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The Other Side: Five Sides of the 5% Slide


The very idea of standing your ground in the face of adversity was crucial to our species' survival and was passed down instinctively through the ages. But in trading it can be precisely what causes extinction.


Note From Prof. Krueger: I wanted to share what may be on the other side of both a headline and a stock that you have no doubt read and heard of.

Before anyone disagrees with either crazy notion, let me be the first to join you.

This will be the origin of each "Other Side" column. I am simply sharing the result of work that began by attacking my own ideas (posing as the other side of each of my trades and structural positions and building a case against myself), especially if I can find a mis-priced trade resulting from over-bet assumptions including, at times, my own. Our biggest mistakes can be found in the mirror, not on the screen.

Long Media Ratings, Short Bulls and Bears.

For me to say Jeff Saut made a great observation in his Monday missive is like saying Cal Ripken Jr. was fairly reliable. Saut noted the media is long volatility and from where I sit their ratings may have been among the few truly happy books last week.

It may help Minyans to know that not all bears were basking on the shores surrounded by a harem of salmon like you may think. It was a remarkably tough week for both camps from what I saw and heard. I am long and short so I hope I can share this with some measure of balance but this market is not easy-money for shorts, which may be an overlooked factor in handicapping positions on sheets and paths of least resistance going forward.

5 Sides of 5%.

I sifted my entire database and found 399 U.S. traded stocks that finished last week higher, excluding all micro-caps. I found 97 of them that finished higher in a brutal (5%) tape on the S&P 500, sitting on the other side of that big number after racking up gains in excess of +5% during the same week.

  • Amazon (AMZN) was up over 17% on the week and (BIDU) rose 8%. I've heard few stocks described as over-valued as often as these. Imagine being short some truly extended names into a meltdown, and losing money. Shorts couldn't even make money in Apple (AAPL) shares last week. This pain shouldn't be overlooked in last week's action.

  • At the other end of the much maligned spectrum sits Japan, which had two entries at the top of this list. Nintendo (NTDOY) is well regarded but to my knowledge and judging by the filings and trading, not at all well-owned. I have highlighted it a few times but only in tipping my cap to Prof. Jeff Macke who is truly a Lone Wolf in actually sticking his neck out on the long side, many many points ago. While plenty enjoy gaming the gamers, remarkably few invest in NTDOY which their holdings are scrambling to make games for, and which was up 13.5% last week.

  • Much more widely followed in Japan are the Yen's erosion and the Japanese equity market's terrible relative performance. The former being the largest den for arguably the most crowded short of all. I Buzzed about the new ETF (FXY) earlier in the year from Rydex that tracks the Yen, capturing its strong move higher last week. It might be helpful to learn about if you are unable to use the futures markets and are at all interested in the potential that could be on the other side of the famous carry trade – the unwind. I tucked some Yen calls under my pillow Friday night and slept a little better. It is a speculative hedge which I hope does not work. On the equity side, the leading bank in Japan, Nomura (NMR) made the list and rose 7% last week.

  • At the very top of this list, sat a favorite name of one of my favorite brains – Opsware (OPSW) was bought out by Hewlett Packard (HPQ) last week sending shares 37% higher in one week's time. Reading Prof. Adam Katz on Technology in the 'Ville for me is like sitting in the visitor's dugout hearing the catcher's mitts pop in the bullpen at Yankee Stadium. I can't see anything yet but I know something good is about to happen.

  • And if a sharp sell-off wasn't enough for the bears, they can usually find plenty to chew on among the carcasses of some the worst-run businesses I've witnessed – radio franchises. Yet Cumulus Media (CMLS) stood out on my list of 97 finishing 23% higher on the week after announcing a management led and Merrill Lynch (MER) fueled buyout. For both bulls and bears last week was harder than you might imagine – unless you were in the media.

Proud to be a Lemming

To be clear, I am neither bullish nor bearish in general. I like to find good trades that are un-crowded, not a good or bad market. I never had a name for that until now. Last Thursday, I found out I was a lemming. I sat here unable to recall such complacent coverage of a market decline on TV. One crew repeatedly characterized anybody selling into that day's decline as a lemming.

With no acrimony towards folks who do a hard job that I could not do nearly as well, I hope I can be objective instead and perhaps offer the other side you don't hear about as often. The message that only those poor-souls-who-don't-know-any-better were doing all of the selling, is either incomplete or includes me. In case it helps anyone reading to know, those calm chuckles of pity were contrasted by some aggressive trading on one of my desks and plenty of other desks that I respect greatly. Human nature hasn't prepared us well for those days. The very idea of standing your ground in the face of adversity was crucial to our species' survival and was passed down instinctively through the ages. But in trading it can be precisely what causes extinction.

I think the interviews on days like that can be misleading. Almost universally, the large fund managers confidently proclaim, "We didn't sell into this," or "We didn't do anything today." Keep in mind that an alternative definition of the often cited "healthy correction" is "we wish we had sold some but we're 100% long and really hope this ends soon." More often it simply means that large funds still run by smart people are giving honest answers they are trapped by. The law of large numbers and inflows over the years are a perverse penalty of success and dictate they may not be as nimble as that same manager wishes he or she could be, or once was.

Yet most reading this right now can be nimble, and to me the other side of those interviews offers an opportunity. More valuable to me is a think tank like Minyanville – and this is where the objectivity has flown straight out the window – where a guy like Todd leads by example talking about wins and losses. He is surrounded by a crew that is more than nimble – they are candid and exceptionally good at what they do. The combination is an unmatched group of very different opinions.

If I can offer anything in return, I would share my use of stop limit orders in certain situations. Almost always disagreed on by my peers in terms of whether they help or hurt, I have been helped far more than hurt. I like to make decisions when the market is closed based on my game-plan and a tightly-controlled process, but then let the flow of the game dictate which players get the ball and which get the bench. Typically only sell stops are discussed, but don't forget buy stops which can also help answer some questions.

As a lemming who admits to buying and selling, changing positions, and who cherishes that flexibility, I was chewing on new data over the weekend and was reminded of a great quote that summarizes my feelings on the market right now.

Albert Einstein once handed his secretary an exam to be distributed to his graduate students. The secretary scanned the paper and objected, "But Professor Einstein, these are the same questions you used last year. Won't the students already know the answers?"

"It's all right, you see," replied Einstein, "the questions are the same, but the answers are different."

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Position in NMR, YEN calls.
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