Morning Market Thoughts
Good morning. I hope you found my Bollinger Band tutorial valuable this weekend. If you have any questions about the material, please email Gary@Stockmarketmentor.com. I have found that presenting a course of material and then soliciting questions is a very effective way to find the holes in your logic and presentation. You then look at those questions and adjust the material so that the questions are answered…and then you have a complete course that is more useful.I would appreciate it if you take the time to do that. I’m sure Gary will be thrilled to have an email box full of questions…but he works for a living, too. I’m sure he’ll be fine. 😎
The news on Valeant Pharmaceuticals is that Bill Ackman will be taking a position on the Board of Valeant. The CEO is stepping down and Ackman is in. I’d pay money to sit in on that first board meeting. The tension should be high as the firm considers how to avoid defaulting on $30 billion (with a “b”) in debt.
I have no stake in this stock right now — I am neither long nor short. If I engaged in such activity, I would be kicking myself for not pressing my short last week to a bigger position during the trade that I was watching. I could have done a lot better than I did. But that’s trading — life interferes with trading at the most inconvenient times.
These types of situations can be traded successfully when you have time to keep track of the position because you just know that, ultimately, short sellers will start covering their shorts. They’ll do it for no reason other than the importance of managing risk. And as the stock slows down and finds support due to the short covering, other shorts can grow nervous and start covering theirs. It is during this bounce that we really get some valuable information. If the stock does not truly rebound, but instead just sits at one level (as we saw on Wednesday), it tends to indicate that the bounce was due to short covering and nothing more — the buying was met with more selling. And once the buyers have exited their trades, the stock continues to fall.
So we want to look at VRX and see how the stock acts today when it opens. I have no idea whether it’ll move up or down, and I have no bias. One thing you’ve got to remember is that the company and the various investors who have a big position in the stock will do EVERYTHING they can to stop the sell of the stock. They are hemorrhaging money and they don’t like that. So they will do everything possible boost the stock. The best time to figure it out is over the weekend, when they can work without dealing with new issues and problems. Often times, the company reports something on Monday that impacts the actions of traders. Sometimes it is a big deal; and sometimes it is a cosmetic thing designed to influence traders. If the latter, it doesn’t take traders long to figure it out and keep leaning on the stock. If it is the former (a big deal), then the short start scrambling and that’s the end of the shorting frenzy.
Here, the appointment of Bill Ackman to the Board is definitely major news (he is one of the, if not THE, largest shareholders). So it will be interesting if the street believes that he can be effective.
So while it is very risky to hold onto a short of a hot stock through the weekend, it can be very profitable to look closely at the stock on Monday to see what the shorts are doing. Do what the majority of them are doing. And as long as you do it quickly, you’ll be ok. If you sense that there is a lot of short covering going on, then cover your short quickly. Let the slow guys buy it higher. Remember that you can always re-short the stock if you choose. As I look at that stock right now, I’m thinking the easy money has been made….if only, for right now.
See you in the forum.
–Dan
Market Update