View From the Turret: Light Holiday Trading

December 27, 2011

Welcome to the lightest trading week of the year…

Not only is this week pared back to only 4 sessions, barring any huge event in Europe, each day should feature anemic volume making it difficult for the heavy hitters to move any material amount of exposure.

The light holiday trading has a natural tendency to create choppy action – and in this environment, short-term chart patterns become unreliable and any trading signals should be taken with a grain of salt.  It’s little wonder that many professional traders take this week off because of the poor reward-to-risk characteristics.

At Mercenary Trader, we’re still manning the desks, but the focus this week is on outlining some of our plans and goals for the coming year.  2011 has been a tremendous year of growth for us, and 2012 will be no different.  We have a couple of new services in development right now – along with some exciting partnerships we are setting up with companies who offer premium trading resources.

All of these initiatives will help to improve the quality of our content, the profitability of our trades, and allow us to cover more opportunities on a day-to-day basis.  I’m tremendously excited about the coming year and look forward to hearing what you think about the new opportunities in the coming months.

For this week, we’re much more focused on managing our existing positions – tightening risk points and watching for pyramid opportunities – rather than aggressively pursuing new setups.  With light-volume choppy action, chart patterns tend to become less reliable and we would rather wait for better conditions to lay out new exposure.

Below are a few trades we are currently tracking – (all actual trades time-stamped and documented in the Mercenary Live Feed)

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Stable Dividend Stocks Climb

Despite the bearish overhang and headline risk that has plagued the market this year, stable companies paying high dividend yields have attracted a significant amount of capital.

Part of the draw here is the fact that “traditional” income investments just aren’t paying a material amount of income.  10 year treasuries have been paying only 2% and shorter-term fixed income investments are even lower.  On the municipal side, risk levels are high, but investors aren’t getting paid to take that risk.

A few industries like energy pipelines and consumer staples have natural cash flow that is somewhat independent of the economic cycle.  The stability naturally attracts capital during uncertain periods – which is why we’re seeing natural gas pipelines and tobacco stocks rallying sharply.

We’ve got a profitable position in Magellan Midstream Partners LP (MMP) which has rallied 5% from our November 11th purchase – along with a 4.7% dividend yield.  The fact that MMP has a low Average True Range (ATR) means that we can take a larger position (in nominal dollar terms) because our risk point is much tighter.

With a tighter risk point, we are able to buy more shares with a tight risk point – allowing us to make more profits out of this 5% move than we might otherwise make in a 20% swing for a more volatile position.  For position sizing, the denominator is the capital we will risk before having the trade stopped out – rather than the total amount of cash it takes to buy the position.

At any rate, MMP continues to push higher and our risk point has now been tightened to ensure a profitable trade…

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The Sky (Cloud) Is Falling!

Cloud computing has been one of the speculative areas that we have followed all year.  The elements for an implosion have been there from the start.  But until the second half of the year, this sector has held up relatively well.

Error, group does not exist! Check your syntax! (ID: 11)We took a short position in Inc. (CRM) a couple of weeks ago at a key technical juncture.  The stock had broken a key support area dating back to August – and then rallied back up to the 50-day average.  For many equities, the 50 EMA is a good technical indicator of strength or weakness.  Many institutional managers accumulate positions above this line, while whittling down their risk when stocks fall below this line.

At any rate, the 50 EMA repelled the stock, and we took a short position just below.  As managers liquidated their risk, we were able to take half profits off the table and tighten our risk point to ensure a gain on the entire position.  Even after the fall, CRM still trades at a premium multiple to earnings and could continue to fall.  We’re also interested in adding horizontal exposure in the coming year – with a number of related stocks setting up good short entries.

Euro Continues To Languish

The European debt crisis has weighed on the markets all year – and the EURUSD currency pair has been in a bear trend for the majority of the last 6 months.

In early November, we took a short position in the euro – after a bullish breakout turned out to be a false move.  Traders who bought into the “all clear” signal became trapped in a losing position.  Their liquidation offered the fuel for a new decline which has taken the EURUSD pair to the critical 1.30 level.

A break of this level would do tremendous damage both on a technical (chart) level – as well as on a psychological level.  We’re currently holding our position with a risk point just above 1.35 and looking to add additional exposure once the currency breaks definitively below this level.

This holiday week is a good time to recharge the batteries, while reviewing high-level trading strategies and goals for the coming year.  Entering 2012, there are still a number of key risks in play – leading to plenty of trading opportunities as markets react.

Trade em well this week and take some time to enjoy friends and family as well…

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One Response to View From the Turret: Light Holiday Trading

  1. bevok on December 27, 2011 at 4:55 pm

    Good calls. The whole cloud computing 'thing' is a classic case of a story that investors have bought into, hosted applications and services (which have been around for years) being packaged up in a new way. I think there are a number of challenges in delivering the economies of scale and performance and adaptability required by most reasonably sized organisations, as well as the risk of having data 'owned' remotely with little real control or influence for the client, certainly in large organisations like Salesforce.
    I got short the Euro at around the same time. It has continued to surprise through the year and always contains the risk for large-scale intervention. My feel though is that behind closed doors all the decision makers are absolutely delighted with its decline.

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