The Neutral Zone

I received an interesting email the other day, in which a reader was curious about the neutral stance that I adopted in February. With the markets now clearly in rally mode, did I miss out on a fantastic rally? That's a great question. The market is now breaking out on all indices, and with recent new longs such as Weyerhaeuser (WY) and E*Trade (ETFC), we are definitely in the bullish camp. But even a portfolio that is equally balanced on the long and short sides can make money in a bull market. A quick recap: Early in February, I closed out a series of long trades as we rallied into resistance on the S&P 500. On Feb. 15, I indicated in Columnist Conversation that I was still short Research In Motion (RIMM) and Amazon (AMZN) and still long Microsoft (MSFT) and Dollar General (DG), maintaining net neutrality. How did that work out? I've been hanging on to a long position in Microsoft since the beginning of the year and I still haven't found a reason to sell. MSFT is sailing straight up its 10 day moving average (blue) and reached a new year to date high yesterday. What's not to like? Microsoft Source: TradeStation View Chart » View in New Window » My other holdover long position remains Dollar General. I was a little concerned about the stock's relative lack of participation in yesterday's rally, as it formed a doji candlestick pattern, representing indecision (highlighted below). If the economy really is improving, it might be time to take profits on this final holdover from the poverty portfolio -- namely, companies built to perform in a bad economy such as Public Storage (PSA), Extra Space Storage (EXR) and Big Lots (BIG). But since it did reach an all-time high earlier this week, I'll hold on to Dollar General for the time being. Dollar General Source: TradeStation View Chart » View in New Window » On the other hand, I'm extremely encouraged by the lack of participation in this rally by my two holdover shorts, Amazon and Research in Motion. Research In Motion is actually down 15.4% for the year and has lost 19.4% since the beginning of February. Analysts continue to puzzle over the company's strategies, such as this week's announcement that it will sell a keyboard for a tablet nobody is buying. The chart below, which compares the relative performance of Research In Motion (red) and SPDR S&P 500 ETF Trust (SPY, green) since the beginning of February, tells the story. Research In Motion vs. SPY Source: TradeStation View Chart » View in New Window » While not as dramatic as the continuing debacle in Research In Motion, shares of Amazon have lain dormant during this entire rally. I've been short since the break of the stock's 200-day moving average back in November (highlighted below), and plan to remain short unless and until it can climb back above that level, currently about $200. Amazon Source: TradeStation View Chart » View in New Window » If I were long Amazon, I'd be very concerned about this stock. Although it is considered a bellwether for both the retail and Internet sectors, nobody seems to want to own Amazon. You'd think that the powerful year-to-date performance of the indices would provide a lift to this stock, but Amazon has not participated in this rally. The bottom line: Since that Feb. 15 note on Columnist Conversation, Microsoft is up 9.3%, and Dollar General has climbed 6.7%. Over that same time period, short positions Research in Motion and Amazon fell by 9.12% and 0.02%, respectively. I'll continue to pursue a philosophy of buying strong stocks on weakness and shorting weak stocks into strength.

The Neutral Zone

A portfolio that is equally balanced on the long and short sides can make money in a bull market.

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