We start off today by looking at yesterday’s Overnight Trade of the Day, Citigroup Inc. (C). We picked the stock based on the prospects of solid earnings from JPMorgan this morning, which we got. Yet, even with the beat, C is down slightly in pre-market trading. The market has not taken these earnings as well as I had suspected. People are paying more attention to JPM’s revenue miss than their outstanding profit beat. A number of economic indicators, however, it appears will make or break the day, so we will need good news out of the industrial production report and Consumer Sentiment Index. We are going to obviously hold onto C for now.
Let’s get into today’s picks.
Buy Pick of the Day: Ultra Proshares Financials (UYG)
Analysis: Although a lot of the major money center banks are yet to react to the earnings beat by JPMorganChase. I think we are going to see a rally around the financials today. JPM was projected to report earnings with an EPS of 0.61, but they beat that with earnings of 0.74. The stock is down slightly, but my suspicion is simply that there was so much other economic news on the front today that had not been released earlier that we had not seen a major move. At 8:30 AM, we got the CPI numbers right at the levels we were expecting and the NY Manufacturing Index beat its December estimates. Since those reports came out, futures have come down almost to a neutral level from being down over 30 points before the reports.
I see this as a pretty good sign that the market is getting ready to rally. The 9:15 AM Industrial Report and 9:55 AM Michigan Consumer Sentiment Index will go a long way to continue this upward trend. Further, I think at some point investors will look at the JPM earnings and Intel earnings’ beats and get excited about them. The company was pretty cautious about their earnings due to credit losses and the fact that they missed revenue estimates, but they were free of one-time items and were able to keep costs down to make considerable profits.
CEO Jamie Dimon, though, singlehandedly downplayed the earnings with his commentary, "Though these results showed improvement, we acknowledge that they fell short of both an adequate return on capital and the firm’s earnings potential."
Ouch.
So, the question then is do we think financials will go up from here or down. Well, if the rest of the market is going up, it will help pull up financials. Further, we can get UYG in the red at the beginning of the day. Yet, there has to be something to rally on. This morning, Discovery, Comerica, and HSBC all got solid upgrades. The important one is for Discovery, which is part of the UYG holdings. The upgrade from none other than…JP Morgan. I love the round about of this story.
We definitely want to see good economic reports to keep energizing investors and help them see these JPM earnings as not as bad as some are taking them. UYG’s technicals are probably not the most favorable. The stock is a bit overvalued and overbought, but its under its upper bollinger band, and with a discounted price, we can definitely make some money off this ETF.
Entry: We are looking to get in at 6.10 – 6.20.
Exit: Looking for a 2-3% gain.
Stop Loss: 3% on bottom of entry.
Short Sale of the Day: Shuffle Master Inc. (SHFL)
Analysis: So it is always hard to argue for the short sale on a day I feel we will see some rallying, especially since I am considerably bearish most of the time. Yet, we have to find something to play. This trade is strictly one where I think the stock has gotten a bit ahead of itself and would have made an outstanding Overnight Trade. Shuffle Master, last night, reported great earnings alongside Intel. The company, which is involved in gaming supply and in charge of things like shuffle machines, slot machines, and other gamin electronics, beat earnings with an EPS of 0.12 vs. the expected 0.09. That has shot the stock up over 6% in pre-market trading. 
The company saw 1.8% rise in revenue and turned to a profit from a loss one year ago. The company was pretty confident in their earnings, and the result is a solid gain to start the day.
"We are still cautious in our future outlook, but 2009’s operating results demonstrated our ability to successfully manage through the recession and, subject to unknown economic factors, we feel there is a good opportunity to grow revenue in 2010," said Tim Parrott, Chief Executive Officer, in a statement.
Well, much like Parrott, I am very cautious when I see a low volume stock making this sort of movement. It tends to be setting itself up for a nice pullback to start the day, and that is what I am expecting. I think we can get in this after a quick pop to start the morning and ride this down.
The technicals make this trade even more attractive. The stock had risen a bit under 25% in the last month and rose nearly 10% over the past few days, moving into earnings. The stock was near its upper bollinger band, and it will be opening outside of the top of the band, which is a major suggestion of….PROFIT TAKING. Buyers of this stock were waiting until earnings, and we are going to see a large unloading of this stock. Yet, with an average volume of only 400,000, not a lot of investors are looking for SHFL to add to their virtual portfolio. That means those sellers are going to be replaced with short interest and low demand. This will cause the price to fall.
Get in early and enjoy the short.
Entry: We are looking to get in at 9.70 – 9.80.
Exit: Looking for a 2-3% gain.
Stop Buy: 3% on top of entry.
Good Investing,
David Ristau
