Shorting the Four Horsemen as Market Grinds Lower?

As markets skid to new lows, the chorus calling for a bottom grows louder. Despite seeing the primary trend confirmed as bearish, most investors are more concerned with missing a potential rally than protecting their capital. This has led to an interesting market where general indices grind lower, yet some stocks remain well above their recent lows.

As an example, consider four high-momentum names, namely Jim Cramer's "Four Horsemen"-Google (GOOG), Apple (AAPL), Amazon (AMZN), and Research in Motion (RIMM). All four companies are heavily owned by momentum investors. If we are approaching the point where markets are set to rally, you should expect these companies to lead the way. With current prices ranging from 8% to 83% above recent lows (vs. 5.7% for the NASDAQ), it is clear that investors are preparing for a market bottom.

Such activity piques our interest. Always looking for stocks that perform well in poor markets, should we be buying these shares? With the exception of Google, which was featured in my weekly newsletter EPIC Insights, I do not see clear technical patterns emerging, and the lack of clear bullish patterns concerns me.

Confronted with an environment where few stocks outperform, a decisive moment awaits us. Either the weak names will be pulled higher by the strong, or the strong names will succumb to general weakness and push lower. Typically, weakness overwhelms strength. Therefore, we should expect to see the "Four Horsemen" mirror the broad market's weakness and move lower.

With this expectation we now consider how to implement the trade. A direct approach would involve shorting each of these four names. However, I see no need to stubbornly short stocks that are showing relative strength. Although my thesis may eventually prove correct, shorting strength is likely to lead to losses and frustration. Instead, I will take a more hedged approach by shorting the NASDAQ 100 via the Powershares QQQ (QQQQ). The "Four Horsemen" have a combined 20% weighting in the NASDAQ 100, so a short position in QQQQ will enable us to benefit from their eventual decline.

Comments

[Shonkypom:]

You should go to Vegas and stay there.

Mar 02 04:22 AM

[Zoltan L. K...:]

Don't expect a clear pattern in the current volatile environment. As for Apple, it is important to look at the drivers of past performance. It less the momentum, but much more a (only partial) representation of a highly improving cash position. Growth opportunities will be priced in, as soon as the market environment improves. Until then you can short probably over 30 billion in cash now, but I would not prefer this tactic.

Mar 02 05:19 AM

[Gerard Hall...:]

RIMM: agree, it has structural problems.
AAPL: disagree, we only cover the phone side and there they are leaps ahead.
GOOG: agree philosophically, Android is what we know about and that is going well but for GOOG is a VERY long term game.
AMZN: no opinion but it is one of the the best places to buy a new mobile phone and contract.

Mar 02 08:37 AM

[Zircon - 212:]

If you are shorting the QQQQ rather than executing a more cost effective way through a long QID position my guess is you also spend more time writing blog entries than actually trading.

Mar 02 08:40 AM

[WhereAreThe...:]

Can you explain the QQQQ vs QID efficiency ? Thanks

Mar 02 09:03 AM

[Sean Hannon:]

QID delivers 2 times the inverse of the QQQQ. Since the returns are based on daily results, QID should never be used for a long-term tactical asset allocation choice. There are many articles all over this website that explains the problems with using leveraged ETFs for portfolio decisions. Leveraged ETS like QID should only be used for trading purposed while shorts in the actual ETF are more ideal for portfolio management purposes. Hope this helps explain the choice of using the short QQQQ as opposed to QID


On Mar 02 08:40 AM User 234014 wrote:

> If you are shorting the QQQQ rather than executing a more cost effective
> way through a long QID position my guess is you also spend more time
> writing blog entries than actually trading.

Mar 02 10:41 AM

[Socialism c...:]

I'm long the *other* four horsemen!!! ;)

Mar 02 04:02 PM

[Optionsforme:]

Amazon is the most ridiculous of the four, selling at 43 times 2009 earnings. The estimates called for zero to negative growth in 2009 before analysis reduce estimates, as they normally do for this stock. This stock is controlled by the momo's. However, its a ticking time bomb, a retail stock in a depression as consumers spend less and less. The game of musical chairs is being played and eventually the music stops. For now the share price is being nicely controlled as evidenced by level 2. But doy want to buy a stock that is by all metrics to to 3 times more expensive than the other horsemen and e-bay and the industry PE is less than 8? How much upside could this stock possibly have ? Are you willing to pay 50, 60 70 times earnings for a retailer ?

Mar 02 06:46 PM

[Thomas J. G...:]

I am shorting amzn as a hedge. The p to e is high, I think their q4 was forward momentum from earlier in the year that will not continue into 2009. But if the stock market goes up, sales of publicly traded companies increase, the economy gets better, amzn goes up, my short loses, but the rest of my portfolio gains so I am happy. If everything is going downhill, amzn seems like a good stock to be short.

Mar 02 08:14 PM

[Optionsforme:]

Sometimes I wonder whether Amazon is a retailer or a PR firm. They put ot so much hype, but they need to do so conceal their poor net results. Problem is that they have their collaborators on the street that manipulate the stock up.

Mar 02 08:49 PM

[throwerw:]

lol you are going to lose all of your money

Mar 04 03:22 PM