Then the market melted down, and with it down went the education names.  They got thrown off my watch lists because of broken charts.  In early July a few started to peak my interest again, notably $CPLA  and $LOPE.  These stocks had made their way back down to important levels of long term support and bounced quite strongly.  Institutions had stepped up to the plate once again.

Let’s back up a little though.  The for profit education sector is a secular growth story, and what made it even better was the very low correlation most stocks had to the overall market.  Some of these stocks enjoyed large institutional participation.  The government was the driving force of this for profit education boom, they gave easy money to students in the form of loans and grants to retrain them selves.  As the jobs picture got worse and worse, the government poured more and more money into these programs thinking that getting a bachelors degree from a community college would increase the chances of the unemployed.

Newsflash, it didn’t.  Not only were these people not getting jobs out of school, they weren’t getting a good education to begin with in community college.  They weren’t leaning practical skills, they were leaning liberal arts, which unless you are studying at a top 50 university or college, is rather useless to employers.  Even then, I’ve seen amazingly smart kids graduate from Ivy League schools with liberal arts degrees, with majors in subjects like anthropology and English get no job offers because of the fact that they have no practical skills which are useful to employers on day one.

If there is anything that Europe does right, it’s schooling.  They realized long ago that not everyone is meant to do anything, people are good at what they are good at, and thus should start early on in the education training for those things.  This means that not everyone is put on the track to be a scientist or mathematician, some people are welders and mechanics, some are teachers.  A students path to his career is carved out far sooner in France where the gifted are put on a certain track, and those who don’t score as high on tests are placed on others.  Yes, this does lead to a class system where those who grow up in wealthy families, or just those with a culture of education have a better shot down the road, and those who don’t fall behind quicker and are placed in certain buckets.  The Europeans aren’t as concerned with, shall we say, affirmative action, in whatever sense you would like to use that term.

I’m not making a moral argument that they do it the right way, far from it, in fact I think it’s rather cruel and perpetuates the cycle of the poor staying poor and the rich staying rich, much like how a lot of idiot kids graduate from Harvard and get placed right in to the Goldman Sachs analyst program because daddy is a Senior VP.  They didn’t earn a damn thing, but frankly, they are just cogs in the wheel anyway and most of them wash out after a few years.  Still, they get a shot at the big time, whether or not they waste it is not the point, they get their shot just because of their position in life.

Forget that for now though.  The point I’m trying to make is that the Europeans are much more efficient at training students for the real world, instead of filling their heads with liberal arts and telling them they can be scientists and doctors.  They have excellent vocational schools, and many attend, and it’s not shameful in any way.

Now, back to the United States of America.  All of those students who were told that they would get a better shot at high paying jobs if they went to community colleges got screwed, well, most of them anyway.  First off, they had to take out a ton of loans, federal loans.  Then, when they got out of school with their just about useless bachelors degree, there were not jobs for them.  I don’t feel the recession is the major cause of this, even in the best of times many of these people are not going to get the salary they were told they would get.  So now they have no job, and a ton of debt.

Of course the schools don’t care one bit, their job is to get the students in and out the door, because well, their performance after graduation is not tied to getting paid back.  Why you ask?  Because the schools have already been paid by Uncle Sam.  Now whether Uncle Sam decided to look the other way, or was just completely ignorant to the fact that repayment rates for these loans were somewhere in the 30-40% range, I’m not sure.  But just stop and think about that for a second, the bar for these schools to qualify for these federal loan programs was at a 40% repayment rate?  You’ve got to be fucking kidding me, please excuse my language.  Who loans money with the goal of getting 40% of it back, AT BEST!

So we’ve got two problems here.  First, the students aren’t getting jobs, and second, they can’t repay their loans, the repayment rate for some schools was around 20%.  You tell me, does this sound like a sustainable business model, where students invest a certain amount of money, effort, and time, and their return on investment is, well, you get the point.

Back to the stocks.  There were heavy short positions all through the run up of many of the education names in March and April.  The shorts were getting squeezed for sure, but the short interest just kept piling up, they weren’t giving in.  They knew that it was only a matter of time before the whole house came crashing down, similar to the housing mess.  In fact, it was so similar that many of the hedgies who made a killing on the short side of the housing collapse were back for round two and were targeting the education names for many of the same reasons.  Easy credit and a negative return on investment don’t add up well.  The main character of Michael Lewis’ book The Big Short, Steve Eisman, was one of them.  And when this guy takes aim at an industry, you don’t want to be in his way.

It all started falling apart back in May when the Department of Education began to dig deeper into what was going on with lending practices at the schools.  They smelled fraud, and that’s just what they found.  It turns out that these schools are encouraging their prospective students to lie on their applications, and in some instances they even told them outright lies about their future earnings potential based on the education they would receive.

The fundamentals of a business might be flawed and the stocks will still attract value players who believe they can turn it around.  But when you introduce a healthy helping of government and the word fraud, investors run for the hills.  Michael Burry and other shorts pressed and destroyed these stocks, and rightfully so.

Many of these companies deserve to be out of business, today if possible.  The scams they are running are out of this world.  But, there are for profit education companies out there which run a clean ship so to speak.  It seems that $APOL and $LOPE are the cleanest of the bunch, we think based on repayment rates, although the department of education said that all 18 of the major for profit education firms committed fraud in one form or another.

Today feels like capitulation day for the whole space, the volume on many names is 4 to 5 times average and some stocks are down 10-20%.  I’m not saying this is the bottom, it’s completely possible that the whole space is completely FUBAR and that many of them go bankrupt in the months and years to come.  As well, those companies which might be clean will see their share pries decline with the rest of the group if there is more pain to come.

But if you are a value investor and believe you have done your homework, and I mean really done your homework on these companies, today is the day to start taking positions.

These videos were all made using the new Chart.ly screencaster.  If you are new to this blog, please remember to check my Chart.ly page on a daily basis as I post most of my individual setup technical work in real time there, it’s just a much easier platform to use to share ideas in real time.  You can find the link to that page on the navigation bar above.

First, let me reiterate a little bit of my thesis for being long the education names.  There is a secular trend going on here and the fundamentals of these companies look excellent.  The government is trying to send as many people as possible who were displaced by the collapse in manufacturing back to school for retraining.  On top of that, secondary educational institutions have supreme pricing power right now as there has been a surge in demand for education.  Just look at the average cost of a four year private school secondary education, it’s growth has far outpaced both inflation and average income.  Margins for this industry are expanding at a rapid pace and many names were not heavily held by institutions a few months back.

The guys over at Ycharts wrote a great piece on the sector about a month ago, you can find it here, I encourage you to read it.

Technically, both stocks set up extremely well at their entries.  Both were just about to make new all time highs, breaking those from back in late 2007.  These two stocks showed the best relative strength of the group, were liquid, and didn’t trade too wild.

Now, you might be asking, why did I sell out.  I won’t go through each transaction, here’s what I’ll say.  I believe I traded both these names just about as good as could have been traded over this period, minus two mistakes.  In $DV, I should have bought the pullback to the 50 day moving average in early February.  I had made the decision to set my stop under it, and had a lot of fundamental conviction, there was no reason not to go balls to the wall there.  As well, I should have added more the past few days to the position as it was basing above support, I even got loud on the stream about it, but didn’t pull the trigger.  In $CPLA, the pullback to the 200 day moving average should have been bough as I had decided to hold on and set my stop below that level.  Other than those, I can’t complain with my trading, my exits were all good.

The stocks and the group as a whole is getting extended on the intermediate term time frames.  Long term, this is a group that you want to have capital allocated to, it is a secular growth story.  Here are the two weekly charts.

As you can see, both charts are rather far from their major weekly moving averages, but have broken out in a big way.  I want to see a few weeks of consolidation now, time for those moving averages to catch up.  To be sure, the angle of ascent has increased, as it should, this is positive, but some sideways action is needed.  Devry has a history of going on crazy straight up runs without stop stop.  Capella has a smoother track record, pacing itself as it moves north.

Here is the list of tradeable education names, I will be keeping track of these in the weeks and months to come, looking for entries.

Of these, my favorites are $DV, $CPLA, $STRA, $EDU, $LOPE, and $LINC.

The market took the express train past the rally highs this week and provided yet another round of excellent swing trading to the long side.  While everyone was buying puts and inverse ETFs to protect profits from an organized pullback, the market marched higher, stopping them out one after another.  Are we seeing a repeat of July here?  It’s completely possible, the two sell offs look very similar, if we surge out of the gate on Monday I would venture to say that it’s likely we repeat the action from July.  Anything can happen on mutual / merger Monday, I almost bought a few very speculative options positions in some oil names just in case, but alas I ate another sandwich and chilled out.

The US Dollar continues to act weak, I’m expecting more of the same next week with major rotation into materials and energy names.  We had the run in tech last week, this week was all about retail, I think next week is energy’s turn.  I still have no exposure in either, but have several names on my list including $DRQ, $BEXP, $XTEX…

I picked up more than 230 basis points of alpha this week with an absolute return of about 3.4%, in other words, I killed it.    Unlike last week where I was disappointed not to have put more points on the board with the market surging, this week was a huge win as my heavy exposure earlier in the week paid off.  I took cash back up to 15%+ on Friday afternoon as I believe we will consolidate and pull back a bit here.  If Monday opens flat and sees strong buying on volume though, I will be a buyer of energy names.

Positions added this week include $VECO $NYB $TSTC and $EVR.  I had been watching $VECO for quite some time while I held $CREE (I added to my position this week), but an excellent entry was give on Tuesday that I could not pass up.  The $TSTC position is very small, 1/4 the normal size, it is a very volatile stock and could open up or down 5% on Monday.  If it opens strong I’ll be looking to add.  I bought $EVR on the large gap off the Goldman Sachs conviction buy list upgrade and the break of its downtrend line.  I love this company and the technicals on the weekly chart set up very well right now.

I did some selling this week as gains were heavy.  I cut my position in $IPXL $ARUN and $INCY in half.  I’ll look to add back to them if the market pulls back.  I sold $RVBD Thrusday and Friday as I had big gains and the position was extended.  $SBUX $HAS and $LUV were also cast off, frankly they all look great here.

Major winners this week include $CMG, which is about 1/2 my original position, $V which I’m heavy in, $VECO, $INCY, $SFSF, $GMCR which is now my biggest position, $MJN, and $PRAA.

There were no large losers this week.

As I said, I’m looking at energy and materials next week.

The dollar / equity correlation continues to fade in and out.  Net short positions in the Euro have reached all time highs, which leads me to believe that a $EURUSD squeeze could be the catalyst that fuels the next run in this market.  The Euro is in a bear market to be sure, trading below all major declining moving averages.  I’ll be looking for a counter trend rally up to the declining 50 day moving average as several momentum divergences are visible, especially in the RSI reading.

It was an excellent week for the momentum portfolio, I picked up a little over 70 basis points of alpha while holding 20%+ cash in a surging market that was up 2.87%.  I struggled to keep myself from selling positions all week, but was able to hold off and enjoy the great momentum.

Major wins this week include $ARUN, $CPLA, and $PCLN which gapped up on earnings and continued to run.  $CREE, $CTXS and $DLM also saw very strong weeks.

The only disappointment this week came on Thursday after hours when $LOPE reported earnings and was smacked around.  I held on as there was no ability to get out after hours on the thin issue and sold out Friday afternoon a few cents above where I entered last week.

I sold 1/3 of my position in $ARUN on Friday afternoon as it surged 15%.  Partial profits were also taken in $DLM on Wednesday as it surged past 12.50.

I’m getting a little bored in $IPXL, another 3 days or so is about all I’m going to give this position to move.  It continues to hold the 20 day moving average and the setup is still strong.

I have zero exposure to the energy and materials sectors and the patterns are too messy right now and the $USDX continues to climb.  The portfolio is still heavily weighted towards technology and service names.

On a low volume pull back early next week I’ll be looking to put some of that 20% cash position to work.

On Monday we saw $RVBD and $CMG surge past breakout levels.  I’m especially happy that I didn’t panic after hours in the $BWLD carnage and dump $CMG.

Tuesday saw the beginning of a major run in $CPLA as earnings were solid and the shorts are now getting squeezed.  $CTRP, a long time portfolio holding also made a move.

And Wednesday saw major wins in $DLM, $RAX, $CPLA,$LOPE and after hours $PCLN which traded as high as 131 or so.

I’ve been vigilant about cutting stocks that weren’t making moves they should have been, such as $MR, and taking profits into extended holdings like $VRX and $DLM.

Having been patient during this recent run and keeping a good deal of cash has helped.  I have the confidence that if the market pulls back here between 1 and 2 % as I believe it will, I’ll start adding to my positions further.  Joe Fahmy makes an excellent point when he says that you have to protect your confidence is market downturns, or markets going against your strategy in either direction.  This can be done in several ways, but for me, holding a little extra cash and fewer high beta names when the market isn’t quite right is how I like to operate.  Yes, the small Chinese issues have made huge moves the past few days, but in a market that hasn’t completely proven itself yet after a considerable smack, I’d rather sit those out in favor of less correlated names in the food service, education, and airline industries.

I still like big cap tech here, but the market needs to pull back and chop around for a few days to work off some short term overbought indicators.  Be patient and watch for a strong bid on the next sell off.  I’ll be looking to put all my chips on the table if that happens.

It also seemed as if the market makers took the week off.  Spreads have been super wide the last few days producing wild intraday swings without the normal liquidity.  It’s possible that this week was just a bear flag, a respite from the selling, and that in the coming weeks we will move back down towards the 200 day exponential moving average and the bottom of last Friday’s hammer candle.  The chart below should be your guide, if we lose the green ascending trend line I’ll be far more negative on the market.

If and when we break through Thursday’s high, 109 is going to be a massive test for this market, it marks the location of the declining 20 day moving average.  I would also be taking off exposure at that point, and wait for more clues.

The $QQQQ had a strong week, tech outperformed by a decent margin.  The Nasdaq sits right under the 20 day moving average and the all important 44 dollar level.  A move above 44 and asset managers who are light on tech could start to panic a little bit that their exposure is too low, a move up towards the highs in a quick fashion would not surprise me.

As for my long only momentum strategy, we had a great week picking up some serious alpha, 175 basis points in fact.  I sold a bunch of my materials exposure on Wednesday brining my cash position up to around 35%.  I added positions into strength on Thursday and early Friday morning.  Cash in now under 24%, and as I said above, I’ll take off some exposure into strength early next week and wait for more clues.  A few days a consolidation above the 20 day moving average would get me all in with tight stops.

Two major losses and one major mistake this week.  I took a position in $SWM Wednesday afternoon without checking for earnings.  $SWM reported Wednesday after the close and got mauled.  The damage was bad, but not catastrophic as I pulled the rip cord Thursday morning for a bad loss.  I took a similar earnings beat down on Thursday afternoon in $BWLD but luckily got stopped out after hours before the damage got too severe.  I almost pulled the plug on $CMG as the food service industry looked real ugly across the board after hours, but decided to hang on and keep my stop where it was.  It paid off as $CMG showed great strength on Friday with a major breakout.

Positions added this week include $RVBD, $IPXL, $MR, and $LOPE.  I also added to my position in $ARUN.  Positions sold include $TIE, $BUCY, $ANR, $BWLD, and $SWM.

I have no financial, energy, or materials exposure at this point in time.  I’ll look to focus on materials if the $USDX shows signs of making a short term top in the next few days.

As I’ve been saying for a few weeks now, bring your positions sizes down and shorten your time frames.  Being flexible in your thinking and willing to change sides in the matter of a few hours is extremely important in this market environment.

Aaaaaand this is where things got interesting.  Materials have been slaughtered during this sell off and there are some monster players out there who still believe in the gold / hyper inflation trade.  It was only a matter of time before the decided to step in and buy what they must see as value.  Gold $GC_F was the first to make the turn having bottomed out in a capitulatory move before noon.  Crude was also down a ton before noon as it failed some important support levels.  After a little bit of churning the volume picked up and major players came after the gold miners $GDX.  Gold Corp. $GG ended the day up greater than 6%.  This was major buying but guys with deep pockets, they sent in orders to the institutional desks and told them to keep buying until the close, it was relentless.  The $SPY closed green and we now have one major hammer candle to think about this weekend.

Is it time to go all in and buy what you perceive as value, no I don’t think so.  The longer term technicals of this market are now quite ugly.  The 20 day moving average has crossed below the 50 for the first time since the March 09 low.  This is a sign that rallies should be sold into until further notice, just as a 20 day moving average trending above the 50 is a sign to buy the dips.  There most likely is a bounce coming though, and it’s possible that we could go into a period of several months where the market does not trend but chops around.  Until the 200 day moving average is broken, I believe you should be playing mean reversion now, do not be buying or shorting breakouts or breakdowns respectively.  Below the 200 day moving average and all bets are off, we could see a complete meltdown, I’m not kidding.  Look for the US Dollar $USDX to pull back in the coming weeks, it’s overbought after breaking through that big bull flag from a few weeks ago.

I stayed above 40% cash for most of the week as I did not trust the rally attempt on Tuesday until that major level of resistance was broken.  I did sell a few things on Thursday at the open but should have sold more in order to pick up more alpha on the downside.  I dipped in Friday afternoon as the market turned, buying positions in $ANR $TIE and $NTCT as well as more $DV.  This is a little bit of style drift for me, $TIE and $ANR are both support plays off very oversold conditions, not momentum moves.  I will most likely be selling into any major strength in these two names over the next week or two but believe there is a nice bounce in store.

Over all I made up some good ground through my large cash position and I’m poised to take advantage of any further strength in the market next week.  It’s very important to be extremely nimble in this environment unless you have chosen to move primarily into cash in order to play for a further sell off.  I think we are going to see some tradable bounces and will be quick to sell into them.

Stocks that I own and still look very nice to the long side with good momentum include $DV $CMG $NTCT $CREE $ALGT $VRX $PEGA.  I will be looking to add to $VRX and $PEGA on any strength next week.

I’m stalking a few other stocks including $PFCB and $GRA for entries.

The food service names have held up amazingly well through this sell off, frankly I have no clue why.  Possibly because of lower commodity prices, but who knows, they still show great momentum and I’m very interested in adding another name or two.

The major theme here is that if the market has found an intermediate term bottom, I don’t believe we are set to rocket back up to the highs.  The market needs to to base out and collect itself.  Wait for stocks to show good basing patterns and give good risk reward entries before you load the boat back up to the long side.  If we fail Friday’s low, run for the hills.

As you can see below, investors took materials and tech to the woodshed.  The trend in most, but not all momentum names is busted now, it will take some time for issues to base out and give goo low risk entries to the trend.  If we see a quick bounce back from the high momentum names, I feel it will be shorted into relentlessly.

Some stuff I sold out of this week: $NFLX, $AMZN, $AAPL, $IBN, $IAG, $MHS, $RHT, $RGLD, $CERN, $EGO, $CTSH, $ATHR, $LZ, $ANR.

The Netflix sale is really the only one that haunts me, not holding into earnings was a huge mistake and an emotional decision based on the overall market and my portfolio, not the fundamentals or technicals of the individual issue.  I fell victim to the emotion of just not wanting to be exposed to risk, when I should have traded the stock.  This should be a lesson to you all, not to be overwhelmed by the performance of your portfolio or the overall market when making a decision regarding an individual issue.

Some stuff that I still like.  The education names have held up very well, $DV even had a monster breakout this week.  I’m holding $CPLA and believe we could see a massive breakout on the weekly chart imminently.  $V still looks good and I’m happy to own this name until the weekly chart breaks or the government takes their candy away.  I don’t see either happening in the near future.  I’m looking to add to my $SBAC position on any strength.  The tower operators may not be the best businesses in the world, but hedgies are chasing them to the ends of the earth off the idea that $T and $VZ need to jack up their networks to deal with the onslaught of mobile devices requiring massive amounts of data transmission.

My cash position is now above 40% and will likely stay that way for the next few weeks.  Stocks need time to heal, and catching falling knives is not my game.  I’ll also be limiting the number of positions I have on, there are still some good trends out there, and new leadership, but I don’t believe I can spread myself out to 30 positions in this market while momentum names are getting picked off one by one and shot.

This is a long / short market now, trade accordingly.

I cast aside $NTAP, $TSL, $HL, $CGA, and $RINO this week.  Notice that three of those names are China plays.  The Chinese market isn’t acting right and it’s better to step out of the way while that deleveraging plays out.  The small cap Chinese market was overheated and too many people were making too much money, someone needed to be punched in the face.  I took some pain by not taking profits while they were there.

$LZ was on fire until Thursday when it was obvious that it could not buck the market trend for any long, I took nice profits and reduced the position to 1/3 size.  Winner of the week for sure.

I took some profits in $CREE, how could I not.

I bought the dip in materials this week by adding positions in $RGLD and $ANR.  I’m not feeling too much pain and believe we are going to see a major bounce there.  I also added to $RBY.

I started positions in $PEGA and $SBAC and added to $AAPL, $ARUN, $CPLA, and $RAX.  I love the education sector here, it’s relatively uncorrelated to the market and institutions are making big bets on the government pouring money into retraining people through online schools.  I’ve also been begging the market for a chance to step into $SBAC, a cellular tower company, I’ll add to it on any market strength, I want a big position if the market allows.

Business service stocks like $RHT got slaughtered this week as investors sold the excellent $IBM earnings.  I still like it up here.

I’m loving the international banks here as investors flee US banks in fear of government regulation.  My pick $IBN is still squeezing into the apex of a large triangle.  A failure and I’m out, but I believe it breaks north and catches fire.

Next week is huge with $AMZN and $AAPL reporting, as well as the Apple tablet announcement.  Look for support on the weekly charts after a puke like the one we had this week, step into solid trends, the market isn’t just going to fall apart and collapse.

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