Sirius, Netflix, RIM: Exploiting Nasdaq 100's Weak Links In The $10,000 Portfolio

by: Rocco Pendola

It's not easy to put up with the drivel spewed from peanut galleries full of emotionally-attached "investors." That said, as a trader or investor, they still deserve your attention. You can learn by watching investor psychology play itself out before your eyes.

If, over the last several months, you've paid any mind to the comments' section of Seeking Alpha articles about Sirius XM (NASDAQ:SIRI), you might think that you run in a bizarro world, some sort of alternative universe where up was down, black was white, good was bad and day was night.

As SIRI's chart started to disintegrate in mid-July after a seemingly healthy pullback from its 52-week high of $2.44, bearish articles, some written by me, were met with scorn from the peanut gallery. Each leg down in the stock produced more vitriol. Some even argued that Seeking Alpha was part of a vast conspiracy aimed at manipulating SIRI for the benefit of evil and mysterious market makers, hedge funds and day-trading "shorts."

Of course, if you paid attention, you also noticed roughly the same number of bullish articles to even things out. It's too time consuming to even count the number of articles written by Investment Underground, Vatalyst and others touting SIRI as a "double" or "heavily traded" or with great "upside potential." Some contributors even went so far as to blame things on macro events and urge patience all the way down from the mid-$2.30s. And, of course, the hedge funds aren't so evil and mysterious when they're buying your stock.

What's even more bizarro, however, is the notion that there's something wrong with flipping from long to short. It's not just bizarre. It's patently absurd. I don't know an actual trader or investor in his or her right mind who would, knowingly, proclaim him or herself a SIRI bagholder between $2.44 and $2.00, out of some perverted notion of loyalty to a stock, the company, a brand, a beloved service or fellow shareholders.

But, herein lays the kicker. I'm not sure bagholders knowingly proclaim themselves as such. Instead, truly powerful psychological forces take over - you can witness exhibit after exhibit in the comments' section of past SIRI articles and maybe even this one - that help longs filter out information and create their own realities. Realities that align with what they want to believe and what they so desperately want to see happen. Not much of what most members of the SIRI peanut gallery ever said made much sense. It all flew in the face of what was happening right in front of their eyes. A refusal to see does not stop reality from proceeding without you.

While you can use message boards and comments' sections of articles to learn a thing or two, treat them like talk radio. People who take the time to comment or call represent a fraction of those who just read or listen. I see the numbers and, I can tell you, the number of comments to my Seeking Alpha articles make up far less than one percent of my total readership. And that number gets smaller everyday.

It's also important to note that SIRI provides a somewhat peculiar case study. As Cramer recently noted, "penny stock guys" represent a considerable faction of SIRI longs. They're emotional and often inexperienced investors looking for a big, quick hit, thus the less-than-civil or rational response to discourse on their stock. Articles on most other stocks, even passionate ones like Netflix (NASDAQ:NFLX) and Research in Motion (RIMM), generate a much higher level and measured conversation.

And that leads me to the latest on the $10,000 portfolio. Bearish plays account for a sizable chunk of my returns. Buying puts on NFLX and RIMM banked $630 and $3,600 in profits, respectively. In my last update, I noted that I was shorting 5,000 shares of SIRI from $1.66. Even I did not expect to get so close to my target of a $0.20 profit so fast. Therefore, I took profits and ran near SIRI's Thursday intraday low:

Pencil in that quick $900 gain and shorts via puts or stock account for $5,130 of the $10,000 portfolio's appreciation. The other position I opened on Thursday - five FedEx (NYSE:FDX) April 2012 $67.50 calls at $8.90 each closed Thursday's session at $9.38, good for an on-paper profit of $240.

Taken together that leaves the $10,000 portfolio with a balance of $18,642, a gain of 86.4% in just over a month's time and just shy of the goal of a double.

As of now, I intend to continue along with the FDX trade and probably not make any more trades on NFLX, RIMM or SIRI. I made the calls. Each came to, representing three of the strongest shorts of 2011. It pays not to go to the well one too many times. No doubt, it's a risk, as I remain decidedly bearish on all three stocks. And I expect each to continue to fall, barring something extraordinary, such as the bagholder's dream - M&A activity.

But, as I have said, I intend these articles as learning experiences both for writer and reader. I don't mind stepping out of my comfort zone - and not trading the stocks I seem to have a decent handle on - to keep things fresh and interesting.

That said, don't let anybody fool you into believing that stocks like RIMM, NFLX and SIRI are (A) value plays, (B) going down because of macro events or (C) require the patience of a wise man or Warren Buffett. You're not Buffett so you probably should not try to act like him. That's dangerous for your portfolio. And it's a sure way to rack up losses when you could be putting your money to work elsewhere or on the short side of broken stocks (e.g., SIRI) and broken companies (e.g., NFLX, RIMM).

Consider the following two charts, courtesy of Yahoo! Finance. They illustrate much of what you need to know about SIRI, NFLX and RIMM in relation to the broader market.

Click images to enlarge

SIRI Thursday, intraday chart v. NFLX, RIMM, the DOW, NASDAQ 100 (NASDAQ:QQQ) and S&P500 (NYSEARCA:SPY)

SIRI 3-month chart v. NFLX, RIMM, the DOW, NASDAQ 100 (QQQ) and S&P500 (SPY)

What should concern investors most is how SIRI, NFLX and RIMM perform in relation to their counterparts in the Nasdaq 100. Click here for the complete list, but the following data show the weak links in the Qs from Thursday:

And this is not merely a one-day event. While the Qs have held up relatively well through the market's fits and starts, these three shorts have woefully underperformed the index. Here's a look at the performance of SIRI, NFLX and RIMM against QQQ since SIRI became a Nasdaq 100 member on July 15, 2011:

No matter how you slice it, these three stocks rank among the market's biggest underperformers over the past several months. Taking advantage of this reality has clearly worked wonders for the $10,000 portfolio. It's just a shame I have not been working these trades with real money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.