Yellow Light For Medium-Term Shorts
I’m seeing more beaten-down stocks
rise on or ahead of reports of declining earnings, a sign that trying to short for the medium
term now may be too late in the game.
After Tuesday’s close, sports shoe and
apparel giant Nike
(
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PowerRating) reported earnings for the Feb. 28 third quarter
fell to 35 cents a share vs. 52 cents a year ago. The company cited weakness in
its U.S. footwear market and problems with new supply chain software. The stock
rose 4.7% on average volume.
The stock did run into distribution intraday to come off its session high. The point here is not that Nike has put in anything close to convincing evidence of a bottom. It hasn’t. The point is that the market isn’t spanking stocks like Nike today and Corning
(
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PowerRating) yesterday for deteriorating fundamentals. This is different from the harsh treatment meted out to stocks last year during the Q3 confessional period and during the proliferation of inverted cup-with-handle breakouts that we saw from February through early March this year.
Add the fact that I’ve seen a relative dry-up of clear-cut shortable patterns. This market feels like one trying to make up its mind, rather than showing signs of priming for a clear trend. In such situations, my inclination is to wait in cash until the action of individual stocks signal reprise of the bear or, which will take longer, a rally of high RS stocks out of sound bases.
If you trade the intermediate term, you need to ask yourself the right questions. Ignore the futile and unprofitable media debate over whether the market has made a bottom. Yours and my goal is not to try to pick a bottom. Our job is to remain alert for the next time when the market gives us strong evidence of another brewing move in one direction or the other. You’ll see that in the collective action of individual stocks: Plenty of high RS merchandise to buy or low RS merchandise to short.
The rate-sensitive stocks were
unmotivated by the Fed’s 1/2 point rate cut. An exception is Lennar
(
LEN |
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PowerRating).
The home builder rose 3.9%, clearing its 50-day moving average on more than
twice its usual trade. The stock appears to be forming the right side of a
two-month base. Note the healthy confirmation in the relative strength line,
which rose Tuesday into new high ground. The stock still has work to do. In
particular, it needs to clear resistance at 38.
However, remember that this market is
giving us very little in the way of high RS stocks forming sound bases and
breaking out. So I am disinclined to chase the isolated breakout at this point.
We’ll know the market favors intermediate-term
momentum trading when we see those base breakouts proliferate.
In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.