Momentum Book Update
- Posted by Leigh Drogen
- on July 24th, 2010
I’m going to save you the colorful language this weekend, primarily because the beach is calling me, and just get down to it. Now is the time to be focused on the long side. It’s been three months since I’ve said as much, but you’ve got to flip that switch. It’s hard to get yourself back into gear after the market being such a complete mess for a whole quarter. I hope you’ve preserved your emotional capital during that time, maybe taken a few day trades or made a few bucks on the short side.
Setups to the long side are abundant right now, on Tuesday night I posted a handful, I could have posted at least double that number. The first batch of leading names broke out on Wednesday. The market did what the market does, and tried to shake out buyers like me on Wednesday afternoon with a nasty move lower into the close. I was undeterred. Thursday and Friday confirmed my belief that the market is getting a bit healthier. More stocks broke out on Thursday and the rest Friday. Friday in my mind was a classic follow through day with higher volume on the $COMPQ.
The naz is now back above its 20, 50, and 200 day moving averages. That 50 day moving average is flat and the 20 is rising. The only thing left to confirm that we are back in an intermediate term uptrend is some consolidation without bids evaporating. In a perfect world, bulls would love to see Monday and Tuesday be extremely quiet, giving back maybe 20 basis points each day. Three days of a slight drift to the downside would be even better. If that happens, I will be loading up to make some real money.
What do we not want to see? A huge gap up on Monday morning or a big distribution day. Here’s the play book. If we gap up big I will be a seller, not a short seller, just a seller. Short term we would be very overbought and I am not going to risk giving back great gains over the past 3 days. I won’t be a seller on the downside until we see a distribution day now.
I’m now about 40% long, but I do have a few short positions, so overall it’s further towards 30% or so. Garmin $GRMN is a dying company, what exactly do they make that anyone wants? Everyone has GPS on their smart phone now, who really buys those car navigators anymore besides the rental car companies? The chart is broken as well, it’s flagging out, I fully expect another leg down there unless this market just rips. Either way, in a market that still feels a little iffy, it’s nice to have a few shorts. In fact, I am a much better short seller when I have a good deal of long exposure, I have no clue why this is the case, but I’m pretty sure the performance numbers would bare this out.
Ok, this week I took long positions in $FNSR, $ISLN, $OVTI, $RBCN, $SWKS, $WPRT, $CMI, $VQ, $TIE, and $ARBA. You’ll notice two main themes going on here. The first is tech, obviously. Tech will be the sector to lead us out of this downtrend or the market isn’t going anywhere. The fundamental story in the semi space is still on fire. I saw YOY revenue growth rates in certain semi reports that were pushing 50%, and that’s after a year earlier that was up 100%. The point I’m making here is that we are no longer in “recovery mode” for semi revenues, we’re now in a crazy strong secular growth phase. Trend traders take note, you should have large exposure to tech. The other theme is industrial. Frankly I don’t know why the industrials are running, but $CAT and $DE are leading this market out of the hole and I want to ride that train. Those two stocks are a little too low beta for me though, so I’m going with $WPRT and $CMI. I will be adding HEAVILY to these two positions if we get some consolidation early next week.
The positions I took this week are still relatively small. My largest position is only a little more than 5% of my book, and the average is about 4%. These weren’t quite test positions, but they don’t represent balls to the wall exposure. As I said, I’ll be upping the size on constructive consolidation next week.
I added a short position in $RIG this week. The chart is broken, they have major issues regarding their liability for the well explosion, and none of it is going away any time soon. As I said I’m short $GRMN, and I’m still short crude oil via short $UCO.
Best performers this week were $ISLN which was up 20% on Thursday after a great earnings report, and $PWER which continues to be a monster. $WPRT also led to the upside on Friday and I’ve got decent size there already.
Worst performers this week were my crude oil and $GRMN shorts.
I put up 300 basis points of absolute return this week and lost 40 basis points of alpha, I’m perfectly fine with that. I’ve got a huge lead on this market for the year so far and I have no reason to be anything but patient with adding exposure to the long side. If I do get comfortable though, I will be going after high beta names, it’s time to make some money.
If we are at the cusp of a new uptrend, look for those weekly charts which have been consolidating well over the past few months. These are going to be the stocks that you can swing and make the real money on.
Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security. The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.
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Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
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