We Could Be Off To The Races

by Dan July 20, 2011 7:56 am • Commentary

I have tried to stick to my guns (bearish ones), continually poking holes in the the short run bull case for equities but it is becoming increasingly hard in the face of some of the earnings we have seen in the last week.  There appears to be a disconnect between the “soft patch” of economic data that we got in May/June and some of the actual results by U.S. companies.  There is no doubt in the consumer space that high end is doing just fine, look at AAPL, WYNN and TIF for proof.  As I write UTX‘s results are hitting the tape and the company not only beat estimates but is raising guidance for the year.  It seems that we could be facing a “perfect storm” for equities …..the fed seems determined to keep rates as low was possible until they are convinced the economy is on the right footing, any budget deal will be laced with goodies that will be bullish for equities and U.S. corporate earnings are clearly better than expected at a time where economic expansion maybe only temporarily stalled which could lead to massive revenue growth possibilities in the qtrs to come with just a slight reboot of growth….All of this sets up for a rally into year end as UP is the direction of choice for those who own risk assets.

Just because I am throwing in the towel on my call that the SPX will break 1250 this year (I got very close on 3 occasions) doesn’t mean that I will not continue to look for opportunities to make money on the short side in single stock names or on a macro basis.  There will be plenty of opportunities to do so.  But I can assure you that even with my shift in direction, I am not going all in from the long side.  As many of you have heard me say in the past, I don’t buy run away break-outs and when I want to buy something, I wait for it to come to me.   AAPL is a good example. If you wanted to buy the stock, you had shot last month to buy it almost 30% lower than where it is trading this morning, following its blow-out results.   The problem was that the world looked like a fairly different place than it does this morning, and when the stock was making 7 month lows and dramatically underperformed the broad market, investors overall seemed worried to say the least.  Just because you missed what in hindsight seemed like the buy of the century doesn’t mean you have to compound the problem and buy the stock sloppily.  Listen, the stock is going up from here and will very likely close higher on the year, but wait for the thing to consolidate for a bit while working on your long thesis and pull the trigger.  You don’t have to be a monkey and buy when everyone else is scrambling to do so. The bullish AAPL trade that I suggested on Friday (read here) was a way to replicate long exposure into an event that I thought had the potential to be volatile, while setting up for an expected event in Sept.  The stated goal of this site is to try to offer alternatives to just buying or shorting stocks that offer attractive risk/reward scenarios regardless of timing.  We feel this tactical defined risk approach is the right one for volatile markets.  Don’t listen to monkeys on TV or on the web who say buy this, sell that, because its a great company. They likely have a very different risk profile than you.

I guess a good example of “paying the high” would be WYNN’s price action yesterday.  The company posted a big beat and the stock gapped almost 5% on the opening….well, the open was the high for the day and the stock closed 10 points off its high and near the lows of the day…….Don’t be that monkey paying the high.  On a longer term basis the stock could clearly be going higher, but to pay 170 and then have the thing come into 160, you would have put yourself at a massive disadvantage and reduced your prerogatives from a risk management perspective if the pull-back continues.

[caption id=”attachment_3338″ align=”aligncenter” width=”300″ caption=”2 Day WYNN chart provided by [/caption] [caption id="attachment_3339" align="aligncenter" width="300" caption="7 Month WYNN chart provided by Boomberg LP"][/caption]

The stock ran $30 into the earnings event and then gapped up $10 after. This is all within a period less than a month, I think it is safe to say that a lot of good news was in the stock……People looking to get long generally don’t panic to buy things the way that shorts do, so in names like this, recognize that a good bit of this price action is shorts jumping over each other to get out.  This is a great example of a stock that is probably a great buy on a pullback or consolidation, but not at 52 week highs after a monster run.

If the market is going to make new highs look for good stories that haven’t participated yet and try to figure out why.  Try to extrapolate from names that you are watching and ask yourself, what’s next?  NTAP could be a good example of this.  When they reported their fyQ4 back in late May they beat and raised and the stock rallied 7%.  The company recently hosted an analyst day and reiterated their guidance for the current qtr, yet the stock remains down 5.75% on the year vs a Nasdaq Comp that is up 6% on the year.  The chart is basing and looks like it could be poised for a break-out to back above $55 on any incremental earnings news.

[caption id="attachment_3341" align="aligncenter" width="300" caption="1 Yr NTAP chart provided by Bloomberg LP"][/caption]

Check back later today after I take a closer look at the name and offer ways to play for this move.