Thursday, August 12, 2010

A neutral day but the momentum still lies with the bears

Both the bears and the bulls had something to cheer about today. If you are bearish, the fact that markets ended in red even after an almost 300 point down day is impressive. If you are bullish, the facts that the markets pretty much went nowhere after the initial thrust downwards and ended well of the lows is something to be hopeful about. But make no mistake dear readers, the momentum lies very much much with the bears. That being said, we have three consecutive down days now in both S&P and Nasdaq, so it wouldn't be unreasonable to expect a bounce here.
The question is whether this bounce is a reversal or just a constructive breather for the bears. I suspect it might be the latter, so look out for any bounce being rejected right at the MA(50) or gap resistance, as that would be a signal to go short. Its interesting the NASDAQ has gapped down three days in a row now but the Nasdaq McClellan Oscillator is still not at oversold levels, meaning we still have potential for further downside in this move.
So, that is pretty much my strategy for tomorrow - ignore the noise and keep an eye on how the market deals with the important levels. A bounce could very well happen here, but be careful playing it. If you do play it, remember not to get too greedy in collecting profits! And remember if the market pretty much sits around here like it did for most of the day today, that action is bearish and not a sign of bulls making a comeback.

Take care and good luck!


Bill said...

Good strategy here. I see tomorrow as flat at best. With more data coming out in CPI i expect the doom and gloom numbers to keep piling on, although CPI may be the only number this week that has any chance of meeting expectations but don't count on it. Look for the 5th losing session out of 6 and don't see a decent bounce until next week. If your a bear look for retail sales to be flat and MICH sentiment to fall below 66. I see sentiment coming in around 68.

PositionTrader: how do you see NFLX playing out over the next week, the stock seems grossly overbought especially since it just went to under $100 on weaker growth forcasts and now it goes to all time highs when the market is dropping like a rock? I'm curious to know if you think this price hike is just a result of everyone fleeing all the other stocks and piling money into the one winner or if you think this balloon is gonna fly higher?
Thanks as always love the posts.

positiontrader said...

Thanks Bill! And watching NFLX from the sidelines, I certainly find it a very interesting stock. I will try and do a post on it on the weekend. Meanwhile, I would love to hear your views on NFLX from a fundamental perspective. What do you think is the fair value of the stock? Thanks!

Bill said...

From a fundamental perspective i would say they are a hold at best and personally i would sell if i owned stock. The positives are that they are growing from operating cost reduction (also an upcoming mail-less Saturday will add to this operating surplus) and their balance sheet doesn't have a lot of choppiness to it which is comforting to investors for solid long-term growth. The negatives are that the operating cost reduction was b/c of decreased delivery cost to costumers which means they are shipping less dvd's. This could be good if consumers still maintain the same monthly rates but they are downgrading to the lowest price package which is 8.99 (one dvd and unlimited online) instead of 14.99 (two dvd and unlimited online). And i can relate to this b/c that's exactly what i did with my subscription, with the emergence of redbox and VOD the need for instant dvds from netflix is fading and the demand for more instant online content is heating up. If netflix doesn't find a way to generate more income from the online portion they will fade into the distance like blockbuster as newer cheaper version will eventually emerge and people will flock to that. Especially since the online content they have now will not satisfy the masses forever, which is why making deals like EPIX but they come with a hefty price tag. And if that deal doesnt generate new subscribers then they just paid 1 billion to make their current customers happier.
One other negative is the just added about $200 million in debt last year as apposed to the $36 million they had before, that may have been partly to finance the EPIX deal but it may the beginning of a larger debt accumulation.

Ultimately my analysis of this stock comes down to the P/E and the beta. P/S and P/E indicate this stock is trading about 4 years out in estimated growing profits at almost 55 times current earnings. I wouldn't bank on any company keeping growth rates consistent for 4 years so Netflix is no different, but the beta for the stock is .52 which is shocking considering the run up and the %6-8 daily moves. This leads me to believe that even though the stock price is dreadfully overinflated it doesn't look like its going to fall off a cliff. However i think its fairly close to its top which i would put around $140-$145, so there's more downside potential than upside. I would say short term the stocks moves to around $139-$140 in august but 6 month outlook i see it moderating to around $95-$110. Its a little difficult to peg a price b/c it moves so quickly but when you see people piling on to the stock even on bad days for the market and the sector, it doesn't usually bode well for an extended period of time.

positiontrader said...

Thanks Bill! Your comment deserves a separate post. Hopefully, I will get time to post it sometime during the weekend.