Contrary to popular belief, even disciplined traders sometimes need shackles to keep from entering trades. For those that hadn't noticed, or more impressively, had kept their fingers off the mouse button and not traded the whipsaws offered this week, the action has been enough to drive hyperactive trader crazy. When you want to trade, you want to trade, and by golly, you're going to find something if it kills you! Hence the need for shackles. Reminds of the two buzzards in the tree snag with one saying to the other, "Patience my [behind], I want to kill something." I can relate. So can a few others around here.
In fact, resident Rocket Scientist and LEAPS editor, Mark Phillips and I were having this conversation earlier today. He called me and said, "OK, keep me from doing something stupid" to which I replied, "OK, the answer is 'no'". After yuckin' it up for a few more minutes, we got down to business.
Here was the proposition. On the hunt to manufacture a trade - and there are many of them out there daily for those looking to make something happen, but it's like swing at a less-than-perfect pitch - Mark noted that Intel (INTC) loomed large on the event horizon. The proposed trade was to buy calls on the semiconductor sector for a bounce.
A bounce? Yes, a bounce. Before I go on, understand that there is no "right answer". In the world of manufactured trades, we're not looking for home runs. Only singles that can generate a bit of income for the risk we take in entering the trade. They aren't conjured up to be killer plays, but merely tradable for some daily bread! Just enough to keep the machine running while we wait for a profitable setup to come around.
So anyway, back to the news. Everybody and their brother knew that INTC was going to give their mid-quarter update, as they do every quarter. I might add that for those who have followed INTC for a number of years, their guidance isn't worth the price of the paper it's printed on. It has a nasty habit - at least since I started paying attention in 1998 - of saying something like, "Business isn't going as well as we hoped, but we'll do better next quarter." I don't think they've hit an honest earnings target in four years. So why they continue to be trusted by Wall Street is beyond me. Be that as it may, analysts and pundits were slobbering all over themselves half in fear that the numbers reported today in mid-quarter would sorely disappoint, and half in hopes that things wouldn't really be as bad as feared once corporate brass started squawking their usual lines.
The thinking as that for a short term play, all the bad news was priced into the stock. Precisely because most believed the news would be dreadful, the contrarian would be on the correct side of play if he/she bought calls just before the close.
Here's the nugget: Usually the hyped expectation of news in either direction results in a snap back move in the direction opposite of herd expectations. It was on this logic that this potential bullish play was conceptualized.
So we think we want to put on this bullish trade and buy calls at the close with the expectation of bad news and a warning already priced in. But take the chance on Intel only? Let's look at the SOX chart.
Semiconductor Index chart - SOX (weekly/daily/60):
Very interesting. Apparently, SOX traders were bracing for the worst and had sold off the index to new lows with red candles in nine of the last ten trading days. If we are going to trade this bullishly, the daily 60-min stochastics in both the 5 and 10 period timeframes are both buried and suggest that if we are going to trade with the bulls, this might not be a bad to do it. Yes, the weekly chart shows a bearish stochastic cross. So I certainly wouldn't trust this opportunity as a long-term trade. However, as a scalper and a speculator, it might make sense to pick up some calls with a small amount of speculative money only. If we are wrong, we don't want to jeopardize the whole trading account.
However, this was quite possibly a reasonable use of speculative capital in an effort to fade the crowd. What's that mean?
Think of natives in jungle who all turn simultaneously - reflexively - toward the noise they just heard in the trees. All the natives are keenly focused in one direction, spears up, hearts pumping, ready to kill the beast they have yet to see. That's the focus of the tribe's attention. Essentially, that danger is now recognized and acknowledged. While the danger (though not completely known) is now understood to represent a threat, the tribe is poised to handle it. Meanwhile, that hungry tiger at the tribes back is lurking in the bushes licking his chops for the kill. The tribe isn't paying attention to a noise it doesn't hear. The lion that the tribe turns its back on is the real danger. The only guy who knows the presence of the until-now- unseen lion is the smart native who recognized the real danger of what no one else currently saw because they had their backs turned. That smart native must be willing to turn his back on the tribe and capitalize on the opportunity to live at the expense of the myopic tribesmen still focused on the beastly noise heard earlier.
The moral here is not to be one of the tribe, but to be the smart native who lets others handle the threat from the noise while he looks for what others don't see, and capitalizes on it. That's what we had in mind as the Wall Street minions faced the danger of an Intel warning. What they didn't see is that the news might not be as dire as most believed. The charts certainly told a story of selling into the anticipated bad news. With stochastic indicators crushed into oversold, buying calls for a bounce made sense. We wouldn't get rich, but we'd make enough money to pay the monthly Q-Charts bill!
Anyway, rather than take our chances on just INTC, Mark figured it would have an impact on the whole chip sector. I agree. But SOX is expensive thanks to volatility. So the broad index could be traded using the Semiconductor Holder (SMH), but it doesn't trade after hours. No matter, we can buy it, hold it overnight and sell into the frenzy tomorrow morning as money trickles (maybe pours) temporarily into semi stocks again. That's the plan. Now to wait for INTC news!
Sure enough, we weren't disappointed. After the bell, INTC noted that microprocessor sales were trending toward the lower end of seasonal patterns. Other communications products, excepting flash business, remain soft (Business isn't going as well as we hoped.). Furthermore, it guided quarterly estimates down from $6.3-$6.9 bln range to the $6.3-$6.7 range (We WON'T do better next quarter, as originally planned.) The good news is that it wasn't as negative as the "experts" thought. Ahhhh, breath a sigh of relief! Things will get worse. Just not as bad as we thought. Let's buy it! Based on after hours trading, INTC as proxy for the industry was trading up $0.70 from the close. Tomorrow should show us a nice pop in INTC, the SOX and SMH, barring the unexpected nocturnal happenings overseas.
There's only one bit of bad news in this whole tale. The first is that I didn't see enough upside to justify the seemingly low capital risk. I stayed out - not much of a gambler these days. Still, Mark thought it would be worth a minor wager and entered the order. Unfortunately, he wasn't filled. So both of us walk away with no money, but we didn't lose any either. Nonetheless, it's good education and a real life experience that reminds us there is potentially money to be made playing high profile news events. That's it for this week. Make a great weekend for yourselves!