Potash (POT)

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The chart above is a two year logarithmic chart of POT. As much as its current action is a nail-biter, we have to keep things in perspective until proven wrong (which may happen tomorrow) . Despite the recent slump, POT has yet to close decisively below its long term trend channel. We don't have to tell you how critical these support lines have now become. The longer they are, the more significant a break of them ultimately is. We are at an extremely critical point in POT's cycle, where the next few days literally decide its fate for the next several months. If support is broken, it will either go the way of CROX, or it will consolidate sideways for many, many months before regaining the confidence of investors eventually allowing it to move higher. While a consolidation like this is a healthy and necessary part of a company (and its stocks) natural growth cycle, we never stick around for them because the risk outweighs the reward. We've found that most stocks that break through the bottom of their trend channels never make new highs again. The euphoria that brought them to their peaks is rarely re-created. Companies that do have multiple bull runs go on to become the largest companies in the world. They are the AAPL's, MSFT's and GOOG's. For every one of them, there are hundreds of one-hit wonders that simply disappear into the annals of stock market history. There is no reason to place a bet with those odds, which is why when most stocks break support, they crash and burn, never to be heard from again.

CROX

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Unfortunately, we are not able to short individual names because we trade individual and business retirement accounts, in which margin is not allowed. It's unfortunate, because our performance was far better when we had simultaneous positions in uptrending and downtrending stocks, and it gave us peace of mind in case the entire market collapsed.

We still keep a list of shorts just for fun, and CROX has been on that list since it broke down in November. We never had reason to remove it from our list, and now CROX is set to open down more than 50% tomorrow at $4.50

We are looking into a way to transfer some of our assets into a marginable account in order to take advantage of the market's 'dark side'. It always seemed easier to us to profit from downtrending stocks considering that fear accelerates faster than greed, causing stocks to fall 3 times faster than they rise.
Almost all stocks eventually go to $0 (effectively if not literally), and they spend the vast majority of their life cycles going down. For this reason, most traders lose money in the market because by going long, they are trying to swim upstream.

We have zero faith that ugly rubber shoes will ever make a comeback. Any CROX bagholders should have bailed out a very long time ago, and should send a stale fruitcake to Karen Finerman.

CF, POT, and MOS

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The chart at the top is CF, the chart in the middle is POT, and the chart at the bottom is MOS. What we're looking for, at some point, is a break of the short term resistance line that these stocks have formed since they topped out in mid June. This same basic pattern has played out several times with these stocks in the recent past. A break of the line in each case has been followed by a strong rally, several weeks in duration.

Whether or not it will play out this way again is anyone's guess. We can only tell you what to look out for, not what will happen. There is a theory that traders should buy into strength. Following this theory, one would buy aggressively on a break of the resistance lines drawn above. While we understand the logic of buying the breakout, we prefer to buy uptrending stocks on weakness instead. This gives us some breathing room should the breakout fail.

Commodities Intact

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On short term charts of the commodities, they appear to be in trouble. But taking a longer term perspective shows that they are still within the limits of their channels, as shown on the charts of DBA and DBC above. Granted they are at the bottoms of their channels and looking precarious, but despite recent weakness, it is too early to declare an end to the commodity bull.

Apple (AAPL)

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We don't comment much on AAPL because it doesn't fit our criteria of being in a well-defined uptrend. Today, however, it is worthy of note, because it releases its earnings report after the bell on Monday (July 21st). The chart at the top shows AAPL's recent activity. It's in a downtrend, approaching short term oversold. The chart below it shows AAPL over the past 3.5 years. It's broader trend is up, but it swings wildly above and below its overall channel. The point of this post is that AAPL is at the center of its multi-year trend channel, and therefore, it is impossible to gain any predictive value from its chart as to how it might react to its earnings report. If it were oversold (as it was in mid 2006 and early 2008), or overbought (as it was in early 2006 and especially in the second half of 2007), you could rest assured that the odds would be in your favor if you just simply placed a bet that AAPL would revert to the center of its channel.

In the abscence of any obviously oversold or overbought stance, a bet on AAPL ahead of earnings is simply a dangerous game of roulette.

Canaries

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The chart above is a chart of MTL. We were in and out of it when it was trading within its channel, but sold it when it broke through the bottom of its channel and simultaneously took out its 100dma. Now that its 100dma is starting to slope down, we have a stock that is trading below its downtrending moving average... the very definition of a downtrend. This stock will continue going lower until it hits $0, or unexpected industry-specific news turns it around.

It doesn't look good for MTL. This doesn't mean it won't have relief rallies along the way. It just means that it is now in a downtrend, and there is no reason to think it will perform any better than CROX or BCSI for the forseeable future.

This brings us to a more important issue... fertilizer. There are many signs of weakness in the commodities market. MTL is a steel company, and we see weakness there. OIL is a commodity and there is an obvious recent downturn there (break of trend channel, break of moving average). It has always bothered us that the fertilizer stocks trade like commodities. We much prefer the days of buying and selling DELL, AOL, AMZN and GOOG, where at least the number of variables affecting the stock's price was manageable. With these fertilizer stocks, we feel somewhat at the mercy of an uncontrollable commodities market.

So how is this post about canaries? Back in the day (before carbon monoxide detectors), miners would bring canaries in cages into the coalmines. The small birds were sensitive to even trace amounts of deadly gases, and would quickly die if exposed to them. If the birds died, the miners knew that they themselves should exit the mine. We use this analogy to describe stocks because there are strong stocks (the miners), and weak stocks (the canaries), in the same sector. When you start to see the weaker stocks break down, you know it's time to sell the stronger stocks because it won't be long before they succomb to the weakness.

Right now, with commodities breaking down, we are being given early warning about the fertilizer names. This is why you want to stick with best of breed, and always buy low. Investors in MON (a weak fertilizer stock), are more vulnerable than investors in POT (a strong fertilizer stock). MON is breaking down more and more each day. It has already broken the bottom of its channel and its moving average. It is our canary in the coalmine.

So does this mean the fertilizer trade is dead? It may be on the brink of complete failure, but we're sticking with it. Here's why...

First, not all of the fertilizer stocks have broken down. POT, CF and AGU remain strong. MOS is weak, but is staying within its channel nonetheless.

Second, the fertilizer stocks report earnings next week. This is a big shot in the arm for them. It's what pulled them out of their slump in early April.

Third, this market is rotational. The money has moved out of commodities and into financials and homebuilders for now, but that will come full circle at some point. Citigroup has rallied from $14 to $20 over the past 3 days. Would you buy it here? At some point, the rotation will draw money from the financial names and it will be looking for somewhere to go. When money needs somewhere to go, it usually finds it way into the familiar rather than uncharted waters. This psychology is what creates overall trends in the first place.

Fourth, the valuations of these stocks are very reasonable. We understand why an Amazon or a Yahoo at a p/e of 120 finally reaches a point where its valuation outstrips its earnings potential. But in fertilizer, we have p/e's of 10 to 20, well within standard range for the S&P500.

Fifth, it is often a confluence of events that triggers a large move in a stock's price, with a single event acting as the sole catalyst to spark the move. With the fertilizers, we have extremely popular, strong stocks with stellar earnings that have just corrected significantly. All they need is a catalyst. Next week's earnings are the perfect excuse from which to launch a very profitable rally. This is in keeping with our theory that beaten up stocks respond positively to earnings reports and overvalued stocks respond negatively to them, almost regardless of the contents of the reports themselves. We said we would have an opinion on how these stocks would react to earnings as they get closer to their release dates. We are definitely leaning toward a positive reaction to earnings considering how much they've dropped ahead of them. We still have a few days before earnings, but it looks like they'll remain under pressure until they are released.

So what are we doing now? We are a decisive group of traders, for better or worse. We've made the decision to stick with the fertilizer trade (despite some canaries dropping dead), until earnings are released next week. We will have a better idea about their future once we see their reaction to these reports. In the spirit of sticking with our trade, we are actually buying more into this drop. We added some MOS today at 127, bringing our total stake in fertilizers to 64% of our portfolio. The rest is currently either in cash, DDM, and SMN.

We do not recommend people follow us blindly into this trade. It is a high-risk proposition and we are particularly skilled at damage control should things go wrong. Do your own homework, and make your own investment decisions.

CF and SIRI

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Above is a chart of CF. Considering the sudden drop in commodities, the fertilizer stocks are holding up pretty well. Every drop is met with buying. Now is a good time to beef up your SMN position in case we crash, but we would not sell fertilizer here. Next week the fertilizer companies report their earnings. Our general theory about earnings is that a stock's reaction to its earnings report depends more on where the stock is trading ahead of the report than on the information contained in the report itself. This explains why stocks sometimes crash after stellar earnings reports and rally on seemingly poor reports. If a stock is overbought going into earnings, it is likely to drop regardless of what they report. If a stock is oversold going into earnings, it is likely to rally regardless of what they report. The fact that the fertilizer stocks are putting in a somewhat disappointing performance ahead of their earnings means that they have room to rally when their earnings are released next Thursday.

The fertilizer trade right now is one of patience. It's a wait-n-see game. There is no clear sign to exit the trade yet, and any attempt to do so may make you miss out on a formidable post-earnings rally. That said, you better be hedged with SMN.

Ok, so now you understand our take on fertilizer, so on to something we don't understand...

Why does the SIRI merger require minority broadcasting? What do "minority channels" (whatever that is) have to do with whether or not SIRI-XM would be a monopoly? Our guess is that somewhere in the halls of the FCC is a white guy, as big a racist as Al Sharpton, making rash assumptions about what minorities listen to. To us, this is a blatant and outrageous act of racism. If he were a radio DJ, he'd be out of a job for even hinting that minorities need their own programming. Does anyone care to share a better answer?