and 1.47.

Last 4 weeks closing prices
All the tech stocks in our study closed this week at the highest level in four weeks; IEX Friday’s close is the lower of the 4 previous Fridays.

There is no divergence in the prices of ARW and IEX with their RS, the analysis call for buying ARW and some interest in shorting IEX.

Wednesday, October 20, 2010

Yesterday Action

The 1.7% advance of the dollar yesterday may signal a shift in the direction of the market at least in the short term. The strong volume of traders buying dollars (the highest in three months) could be the beginning of money going out of stocks and into cash.

Long term the market looks strong with the Dow Jones trading cleanly above the 10 and 30 weeks moving average, however a one or two weeks correction can take you out of your hard earned profits. Since I trade with a short to medium term in mind, I sold all my positions yesterday with a small profit. I am convinced that making money in the stock market is a long race with the preservation of capital being the most important consideration.

Now it is probably a time to reassess, The Dow lost 1.48% yesterday the SP and the Nasdaq dropped in excess of 1.5% and the volume was significant. I will be waiting for a signal of the markets to start trading again. A simple bullish signal would be for the markets to overcome Monday’s high which is also the same as last week high level.

Start looking for medium term shorts if the market closes below yesterday close or below last week low.

For shorts you may consider looking at AKAM and JNPR.

Sunday, October 10, 2010

Rex Energy Corp

On August 31, Rex Energy Corporation (REXX) announced the following:

“Rex Energy will sell and transfer interests in its Marcellus Shale assets located in the Commonwealth of Pennsylvania, in a transaction valued at approximately $140.4 million. Under the transaction, Sumitomo will pay approximately $88.4 million in cash upon closing and an additional $52.0 million in the form of a drilling carry. “

REXX also presented us with the announcement that its present value of future cash flows before income taxes and asset retirement obligations (PV-10) grew approximately 87% to $357.2 million,.from the December 31, 2009, estimated of $190.5 million.

The market liked the transaction and announcement to the tune of a 10.2% increase in the stock price; also the volume that day was six times REXX average daily volume.

REXX share price kept climbing closing at 13.01 last Friday, which is an additional 15% rise since the August 31 close. In 29 trading days REXX climbed from 10.26 to 13.01, a 27% increase. That makes us wonder if REXX price appreciation is done for now, or if the high volume and price climbing is just the ignition to future gains.

REXX on balance volume climbed above the 50 day ma after August 31.

Since July 19 the SP500 has gained an 8.77%, in the same period energy stocks represented by the XLE Etf climbed 12.62% making energy one of the leading sectors of the market. REXX appreciated 25% since July 19.

What is not to like about REXX ?

The Nasdaq website reports almost 6 million REXX short shares, with a 11 days to cover ratio and a 18% of the float shorted, Big short sellers are very refined, informed and researched people, could they be wrong?

From Feb 2 to Aug 30 REXX short interest went from 3,018,696 to 4,385,470, an increase of more than 1,300,000 shares. In the same lapse the average price of REXX declined from 14 to 10 giving the short sellers great benefits.

But an interesting situation is developing since August 30, REXX short interest continued increasing to a Nasdaq-reported 5,985,076 short interest at Sep 15. At the same time the average price for REXX had gone from 10.90 to 12.70, more than 1 million short sales are losing money as of last Friday.

We will soon know the September 30 short interest, REXX is set to report on November 3, we have until then to speculate.


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About Me

From the Dominican Republic - Swing Trader Speculator - Civil Engineer/Project Manager - sternloinaz@gmail.com