Seeking Alpha

Philip Davis'  Instablog

Philip Davis
Send Message
Philstockworld.com is the fastest growing stock and option newsletter on the Web. "High Finance for Real People - Fun and Profits" is our motto and our Basic and Premium Chat Sessions offer readers a chance to speak to Phil live during the trading day as well as authors like Optrader,... More
My company:
Phil's Stock World
My blog:
Phil's Stock World
View Philip Davis' Instablogs on:
  • The Oxen Report: Five Keys to Fundamental Day Trading
    The Oxen Report: Five Keys to Fundamental Day Trading

    Identifying the Fundamentals 

    Stocks move under the influence various factors that we can use to identify stocks that are likely to move 3-5% in a single day. Even the best technicals seldom give you 5% upward (or downward) movements intraday alone, but combined with fundamental factors, we can find stocks that are likely to make these large daily moves.

    To begin to seek that perfect stock or ETF, we first need to look for something that can propel a stock or, in the case ETFs, the represented sector. This 3-5% movement is not from the previous day’s close, but between the market’s open and close. We want to identify a stock that can be bought sometime in the morning to give us that significant movement by the end of the day. The first type of information that is prone to easily move stocks is earnings.

    1. Earnings
     
    There are multiple ways to play a company’s earnings. One of the most effective ways to invest based on earnings is after a company has already announced their earnings. We are looking for earnings that were surprising, especially ones that say something about a sector.

    For example, if one company announces positive earnings because it had a large profit from a lawsuit, this information does not tell us much about the earnings potential of the sector in general. However, if an important company in a sector has positive earnings due to an increase in sales or because it saw higher demand than anticipated, this information is more telling of its sector as a whole, and the news may move many similarly situated stocks.

    We like the sector-telling earnings because it suggests something about the sector is most likely bullish (or bearish). For example, if Burger King Holdings Inc. (BKC) reported earnings and noted that they were seeing increased demand for fast food because customers were cutting back on more expensive restaurants, this would suggest a general transferring of food money from high-end restaurants to fast food. This information should propel not only BKC, but also McDonald’s (MCD) and Wendys/Arbys Group (WEN). The positive earnings may benefit companies that are closely related to the reporting company. Typically, we do not want to invest for a single day-trade in the specific company that reported the earnings. The reporting company is likely to gap up the next morning and have less room to run due to the large jump up from the closing price.

    Instead, we look for competitors that will profit from the good news. Take for example, J. Crew Group Inc. (JCG) and Gap Inc. (GPS). On May 28, 2009, J. Crew, in after hours, announced earnings that significantly exceeded estimates when it reported an earnings per share at 0.34 EPS. The street was estimating 0.11 EPS. This was seriously bullish news for JCG. The next day the stock jumped 26.4%. The stock gapped up so heavily that traders jumping on in the morning missed most of that movement. So, in the morning, the Oxen Group recommended Gap Inc., a close competitor of JCG, especially with their Banana Republic line. On the same day, GPS moved up almost 5%. The Oxen Group was able to get in at the beginning of the day while the stock was still at a low price, and then ride the wave upwards.

    We find that earnings releases can be used to make gains on competitor companies because the competitors’ stock often reacts slower than that of the company releasing the earnings. We look for competitors that have similar product lines. The same is true in the reverse direction. If a company bombs estimates, many similar companies will be pulled down with it, providing us with a good shorting opportunity.

    Additionally, extremely good earnings in an important company within a particular sector may suggest a day-trade with an ETF that models the sector. In the case of JCG, related retail ETFs are sparse and have low volume, not the best vehicles for trading. But with an energy or financial company, sector ETFs are heavily traded, and playing an ETF the same way we played Gap could be very profitable.

    In summary, earnings can be a very solid fundamental bull or bear signals for a single day-trade. However, earnings do not come out everyday. Where else can one look when trying to identify a bullish or bearish fundamental trade for the next day?
     
    2. Upgrades/Downgrades

    Upgrades and downgrades are extremely powerful mechanisms that can propel a stock up or down significantly. Ratings can move a stock up or down anywhere from 1% to 10% depending on the rating company’s significance, the ratings change, and the company being rated. Moody’s, S&P, Credit Suisse, Goldman Sachs, Morgan Stanley, and Fitch are rating companies that are particularly significant. Smaller equity firms tend to have less impact on a stock’s next day movement. Upgrades and downgrades typically come in the morning or intraday. However, when they do come in the evening, they work in the same way as earnings - an upgrade can give rise to a sizable stock movement.
     
    An upgrade or downgrade will have a strong effect on an entire sector if it has something to do with the broader picture. If a company gets downgraded because of risky investments or bad credit, it is not likely to bring down its competitors. However, if the downgrade is due to lower sales expectations, its competitors are more likely to trade down in sympathy. 

    For example, on Saturday, June 6, 2009, Torchmark Corp. (TMK), an insurance company, was downgraded by Fitch Ratings for bad investments as well as a sector wide decline in the ability for insurance companies to be profitable in this market. All the insurers ended in the red, most likely due to the questioning of insurance companies’ profitability in general. Obviously, a multitude of factors go into companies within a sector, but upgrades and downgrades can be very significant in predicting the movement of single stocks and sectors.

    3. Foreign Markets 

    Another way to gage how well a stock may do the next day is to see what is going on in foreign markets. Typically, this will have the most impact on commodities, such as oil, and products that are sold overseas or overseas companies that have a PLC or ADR on the American stock exchange system. 
     
    For example, oil, oil and gas stocks, oil and gas ETFs, and anything that has to do with oil will be affected by changes in the price of oil. What the oil market is doing overseas can be a great fundamental predictor of what the oil sector will be doing when our markets open.
     
    For example, if the oil inventories are skyrocketing in Asia, demand is down, and the price of oil plummets in the Hang Seng and Nikkei, this will have an effect on the NYMEX. In our globalized world, what happens in one country affects us all. If oil demand is dropping in China, any company connected to selling gas or pumping oil out of China will be impacted by the demand drop. The price of oil will be affected negatively, which will in turn negatively affect other oil companies, oil producers, and ETFs.
     
    The same is true, in reverse. On June 1, 2009, The Oxen Group recommended Toyota Motors Corp. ADR (TM). The company, in Asia, had skyrocketed due to booming Prius sales in Japan that were significant in Japan’s extremely weak consumer economy. Therefore, if Japan was able to do well with the Prius, one might conclude that while the car may not have done as well in America, it was bullish news that would positively affect the ADR. It was not so directly bullish, however, that it would send the stock up 5-6% out of the gates, and we would never have a chance to buy in. The stock did gap up, moved back, we were able to get in and make 2% off the ADR for the day.
     
    4. Financial News

    News can come in many ways and can be fundamentally bullish or bearish. Often, big news stories comes out intraday and move stocks so quickly that the opportunity is gone by the time you see it. Though intraday opportunities may vanish as quickly as they arise, investors should be looking for news after hours that may be significant enough to help a stock or a sector, as a whole, the next day.
     
    For example, one of my favorite pieces of news to use to invest is box office weekends. The company that owns the movie that wins the box office tends to have a very good day on the Monday after that weekend, especially if the movie’s success was extremely bullish and surprisingly. For example, on May 29-31 "Up" won the box office and it was the third largest revenue maker for a Disney-Pixar animated flick, coming in way above estimates. It sent the stock up a solid 4% on that Monday simply based on that fundamentally bullish news. On June 5-7, "Up" retained the top spot but the news was less significant. Disney ended June 8, 2009 without the 4% gain and finished sideways.
     
    News has to be significant to truly propel a stock. However, if the news is too large and too visible, the stock may jump too fast to buy it at a good entry point.
    One of the interesting ways to use news is with a sector ETF. For example, if on a given day, in after hours, three or four major financial companies have some bearish news, it may be a good time to buy into an inverse ETF that will move in the opposite direction to the financial sector in general.
     
    In trading news, however, be careful. It does not always have the effect you expect. 
     
    5. Futures

    The final key telling-signal of fundamental bullishness or bearishness is the futures market for the Dow, S&P, and Nasdaq. These markets open at 12 AM on trading days and trade until the start of the session. The futures markets can give an investor a general sense of market direction.
     
    For example, suppose you are excited about Dryships Inc. (DRYS) because the shipping indexes are jumping up significantly in Asia. At the same time, though, the futures are significantly in the red for the coming trading day, due to a multitude of bearish news and earnings that were reported the afternoon and night before for the American market. This could really hinder DRYS’s movement the next day because the market is in the red.
     
    In the reverse, futures can help you feel more confident that a stock with fundamentally bullish indicators could continue upwards when the market is looking healthy.  Futures are a helpful indicator to determine if a stock will be a good or bad day trade; they’re definitely worth considering.
     
    So, there you have it — the five fundamental indicators to help you identify the perfect day trade. There are a number of other indicators that go into any trade. Technicals are very relevant, the entry and exits are important.  The fundamentals are the start of the ability for a stock to move up. The patterns that were identified in the piece should help you find and search out stocks that would be bullish.

    Everyday, the Oxen Group chooses our Oxen Picks starting with the ideas above.

    The final piece of advice to keep in your tool belt is to stay confident in your picks. If you have done the research and the evidence is there for the stock to move up, then you should feel confident that your ideas will work. If it does not work to perfection, it is okay because if you keep identifying fundamentals, it will work more often than not. 

    *****

    Click here for your 20% discount on PSW reports and trading services. 


    Mar 19 3:26 PM | Link | 2 Comments
  • Overnight Trade: This One is in the Bag
    Courtesy of David of the PSW's Oxen Group... - Ilene 

    Overnight Trade: This One is in the Bag!
     

    I love my clever title for this post. Today, we are going back into the retail sector again to look to make some money. Yesterday, retail was good to us with a pick up of Rue21 Inc. (RUE). Our Buy Pick of the Day was good for 3% as we got in at the beginning of the day at 33.30. The stock quickly picked up momentum as investors got into RUE, hoping that the company would repeat performance like competitors Aeropostale (ARO) and Forever 21 (privately held) were able to turn out this past quarter. Today, the company reported a 68% increase in profit and beat EPS estimates by 20%. We got out at 34.57. Our Short Sale of the Day was in Hovnanian Enterprises Inc. (HOV). We set a short sale range of 4.55 - 4.65. The stock didn’t hit our range until right at the end of the day, and we did not play it. It was unfortunate because it hit a high prior to that around lunchtime at 4.53 and came all the way back to 4.41, which was close to 3% movement. Hopefully some of you were able to get in at the lower entry and make some money.

    Overnight Trade of the Day: New York & Co. Inc. (NYSE:NWY)

    Analysis: Retail has been very solid with earnings this quarter. The reflections of holiday shopping’s quarter has been much better than analysts were expecting across the board. This has attracted me to playing a number of retail companies over the past month. For today’s Overnight Trade, we are looking to New York & Co. Inc. (NWY), which is a specialty retailer that features strictly women’s clothing, in the vein of casual to work-oriented fashions. It is in the non-upscale but not cheap area - in line with Ann Taylor (ANN) and Gap (GPS).

    I think this stock is a great play because of what I am seeing in other retailers. In the past month, seventeen out of nineteen apparel stores have reported positive earnings beats. The top competitors Ann Taylor reported a 600% and Gap was only a 2%, but it is still a beat. NWY is very similar to these companies, and the similarities between these make me very excited. The retail companies have all done exceptionally well after earnings, with gains up to 15% on the next day. The company has EPS expectations at 0.06, which would be a stellar 130% profit, year-over-year.

    Another reason that I like NWY is that it is projected to report in the green for the first time in two years. The stock is not pricing in that type of report as of yet, which means this is a perfect value play. The company, additionally, has not had the breakout that all these other reported companies have had. We can expect a lot of growth coming from NWY.

    The company has great beta at 2.5, so a beat will mean that we are going to see a lot of volatility. Further, the stock does not have a lot of shares outstanding, so a beat will make this one bounce even further. Technically, NWY is neutral on stochastics and means that the company will have a lot of buying tomorrow on a beat and the earnings buzz. Further, NWY has a lot of upside on bollinger bands as well. This stat is exceptional because all the other retailers are extremely overvalued in the short term. That gap has to close.

    Get in today and let’s make some money.

    Entry: We are looking to get involved with NWY by 2:00 PM today. The ideal entry range is 4.30 - 4.35.

    Exit: We will be selling NWY at the open tomorrow, within first two minutes of open. You can set a market sell overnight to sell right at the open or be ready to sell within minutes of market open. This is subject to change, though, and I will give an update if I want to change our exit.

    Good Investing,

    David Ristau 

    Disclosure: Oxen Group will be long NWY


    Trade along with David...for a special 20% discount for PSW's newsletters/services, click here. 
    Mar 17 2:07 PM | Link | Comment!
  • Notes on the Fed Statement and Short Play

    New Fed statement!  Changes highlighted good or bad:

    Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

    With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

    In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

    Last time they said about the closing of loan programs: " The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth."  That was at the end of the 2nd to last paragraph and removing that is a way of saying - "That’s it, you are on your own now." 

    I’m surprised that’s not giving us a sell-off but maybe this is a headfake but let’s not take any chances and stay bullish over 10,650 but maybe taking a poke at the short side at 10,700 with the sale of the March $105 calls at $2.10 with a stop at $2.30



    Disclosure: Short on DIA
    Tags: FOMC Minutes
    Mar 16 3:10 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.