Thursday, November 11, 2010

GMCR (re-visit short ahead of earnings)

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[edit: GMCR earnings were not in fact reported after the market Thursday, but somehow delayed. I increased the position to 7%, from 5%, as the potential for a sizable gap against me was greatly reduced.]

GMCR reports tonight and I've taken a fresh (though smaller) short-entry ahead of the report. It's speculative, to be sure, but I've got enough of a set-up to take a flier (and a need, in the event the market manages to worsen now tomorrow).

Don't follow along, at least not because of me; certainly not when selling short. This will be educational fodder for tomorrow - throwing tomatoes at me then will be much more fun if you're not losing money.

First, I'll speculate that if the company had resolved issues regarding licensing and their accounting of revenues (which triggered an SEC investigation), it is doubtful to me they wouldn't have already alerted the market. Why save news like that for an earnings call when the market's hating on you every day prior? I'll consider it more likely they will brace the issues as best they can (spin) and update the market only as necessary (like with a conference call following earnings); or else when the news is beneficial.

Call me an idiot. Tomorrow I wear the hat; we'll see.

Further though, I like the risk/reward set-up and it is a hedge. If the market sours further tomorrow, the environment will be ill now, to say the least. To come out then with fundamental news is always dangerous, especially if a company's news is less than great. The potential pummel is greater in my opinion than potential upside; and necessary for me since my positions may be getting rocked elsewhere if a negative market is part of the driver). If the market is not still recovering from the gap-lower of this morning, I'll need a solid hit from hedges to pare things. If the market resumes onward and upward, then GMCR will have to really bake my nuts to cause portfolios real damage.

Finally, here is the set-up (not perfect) for shorting GMCR into the fundamental event...

I've spoken on the GMCR set-up previously, but today the name has poked above its 50-day moving average (MA) now for the third time. According to the optimal short-entry of a fallen leader (engineered by database studies, and a book from William O'Neil), the name should be allowed to poke above its 50-day MA for 3-to-4 times, after the major-volume breakdown through that average. Bullish sentiment does not ease in one day. Rather, a former-leader will usually probe upward several times before ultimately dying. Further, you should be in a negative market trend for this to be optimal. We are not, but I remain sufficiently more long than short overall, into this event; an important caveat.

Further still, there remains a very high short interest in GMCR (close to 20%). While this assist the upside in a stock moving higher, I find it a green light to short a name driving lower. Big shorts do their homework. To bank on a short-squeeze once a name is trending down is fighting everything and the wind. I'll side with the shorts here.

Finally, the name should manage to close today above 33.60, on volume > 5M shares, I will be stopped-out ahead of the report. Stops for tomorrow will be on the Spitter...

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