View From the Turret: Along for the Ride

July 26, 2010

After spending some time looking through the charts and data over the weekend, it appears that the broad indices have begun a bit of a shift into more bullish territory.  Since the major top in April, we have seen a series of lower highs and lower lows.  The fundamental data has soured, and institutional investors have been cutting back risk significantly.

But after slipping below the key 1040 line in late June, the bulls did in fact make a stand, and with Friday’s action, the pattern of lower highs and lower lows has at least temporarily been broken.

Friday, the S&P 500 closed above the 1100 level which had proven to be resistance two weeks ago, and it’s interesting to note that the action is now above all three major Exponential Moving Averages (the 20, the 50 and the 200 EMA).

Of course, one day does not a trend make – and there are still significant challenges to deal with on a fundamental (as well as technical) basis.  But from an agnostic Mercenary perspective, I don’t hold too tightly to either the bear or the bull argument.  The key for me this week is to position my trading book to make money and not to determine the long-term direction of the market.

Evidence of a Bullish Undertow

Sometimes, evidence for a shift into a bullish “path of least resistance” can actually come from a major stock that posts a loss.  Such was the case with (AMZN) during Friday’s trading session.  As I mentioned in Friday’s Market Notes, the AMZN report disappointed investors and the stock gapped sharply lower.

However, by the end of the day, the loss was paired from $14.00 early in the morning to only 67 cents at the close.  Volume was the strongest seen since the stock gapped higher in October of 2009, and the major retail barometer is now sitting right on a confluence of moving averages.

I can’t tell you exactly where AMZN is going to head at this point.  I’ve got a stop at breakeven for the remainder of my position and am likely to kick it out early in the week.  The trading prospects for AMZN are a little hazy at this point, but the major recovery in Friday’s action points to a significant bullish tint to this market.

On the other side of the spectrum, Chipotle Mexican Grill, Inc. (CMG) gapped higher Friday after its earnings report and continued to add to its gain throughout the day.  The movement indicates that investors are more willing to buy into speculative growth stories – a sign of optimism that could propel great “story names” over the upcoming weeks.

Similar to AMZN, I’m not particularly interested in trading CMG from the long side at this point.  There are too many fundamental issues – some of which were mentioned in the recent Restaurant Strategic Intelligence Report…  (You can receive the Mercenary Dispatch in your inbox 48 hours before they are posted on MercenaryTrader)

But once again, the action in CMG points to a more bullish tone to the market and has me interested in nibbling on some long positions which have more attractive fundamental features and actionable inflection points.
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Solar Continues to Look Bright

The solar industry has come a long way from its speculative days in 2007 – as well as its dark period in 2008 and 2009 when it appeared all but the most conservative companies would go out of business.

Today, there are a number of healthy solar companies competing for investor capital as well as for orders from municipalities, utilities, corporations and individuals.

If investors are going to turn a blind eye to Europe’s troubles for some time – and at the same time begin to adopt a more bullish stance on China, solar stocks become one of the natural places to park capital.

Friday I mentioned that I was watching Canadian Solar Inc. (CSIQ) and today I will point out that Renesola Ltd. (SOL) is working its way through a key inflection point.

The stock has been turned away at $8.00 at two major points since hitting rock bottom in April of 2009.  With a single digit PE, and the potential to surprise analysts with stronger earnings (remember, most analysts are still working on shifting their perspective from a horrible Europe situation to potential for additional demand from other market participants), SOL could quickly see both multiple expansion as well as higher expected earnings.

So watch this stock carefully as it once again attempts to break above this key inflection point.

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China Internet and Gaming – Legitimate Business or Speculative Story?

Ok, maybe it doesn’t matter…  The Chinese internet / gaming companies could wind up being a “yesterday’s story” or they could turn out to be legitimate businesses for years to come.  Honestly, I really don’t care…

The point is to take advantage of the best trading opportunities and right now it looks like China in general – and some internet companies specifically – could be setting up for a new bull run… Inc. (SOHU) is reporting earnings as I write this – and Friday the stock pushed decidedly through the 50 EMA on relatively strong volume.  This morning’s movement is likely to break a major trendline which has been in place since the October high – and SOHU is rebounding after losing more than 40% of its market value.

Sales continue to increase despite some profit margin contraction, and if SOHU is able to give strong guidance, the bulls could latch on to the information.  When the bulls are allocating capital to speculative issues – this sector has a history of making some violent swings higher as shorts cover and gullible investors buy into a white-hot growth story…

Another name in the sector is Inc. (NTES) which has already broken above it’s 200 EMA and has had less of a decline than SOHU.  NTES continues to post earnings growth and during the last two quarters it saw revenue increase by more than 50% year-over-year.  The company doesn’t report earnings until mid-August, but the stock could get a lift based on the SOHU report this morning.

Nibbling…  Not Gorging

As I tentatively make the shift to a more bullish trading stance, my trades will likely be small and measured.  There are still a number of fundamental issues that just don’t feel right.  We could still see an air pocket lower based on economic developments, earnings reports, or simple trader sentiment.

But the probabilities are looking better for a decent move higher and I want to at least participate and make a few basis points along the way.  I’ll be back to you as more information surfaces throughout the week….

In the meantime, book those profits and manage that risk,

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