Short Picks for Monday

Yesterday I posted some long picks, in case the bulls are able to keep the party going. As I have mentioned, looking at SPY, last week's high represents a key technical level. A convincing break above will likely lead to a short squeeze. Beware of the headfake, however, since a false breakout would be in character for this market.

On the flip side, breaks below two nearby levels would increase fear in the hearts of bulls, and likewise embolden shorts. A move below 83.63 would give us a lower low. More importantly, below 82.75 technical support becomes far weaker, and traders will be thinking about the broken ascending wedge. Incidentally, over at Slope of Hope, BearsRus has provided a chart of SPX showing prior ascending wedge breakdowns. It's worth a look. Here's the 30 day chart of SPY again to see the levels I have mentioned.



I am in wait-and-see mode. If the market looks like it is breaking down, I'll be watching some of these stocks as short candidates:

- MIL: I am already in this one. Price broke down with volume last week. Perhaps it can see some short term upside, but looks unlikely to get through resistance near 60.00.



- CMTL: I got this from Tim Knight. Price saw a massive breakdown after earnings, and has moved up over 60% off the lows.



- NTRS: Price broke down after earnings, and has retraced to just under the 50 day moving average. A descending 200 day moving average provides an additional layer of resistance.



- FDML: I am not quite ready to get into this trade yet, but will be watching closely. As far as I can tell, this automotive and engine parts supplier has very poor fundamentals and a lot of debt. The March low was 2.15, with the stock trading at 11.33 after Friday's close. I'd like to see price show signs of breaking this uptrend before starting a short position. Earnings on May 5.



- BG broke down on earnings with heavy volume. ADM and MOS are also looking weak in the agriculture sector.



- GIL has a very clear place for a stop, and so decent risk/reward here.



After AXP earnings on Friday, I was quite surprised at the buying frenzy that took place. COF is another credit card company that saw a big runup during the past two sessions. Considering the heavy volume, these stocks could continue their advance in the coming week. While AXP beat on earnings, Moody's lowered its credit rating, "citing the company's weaker asset quality and revenue trends stemming from the severe U.S. economic recession."

Moody's downgrade, which it warned in February could happen, came a day after American Express posted a 56% drop in first-quarter net income as write-offs climbed, a trend the company expects will continue in the current quarter.

Moody's said Friday that structural and regulatory changes in the credit-card and consumer-lending industry being discussed in Congress also pose longer-term challenges to the company's franchise. President Barack Obama on Thursday met with credit-card issuers to address outrage from borrowers over practices that consumer advocates say are unfair.

The ratings firm expects American Express will need to boost loan-loss provisions throughout 2009 and possibly well into 2010. Global economic weakness has resulted in declining trends in the firm's billed business and revenue, which Moody's to persist into 2010. American Express' recent efforts to reduce costs will "be critical to its profit picture," Moody's said.

I still maintain that both AXP and COF will trade at far lower levels within the near future, but the short trade is just not set up for now.

Peter Schiff tells us that the government's involvement only provides more headwinds for a troubled industry:

By mandating that the credit card companies lower their fees, the government will severely hinder their tenuous profitability. In order to avoid bankruptcy, the companies will have to deny credit to marginal borrowers, which would reverse the "easy access" policies that have defined the industry over the last generation. The resulting contraction in consumer credit will run contrary to current Administration efforts to keep Americans spending. The horns of this dilemma are completely missed in Washington.

...The securitization process, infamously associated with mortgage debt, has also been utilized extensively with credit card debt and has greatly spurred the growth of consumer credit. As a result of securitization, lenders were able to immediately offload their loans to Wall Street, which repackaged and sold them to investors around the world. In this way, credit card issuers became more concerned with loan volume and less concerned with loan risk. However, now that huge losses in credit card-backed bonds have reduced investor demand (despite recent multi-billion dollar Fed purchases), card issuers need to hold loans on their own books. Greater prudence is resulting.

...When the banks attempt to restrict credit as a result of their business concerns, the government will most likely funnel more taxpayer "bailout" money to banks to entice them to keep lending. In typical government fashion, rather than letting market forces work, our government will force bad decisions on companies and then subsidize resulting losses. Isn't this starting to sound familiar?