If you sit near me on our trading desk you have heard me say, “In a strong market real companies get bought.” What I mean is when a real company gaps down, in a strong market, it is likely to find a big buyer and find a way to trade higher. But then there was UPS on Friday. This was a real company that I attempted to discourage our traders to buy, even after it started to look good. Let’s discuss why.
UPS is a real company. This is a strong market. One of our better traders on the desk, Shark, started sharing that it looked good.
“Shark, I do not like that play.”
“In a strong market real companies bet bought,” responded Shark. Hmmm. I wonder where he has heard this before :).
“You are totally right [what I taught him was totally correct?]. But I do not like the news in UPS. This is the type of news that often can find a stock finishing at the low.”
Some time passed and UPS started to look even better.
“This UPS looks good,” said Shark.
“I don’t want to tell you what trades to make, but again I do not like this idea.”
Why was I so bearish on this bounce idea from a solid trader? Isn’t it true that real companies have a tendency to bounce? Yes but… I didn’t like the news. UPS lowered its guidance for the 2nd quarter and the full year.
In a second-quarter earnings pre-announcement, UPS said today it is lowering its diluted earnings per share guidance to $1.13, which is below the Wall Street estimate of $1.20. Along with lowering its second quarter guidance, the Atlanta-based transportation and logistics bellwether is also reducing guidance for 2013 adjusted diluted EPS to a range of $4.65-to-$4.85, which is 3-to-7 percent higher than last year. (Source Logistics Management)
We need to add more nuance to our trading fundamental that real companies get bought in strong markets. In this case, this news breeds uncertainty for UPS. Things are not going well. Maybe their reported earnings will be even worse than guidance as their guidance is now worse than their past guidance?
As you can see from the chart UPS never did bounce and traded weakly intraday during a market that finished impressively at its highs. I would argue that if the market was not so strong as yesterday that UPS might have found 84. Yes, we look to buy real companies that gap down in a strong market except for when they release news that breeds uncertainty about the company. Then we lean short.
I hope that helps.
You can be better tomorrow than you are today.
Mike Bellafiore
Short UPS