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.

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.

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.

Israel Stocks - Cellcom ( CEL )

On late May 2010, MSCI a leading provider of investment tools for investors globally, including asset managers, banks, hedge funds and pension funds, announced the reclassification of its MSCI Israel Index to the MSCI World Index, coming from the Emerging Markets Index.

With that classification is expected that Israel Stocks attract more institutional investor since the MSCI International Equity Indices are the most widely used global benchmarks in the industry and a number of funds and ETF include MSCI indexes in their investing.

The process at MSCI to reclassify the Israel Stocks started in July 2008, with MSCI analyzing and verifying that Israel complied with the following among other criteria:

The country Gross national Income per capita is 25% above the World Bank high income threshold for three consecutive years.
High securities liquidity of 20% or more than the calculated annualized traded value ratio.
Market accessibility criteria rated very high in the following:
Openness to foreign ownership
Ease of capital inflows / outflows
Efficiency of the operational framework
Stability of institutional framework


It is no surprise then that Israel stocks are outperforming the market as you can see in this graph showing the relative strength of the Israel market represented by the iShares MSCI Israel Cap Invest Mkt Index (EIS), measured against the benchmark S&P 500.

I started to look for dual traded Israelis Stocks and decided on Cellcom Israel Ltd. (CEL), a matured more or less monopoly with a 10% plus dividend yield.

Cellcom shows strong relative strength against the EIS Benchmark, meaning that EIS is set to outperform the markets and CEL is in line to do better than the EIS index.


CEL is not far from its ideal entry point around 28, target is at 32 for a quick 10% gain, consider closing your position below 27.75 for a 5% loss, that is a 2:1 risk / reward ratio.

Some Insider Interest and good looking charts.

First I would like the SP500 to cross over 1125 with good volume, along with that happening I would very much interested in trading long these two stocks.


CODI (Compass Holdings)
The Nasdaq site reports 140,252 net insiders shares bought in the last 3 months, also the site reports net institutional buying of 3,742,222 shares.

There is some resistance at 15.30, if the stock gets to break above that level with a more or less high volume there is a pretty chance of a significantly upside. Above that level there is no resistance in the last 3 years, meaning that everybody that holds the stock has a profit, so no one is in a rush to sell.


COT (Cott Corporation)

Nasdaq reports that insiders bought 647,500 shares in the last 3 months, the net institutional activity is 1,510,180 shares bought at this time. COT broke above 6.5 with remarkable volume and is trading above the weekly ema(30) that should act as support.

OVTI

I shorted OVTI yesterday basing my decision solely on technical reasons.

It will be very difficult for OVTI to overcome the 3 months distribution level.

Also I will be publishing a trade journal. OVTI shorted at 20.51 is the first trade.

For Next Week

Here are the closing prices of the indexes on August 31 and on September 3 and the percent increases in three days of trading.

Index, Closing Price 8/31, Closing Price 9/3, Percent Increase

Nasdaq, 2114.03 - 2233.75 - 5.66%
Russell, 2000 602.06 - 643.36 - 6.86%
Dow Jones, 10014.72 - 10447.93 - 4.33%
Nyse, 6704.15 - 7055.03 - 5.23%

S&P 500, 1049.33 - 1104.51 - 5.26%
Are these impressive gains the startup of a new uptrend in the markets or are they just a dead cat bounce on a market (S&P) that in a four month period (4/23 – 8/24) lost 13.6%.
Let’s look at the support and resistance level in the S&P 500 trying to get some insight on the market.

For the longs:The 1100 level should stand its ground next week, a close above 1110 would be most desirable. Trading between 1100 and 1070 is meaningless, in fact a minor pullback is expected after a 3 day 5+% gain. We’d like the SP to open above 1110 (less than half percent point over Friday close) and stay above 1110 for the day. Next important resistance is at 1130.

For the shorts:
1070 is an immediate support level for the index, an opening below Friday close and a closing below 1070 would be great. There is some minor resistance at 1040 but below that it may be a free fall.

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Other way to look at the indexes are the simple moving averages which have the inconvenience of being lagging indicators, but after they are aligned in the downside, it is very hard and it needs a lot of buying for a stock or index to reverse direction.

The major indexes are still under the wicked dark cross, this signal occurs when the 50-day moving average crosses below the 200-day moving average. For some traders this is the uber-bearish signal. The SP came to be under the cross on July 5 when it closed at 1022.58, since that day the SP had gain over 8%. Maybe that cross isn’t so evil after all.

Previous to the July 5 cross, the ma(50) crossed below the ma(200) on Dec/21/2007, closing the day at 1484.46. After that the SP went to a loss of more than 50% until March 2009 when it started recovering. The dark cross is a signal to be reckoned with.


It is possible to make money buying long on a general down market, also the markets sooner or later are going to recover, meanwhile be very careful with your longs.

One profitable trading set up is the alignment of the 10, 20 and 50 simple moving averages either up or down. This set up on 7/30 failed when it could not drive the index higher; it looks ready to try again.


For long take a look at TOWN and CSR.
For short UHAL looks interesting.