Shorting $XING

$XING is volatile, and based on the hype around rare earths, it picked up steam yesterday with a gap up today.  Worth considering a short as it plateaus with tight upside stops in case a short squeeze ensues.

Going long Airlines $FAA and short energy $XLE

Airlines (sector ETF $FAA) and energy ($XLE) are usually inversely correlated, both appear to have a clear "psychological" spread that has opened up in the past few weeks:  http://www.marketpsychadvisor.com/moodanalysis/sectordivergence.  This type of emotional arbitrage is a risky strategy, and it's important to identify the catalyst that will cause the spread to narrow.  In this case we're anticipating a reversal after the New Year as window dressing unwinds (there is no hurry to get in on this trade).  Earlier this week the snowstorms on the U.S. East Coast and cold weather caused the spread to widen further.  In low volatility environments like this, such spreads can widen for many days (and even weeks), which is why we wait for a large gap between the two sectors and a clear catalyst before putting on this arbitrage.

Shorting Biotech $IBB, Banking $KBE, and Oil Services $PXE, Long Airlines $FAA and Transports $IYT

The short bias today is based on the euphoria of the past week and is centered on sectors that are more sensitive to the whims of trend-following (herding) investors.  High-beta sectors have become a bit over-extended pre-Christmas holiday.  There is likely to be a pause in these names relative to the market, and if we have a small downleg, they should correct more to the downside given their "mood-sensitivity" (versus the potential upside if the rally continues). 

On an individual stock basis, our short on $ARNA paid off yesterday, and we're also getting short-term short signals on Skechers ($SKX) - which is extended to the downside already, so be careful.

Happy Trading!
Richard
 

Biotech Overbought (IBB ETF)

Our SectorDivergence chart for ETFs is showing Biotech stocks (using ETF IBB) overextended following the FDA's more liberal stance on passing drugs through the new drug approval pipeline.  The potential arguments against this bet are that this is real news for the Biotech sector, there is a potential for brutal short-squeezes in Biotech, and the sentiment is not extremely positive (so the contrarian case is weak).  Nonetheless, on a short term basis this looks like a good setup to go short.

We're also seeing excess optimism (remember, hope is not a strategy) in several falling ETFs:  GDX (gold miners) and TAN (solar stocks), so we will keep those in mind as potential shorts in case of a short term rally.

Our macro view, based on sentiment, is that the stock market is clearly bullish and will likely rally into the year end given the absence of disturbing news likely to appear, with a pullback anticipated in the first and second week of January.

Happy Trading!
Richard