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The chart above is a chart of SPY, which tracks the S&P.  It is in the same place as it was 6 months ago, which we predicted in our last post.  We didn't know what path it would take to get back here, but we did know that it had no upside.  Why?  The Obama tax code is designed to support the lazy and hurt the ambitious.

Here's the math...

For the average New York family making less than $217k, the taxes are as follows:

Federal income tax: 28%

Social Security tax: 10.4% + 2% at maturity = 12.4%

Medicare tax: 2.9% + .6% at maturity = 3.5%

NYS income tax: 6.9%

NYS sales tax: 8.63%

Real estate tax: 5%

Total tax: 64.43%

With 2/3rd's of their income going to taxes, and nearly all the rest going to health insurance, the average self-employed New Yorker earning $200k a year gets to keep about $17,000 of their earnings.

In contrast, the average New Yorker making $17,000 a year gets to keep 100%, or $17,000 of their earnings.

When you consider that the lifeblood of America's economy is its small business owners, it hardly seems efficient to take their incentive away.





Dangerous Territory

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Sorry for the brief hiatus, hope everyone checked in at least 3 times a day in our absence!

Back when Merrill, Lehman and Bear Stearns collapsed, we spoke to the CEO of a company which was hired to figure out what went wrong. We ask many people where they think the market "should" be. For some reason, his answer stood out... "on both sides of 11,000, but it will keep coming back to that number for years to come."

We've felt the same way for a long time now. There's no reason for the market to be as high as it was before the crash. Sentiment is nowhere near that level of euphoria. Nor is the economy. So that rules out us being able to sustain anything in the 13,000 to 14,000 range. Nor should we be at 8,000. We belong at 11,000. Maybe 11,500.

For anyone that's followed the basic teachings of this blog, the chart above shows three reasons why one would be lightening up on shares in the near future. The market is

1.) At the top of a trend channel, far from its moving average

2.) Near a very significant resistance level

3.) Blowing off at the top of an S-curve

Sure, it could go higher, and it probably will. But now would be a good time to be 80% in cash.

If someone were to buy into any one of the indexes on Monday, it's extremely likely that they will be back to break even in a few months time.

Without knowing what path the market will take to get back to Dow 12,700 in 3 months, we just take the easy route and let it tell us. We're 86% in cash. If it goes higher, it's a no-brainer short and hold. If it drops, we scale in. There's no need to predict anything. Well, anything other than that we're in dangerous territory now.

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.