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MM Market Notes: Managing The Churn Game

|Includes:AMZN, CSIQ, SPDR Dow Jones Industrial Average ETF (DIA), EBAY, IWM, JOSB

With earnings season in full swing, the broad indices are experiencing significant volatility.  Each day, a new major earnings report or two paints the tone for the day, and investors skew their perspective towards fear or greed.

Still, with all of the movement this past week, we have had little clear indication of the ultimate direction of the next major market swing.  The major indices have worked their way back up to the top end of established price channels, but have yet to decisively break higher.

With yesterday's action, the Dow actually closed above the downtrend line, but the margin is close enough to leave plenty of doubt.  Volume on the NYSE was relatively unimpressive considering the importance of the price point, and my sense is that the path of least resistance is for the blue chip index to fall back into its negative channel...

Depending on where you draw the trend line for the Russell 2000 Small Cap Index ($RUT) the downtrend line is still intact despite the positive action on Thursday.  I'm more inclined to use the Russell as a proxy because it is a better representation of the broad universe of stocks rather than a price-weighted blue chip metric... (NASDAQ:AMZN)
weakness this morning comes on the heels of a relatively positive earnings announcement.  Similar to the Netflix action from yesterday, the company actually reported a decent quarter hitting the high end of expectations for Q2 sales.  But cautious comments from management has growth investors concerned, and with the stock priced for perfection, there is little room for any disappointment.

My short position is certainly benefiting from the action and the gap lower offers me the chance to take half profits off the table and tighten my stop on the remaining shares.  The Mercenary Live Feed will be an excellent window into these trading decisions from a real-time perspective.

Allegiance to Neither Bull Nor Bear

At this point, I still find it difficult to buy into the "recovery thesis" that seems to revive every time a company like Ebay Inc. (NASDAQ:EBAY) announces and trades higher.  Ironically, while Ebay was noted as one of the primary catalysts for yesterday's rally, the stock actually tailed off in late trade and closed near the lows of the day...

But keeping to the Mercenary Creed, I refuse to be wedded to either the bear camp or the bull camp.  If we break above the negative trend line and the price action holds, I'll flip my cap around backward (or would that be forward?) and start trading from the long side.

Areas of interest right now include alternative energy, with many solar companies actually looking very attractive.  Canadian Solar Inc. (NASDAQ:CSIQ) has shrugged off a SEC investigation from early June and has decisively broken its medium-term downtrend.  The industry is grappling with cutbacks in Euro subsidies, but the bad news appears to already be priced in.

Many of the weaker competitors have either gone out of business or been absorbed into stronger industry players.  Demand is showing signs of catching up to the oversupply in the industry, and debt levels have for the most part been paired to manageable levels.  So if the bull camp becomes opportunistic, I'll be scouring this industry for good risk/reward setups.

Finally, there are actually a few retail names that I respect and could see myself getting involved with in the coming weeks or months.  Jos. A. Bank Clothiers, Inc. (NASDAQ:JOSB) is impressive on three different levels:

1) Fundamental Business
- The company has found a niche where it offers professional business suits and accessories for a fraction of competitors prices.  Heavy discounting and promotional efforts have kept inventory moving and traffic levels high.  Earnings and sales continue to rise despite the weak consumer.

2) Technical Chart Pattern
- JOSB is actually trading in a very healthy pattern with little distribution.  Most recently, a decent base has formed offering some interesting inflection points if and when the environment is right for purchases.

3) Stock Valuation
- Considering the successful earnings and sales growth, a forward PE near 13 is actually quite attractive.  If management continues to increase guidance and follow a steady growth strategy, the valuation could remain conservative even while JOSB trades significantly higher.

Shortly before the open, the US futures gave up their overnight gain and we are initially in negative territory.  

Stay nimble throughout the day and watch those risk levels...

Disclosure: Short positions in stocks mentioned