Netflix: Cover Alert on Short Position

May.20.09 | About: Netflix, Inc. (NFLX)

What:

Netflix logoWednesday I covered my short position in Netflix (NASDAQ: NFLX) at $39.90 per share.

The total amount shorted was for a 1/2 position out of a full position, accounting for about 15% of my portfolio.

Those that follow me on Twitter received this update Wednesday as I made the transaction.

Why:

As I recently wrote, I think that the stock has gotten way ahead of itself, and has now shown extreme weakness, good fundamentals or no fundamentals.

This was always meant to be a short term trade, but with the bull market that we are in, whether or not you think that it is a long sustainable bull market or a bear market rally, it’s here now, and fighting that is a hard thing to do.

I will point out that Netflix has thus far shown extreme weakness even in the face of this tremendous rally in the market, and has thus underperformed the market since its March lows by about 15% usually on higher volume to the downside, and rising only on lighter than normal volume.

Even last week when arch-rival Blockbuster (NYSE: BBI) reported horrible earnings and a revenue shortfall, NFLX rose modestly on light volume.

Wednesday was the same story.

This doesn’t even include my macro and micro reasoning for shorting NFLX.

Reasons that include:

  • increased competition by rival kiosks by Coinstar’s (NASDAQ: CSTR) Redbox machines and Blockbuster
  • rising postal rates (which will continue to rise as the post office is losing gobs of money, even thinking about scaling back to 5 days a week delivery vs. 6)
  • increasing costs for their streaming service
  • the eventual burnout of the DVD
  • testy upcoming negotiations with movie studios for streaming content
  • an improving economy with consumers looking to “trade up” to actual movies, dinners out, etc., and dropping their NFLX accounts, and many, many more.

In addition, if you look at the volume/price action, as well as noticing that Netflix has breached some major support levels (10 day, 25 day, and 50 day SMA) on HEAVY volume, I still think we are in a favorable position longer term for shares to trade lower, and at the very least to underperform the market, but because shorting stocks can be dangerous, I wanted to ensure no worse than breakeven.

NFLX_Chart_5-19-09.jpg

click to enlarge

There’s a cardinal sin in stock trading that separates that truly great from everyone else: never turn a winning position into a losing one.

I’ll look to re-enter the short if conditions warrant.

Right now, I’m going to hang back a bit, and see how it plays out.

Warning:

If you are unfamiliar with shorting and how it works, please read

my explanation and disclaimer about shorting

before taking any action. Shorting stocks can be very dangerous if you don’t know what you are doing, and goes against the usual long-only bias of my website, but I will not hesitate to short stocks when the

risk/reward

favors us greatly.