Momentum Book Update: Playing in Traffic

 |  Includes: BP, GME, IRBT, MENT, NUE, NXTM, NZ
by: Leigh Drogen

Playing in traffic can be fun, I guess, but most would say it’s hazardous to your health. I’ve had no doubt about the fact that any positions I’ve taken over the past four months since I sold out of the market at the top in April have been just that, playing in traffic. I’ve done so with open eyes, knowing that this market is still broken, it hasn’t yet healed from the flash crash. Oh we all forget so fast ,don’t we? There have been tradeable rallies, and nice short setups. But overall it’s been a tough environment for swing / position traders like myself.

I’ve been quick to pull the plug on long exposure, and rightly so. Two weeks ago I sold out, packed my bags, and headed for cash. This week that course of action was vindicated as we saw the rising wedge broken and the market fall apart. The bulls put up a good fight to get us back to SPX 1130, but they just didn’t have enough gas left in the tank to get us through it. And after a few failed attempts, the market fell under its own weight, like gravity had finally taken hold, as buyers just ran out of ammo. It didn’t feel like short sellers were waiting this time as they have the past few, this time it was just exhaustion, I doubt anyone made any real money last week.

As for me, I added 20 basis points of absolute return and 400 basis points of alpha as my cash position paid off, along with a few small shorts.

I tried to get long Mentor Graphics (NASDAQ:MENT) and Netezza (NZ) early this week, but bailed quickly as the patterns failed, small paper cuts each.

But short positions in Nucor (NYSE:NUE), Gamestop (NYSE:GME), and BP have worked well. I closed the NUE short on Thursday as I believe we could see a big rally in gold and that may drag some of the industrial material names, including steel up with them. I’m still very bearish on the steel names intermediate term, but it doesn’t make sense to put your head in front of a bulldozer right now trying to pick up pennies.

I believe I have a great entry to the GME short, and this is a stock which could easily go to 12. I will not be closing this position until it capitulates or takes out my stop above last week’s high. The company's business model is shot, and although it knows it and is trying to turn the company around by going digital, I believe it will fail. Too much legacy brick and mortar retail business to turn that ship around, it is the blockbuster of video games, no matter how hard it tries to fight NetFlix (NASDAQ:NFLX) at its own game, it’ll never win. GameStop is toast.

As for BP, I believe I have a good entry to that short as well. I’m looking for 34, pretty simple.

I did take two small long positions this week, one in Nxstage (NXTM) and the other in iRobot (NASDAQ:IRBT).

I’m beginning to hear a lot about the fact we are in this big trading range, and that we could be trapped here for quite a long time. When that chorus starts to get too loud you’ll know it’s time to buy some volatility and prepare for the next big move. I’m completely agnostic as to what direction we may be headed in come the fall, but I’ll be prepared for either. My gut says we’re going south given the economic data and the fact that I believe our government is pretty much incompetent at this point, even if they have the best of intentions. But….they could panic and pull the switch on another round of quantitative easing, which would drive asset prices through the roof, including stocks. So be prepared for all outcomes, it’s not our job to forecast what those guys will do, it’s our job to go with the flow once the market decides how it must react to them.

My advice, if you don’t have to trade right now, don’t. If you do, stay small. If you have some vacation time you want to take, now would be optimal to take it.

Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security. The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.

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Disclosure: Short NUE, GME. Long NXTM and IRBT.