Morning Market Thoughts

Good morning. The market will open slightly lower this morning, with the big news being Amazon’s Prime Day — a 30 hour sale that started last night at 9 am. Analysts expect it to generate more than $1 billion bucks (which is a lot, even for Jeff Bezos). Those shares are trading flat today and my suggestion is that the $1,000 level be watched because it’s an obvious sell point. Nobody decides to sell their stock at $1002. It’s either at $1000…or a lot higher. So demand has to soak up all the supply from sell orders at $1,000 before climbing higher. And whether or not the bulls can soak up all that supply is unknown. We don’t know it, so let’s not pretend as if we do. Just let the stock tell us whether or not AMZN ($AMZN) has cleared through resistance.

I mentioned Snapchat ($SNAP) yesterday in reference to the lockout period for IPO shareholders. The stock is trading at $16.42 this morning — $1.58 below its IPO price of $17. So everybody who bought SNAP is now losing money. And the first lock up period expires at the end of the month. If you recall, there was a lot of hedge fund sponsorship of this stock, with folks like David Tepper touting the company when the stock first began faltering, and saying that he was going to buy more stock. Maybe he’s still waiting to buy. Because if he followed through on his commitment to buy more stock, the Appaloosa has probably stopped running and become a plow horse. This stock will be volatile this month, with increasing pressure on the stock. But before you consider this as a shorting opportunity, remember that there are a great number of investors who have a vested interest in seeing the stock climb back to their purchase price, if only to sell into the demand. Shorting stocks is rarely as easy as you might think (“Oh, it’s just like buying a stock, only the chart is upside down!”). No. There is an underlying bid waiting for every stock. We don’t see it as the stock falls, but we know it’s there. On the other hand, a stock that is making all time highs typically has no overhead supply other than the urge of bulls to take profits at some point. If the stock is going parabolic (E.g., LINE corp ($LN — up more than 30% in just two weeks last August), the selling will occur sooner than a stock that’s moving in a steady uptrend (E.g., Raytheon ($RTN), which has been a steady climber as it runs along its 50-day moving average).

So the volatile, downtrending stocks can be enticing to short, but you’ve got to be careful.

1. Trade small;
2. Have definitive “Oh, crap! I’m wrong!” levels set that limit your losses in the event that you are wrong;
3. Take profits early. We’ve seen some persistent selling in some of the retail stocks recently. Over the last 3 weeks, Costco ($COST) has fallen 14 of the last 17 trading days. The bars have been long and red. There’s also been a “bearish wedge” in this decline, with a $20 decline from the day prior to the big selloff (June 15) to the bottom of the “wedge” (June 23rd). This gives us a $20 difference that can be subtracted from the bottom of the wedge that generates a price target of $140 — $11 below current levels. Shorting a stock like this as it plummets can be lead to big profits; but it can also bite you if analysts decide that the stock is now a compelling value and start upgrading the stock.

So the easy ones aren’t particularly easy. In a market that is still fairly strong, though in a resting phase now, it pays to just stand aside on stocks that aren’t working rather than try to profit from their decline. And if you do decide to go short, watch the stock carefully and consider reducing your position before the market closes. That way, you aren’t greeted the next morning by a favorable comment that pushes the stock higher.

Manage your risk, and don’t give back your profits in this choppy market. Over the year, your profits will come from distinct periods of time throughout the year. They will not be steady. If you can lose less when the market is tough, you’ll make more when the going gets easier. And it will get easier. It always does.

See you in the forum.

–Dan

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