VECO

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Piper Jaffray analyst Ahmar Zaman took over coverage of VECO on July 15th, reducing the firm's rating on the stock and slashing both its price target and EPS estimates. He cited "uncertainties around order momentum" as the reason behind his actions. On the 15th and 16th of July, VECO shares lost $5, or approx 11% following Piper's downgrade.

With VECO's report yesterday, we see that the company is doing far better than Zaman expected, and its guidance negates any of Zaman's fears.

But were they really fears at all, or is something else going on?

Ask yourself the following questions...

Is Zaman completely and utterly inept after years of expensive education and office experience?

Can Zaman do the third grade math required to make the right call on the LED sector?

We happen to think that Piper Jaffray (and all other Wall Street firms) know the deal.

They want lower prices.

So is Zaman incapable of conquering third grade math, or did Piper want to pick up shares of VECO as cheaply as possible ahead of its earnings report?

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To answer this question, we need only to look into Piper Jaffray's recent past.

In 2005, Piper agreed to settle with the SEC, NASD, NYSE, NASAA and the New York Attorney General in a landmark securities fraud case in which Piper had released "biased research designed to benefit its own business."

If you google "piper jaffray fraud", you will be astonished at the sheer number of these incidents.

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So what should we believe happened this time? Should we believe analyst ratings? Should we follow financial "news"? Is it designed to help the retail investor? Are they just being good samaritans, pitying the little guy and lending him a helping hand?

Part of the purpose of this blog is to expose how Wall Street really works, and leave you to draw your own conclusions.

CREE

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CREE broke out from its multi-month consolidation, which bodes well for the LED sector, as well as for the broader market. This is not a guarantee that the market will begin a new leg up from here, but it is yet another sign that the bulls are coming on very strong in the tug-of-war for control of the market. Even though CREE is not near 52 week highs and is not posting the largest percentage gains of the stocks in the LED space, it still is the leader of the sector. What the leader does, the rest of the stocks in a sector will do.

Now that we're quickly closing in on LED earnings, (RBCN on Aug 5 & CREE on Aug 10), we're hoping to be blessed with some upside that allows us to exit all or part of our positions before the earnings are released. Lightening up on shares that rally ahead of earnings is a win-win situation. You make your profit and avoid the risk of an earnings miss. Only in rare occasions will you miss significant further upside. Over the course of an investing career, it is better to miss these rare upside moves than to repeatedly participate in 50% gaps to the downside.

APKT

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Acme Packet is a company that provides border control solutions. It was started in 1866 by Wassily Wassilyevich Kandinsky. They currently own and operate over 14,000 lookouts along the US-Mexico border and an additional 12 along the US-Canadian border.

Actually, none of this is true, but it really doesn't matter. All we see is a stock that is above an uptrending moving average, holding its own despite a weak broader market, trading within a trend channel, at all-time highs. Both its quarterly and annual earnings show steady growth.

On a pullback to the bottom of the channel (below 29), which could happen tomorrow morning, it may make for a good short term trade on the long side.

We don't have the same confidence in APKT for the intermediate term as we have with the LED sector, but for a quick trade it makes little difference.

RBCN's Channel

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Above we've posted a chart of RBCN now that its channel is becoming more clearly defined. We're using a 55 day moving average, because it best fits the chart. The fact that the average parallels the computer-generated linear regression line (shown in yellow) confirms the angle of the chart's ascent. It is at this point in a company's growth cycle (4 to 5 months in) where we start scaling into and out of our position based on the stock's position in its channel. With the stock at its neutral centerline, there is no reason to buy nor sell. If the stock drops to the green line, we add. If it rallies to the red line, we take some profits. In theory, when the stock is at the green line, you should have 100% of your intended position. This does not mean you should have no available cash. When the stock is at the yellow line, you should have half of your position. When it is at the red line, you should have no position. There are lines at the 25% and 75% marks as well, which we have not drawn. By scaling into and out of the position within the channel, one can increase profits and limit risk. We do not follow these rules verbatim. We like to maintain a 20% to 25% position in a strong stock even when it reaches the red line. Conversely, we only hold a 75% to 80% position when it corrects to the green line, allowing for intraday spikes below the line caused by the action of the broader market. However you choose to trade a stock, you should know that in most cases, it serves a trader well to coordinate their exposure with the stock's relative position in its channel, at least to some extent. We've many times sold entire positions in stocks blowing through the top of their channel, figuring we'll always be able to buy it back cheaper at some point in the near future. In over 90% of cases, this holds true. The top of RBCN's channel is at approx $37 right now. If it surged to $38 or $39 in the next few sessions, we would sell. Our money could be put to better use elsewhere while waiting for RBCN to come back to the yellow line, which it most likely soon would.

Crime Pays

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The chart above is that of Goldman Sachs, which is rallying in response to a settlement on its recent fraud case. Goldman Sachs was accused of defrauding investors out of $1B, although many sources believe the figures are a lot higher. In true SEC fashion, Goldman is being fined half that amount. It is yet another shining example of how crime pays, as long as it's white collar crime. Throughout its history, the SEC has allowed companies to profit from their crimes. An incentive for fraudulent practice? Only on Wall Street.

RBCN

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Ever wonder what would happen to the stock chart of a company whose top brass all liquidate their positions in unison, followed by a nearly 10% correction in the indexes in just 9 sessions?

The chart above is just that. RBCN is the perfect example of why you should listen to the chart and not the headlines.

We updated our performance on the left side of the blog today, and while we basically have the same amount of capital we had in mid June, the market has fallen approx 5% since then. We consider this a substantial gain for us, as all performance is judged relative to the indexes.

RBCN remains the relative strength leader in the LED space. There may be other companies with lower P/E's, higher EPS's, higher PS ratios, etc, but compared to the importance of relative strength, none of that matters. If you make your approach to investing as simple as Nick Darvas did, you will find that all of the information you need about a company is in its chart. Fundamentalists completely reject this thinking, preferring to live in an ivory tower of complex formulae and psychological theorem. Most of the strict fundamentalists that we know are no longer investing in the market. They just couldn't beat it on a consistent basis. Instead, they publish books on how to beat the stock market... go figure.

CREE

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Has there ever been a more perfect descending triangle than this one? CREE has held its $60 support level in a textbook way, while putting in lower highs over the past 3 months. Triple and quadruple bottoms never hold, so we have to bet on the odds and say that it's only a matter of time before CREE breaks support. We happen to own it, but are holding onto it anyway. We're looking to buy more CREE, as we feel it's quickly approaching fair value. The confluence of events (falling share price and rising EPS) are shortly going to meet head on.

If the broad market (Mr. Market) continues to fall, it may even give us a below value price on CREE! We'd be backing up the truck if that happened, in keeping with our theory that the LED's haven't seen their highs yet.

The quick math on CREE...

CREE's EPS is somewhere around $1.68, soon to be $1.93.

A fair P/E for CREE is approx 25, in line with its 20% annual growth rate

25 x $1.93 = $48.25

So if CREE drops another 12 points, we could quickly see a rush of buying that brings it back into the 60's in just one or two sessions. Whether you're a day trader, an intermediate term trader, or a long term investor, you should keep your eye on CREE because it may soon offer the trifecta...

1.) Growth

2.) Value

3.) Popularity