Saturday, July 25, 2009

My Earnings trade Gameplan: Hedge (Pair-Trade) Ideas of the Week: July 27-31 (MAR, GMCR, GOOG, X, DO, XOM)

I try to trade what the market gives me, as we all do.....

There are times I have "NO CLUE" what the broad market is going to do short term. (like now)
That does not mean there is not money to still be made and trends to play, there still is (imo).

You can (if you choose too) browse through my May-April posts, and most ideas I posted were Weekly Pair/Hedge trades. Why? Because I was not that confident of the overall market direction. Past performance is NOT indicative of future results. (Those went 5 for 7)

I said it before that last qtr the earnings trend was "easy". That might be an overstatement, as no trading is "easy". But last qtr there were so many shorts on board, that once the earnings trend was established early as a very bullish one, the game-plan was pretty simple. ----> find the highest shorted stock, and buy it long 3 days before the ER, then sell it 1 hr before. (since everyone was "blowing out the estimates"...most shorts were covering prior to the report out of fear)

For this qtr, so far that trend has somewhat carried over. However, even though the broad market is very strong, just as last qtr, due to the reactions being more "mixed" this qtr, especially some of the last few and not as "everyone bullish across the board", I do shy away from employing that identical strategy.

This qtr, it seems that many companies are missing the top line (revenue), but beating the bottom line (earnings). The market's reaction is all the truly matters. However that it not really a bullish long term sign there at all. That means the reason they beat the bottom line is from cost cutting, not actual growth.

So after browsing through a few hundred charts and deciding if i was going to trade these earnings, and if it was even worth it here as the market direction seems tricky. I decided that I would, and to employ a pair trade only (hedged) strategy based off the same trend that worked last qtr PLUS the revenue/eps reality of this qtr. IE:

Fundamental Game plan:
Long a momentum stock that is getting ready to report, and ideally has lots of shorts.
Short a momentum stock that has already reported and had weak revenue, yet ideally still had an initial knee jerk reaction UP
(exit the pair trade prior to the ER, as no "gaming")
Also, I am looking to be putting the options to the side for a bit, and going straight STOCK here.
(larger size plays, as they are hedged 50/50:short/long)

Long XOM
Short DO
(exit on Close of Wed, as XOM reports Thurs AM)

XOM reports on Wed, and I can not find a momentum name stock YET that has sold off "before" its ER. Yes some sold off after (amzn, msft, goog). However the earnings "sentiment" is still bullish, and people are buying before reports here. I would "expect" that to weaken somewhat, as per the MSFT and AMZN rude awaking. However not enough to kill the entire market trend.
DO did "beat the eps", however they had a decline in income, and I like the chart set up alot.

Short MAR
(exit on close of Wed, as GMCR reports Afterhours on WED)

GMCR has 34% shorts as of the last Bi-Monthly data. And with the SBUX "reaction" here fresh in traders heads. (mine included!) I have a pretty good hunch that "SOME" of those 34% might cover before the report. I think GMCR is a train wreck longer term, but its a short term trade, that has a rationale to it here. MAR already reported on the 16th, and cut their fwd forecasts, also with a 76% decline in Q2 profit. (yet they "beat the street eps" lol) I feel the only reason MAR has held up and retraced most of that sell off, has been since that exact same time the broad market has been on complete fire pulling it along "somewhat" with it.

(no relation)
Long X
Short GOOG
(Only for 1 day:Monday, as X reports before the Open on Tue. The GOOG short could be held open longer. But jmo, MAR i "think" is the individual best looking short)

X has 15% shorts on it.
GOOG already reported, virtually no shorts and a triple top at 447, which the $NDX has been pushing higher the entire time and index wise looks the most set up for a short term pullback.
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