The earnings figures released over the last month are absolutely hideous, scary really, yet Wall Street hails them as a sign of recovery and safety.

Revenues are at a fraction of where they were this time last year, yet they beat analyst expectations.

Earnings, if a company is lucky enough to find a profitable strategy, are down by figures like 80%, 90%, even 95%, yet shares are moving up. Investors figure even a couple of bucks in free cash flow is better than nothing.

But what so many investors and even analysts are overlooking is where the surprising figures are coming from. According to reports like today’s dismal same-store sales figures, the extra cash is not from spend-happy consumers.

Instead, companies are slashing headcounts, cutting services and doing absolutely anything they can to increase their margins. In other words, they are burning their house down to cut their electricity bill.

It is great in the short term, but what about the long-term effects?

Not going to be pretty

A perfect example of the recent phenomenon comes today from HSN, Inc. (NASDAQ:HSNI), a.k.a. the Home Shopping Network.

Shares of the couch-potato-friendly shopping channel are up by about 20% today on the news the company was able to cut costs and increase margins enough to squeak out a profit of $11 million even though revenues dropped by 8% during the quarter.

For some perspective, this time last year the company reported a loss of $249.8 million.

The comparison begs the question why didn’t the company cut costs last year when it was hemmoraghing cash?

Easy answer… it did not make strategic sense. It would have been detrimental to the company’s core business if it made a drastic cut to expenses.

So why did the company do it this time? It had no other choice. With credit tight and few signs of any worthwhile recovery, it was cut or be cut for HSN.

But that does not mean the reductions in spending are any better for the company now than they were this time last year. Chances are, we will see the detrimental effects well into the future, in the form of lost market share and slow growth.

For HSN and the plethora of other companies making the same margin-boosting reductions, the key variable will be if their cuts were less detrimental than their competitors’ cuts.

No time to think… just hope and  pray

When marketing, employee benefits and customer service expenses are reduced, there is no doubt it will have a negative impact on a company’s future growth. All there is do is hope its competitors cut just as much or more.

This is an ultra-important consideration for today’s investors. While the bulls may be rushing forward with no ultimate destination in mind, eventually the turnaround stories are going to come to an end and the markets will beg for organic growth.

The only companies adding to their shareholder wallets will be the firms actually able to increase top-line growth. These days, there are not too many of them out there.

Education companies like Apollo (NYSE:APOL) and Grand Canyon Education (NASDAQ:LOPE), which earlier this week announced a 72% top-line increase, are good candidates going forward.

So are companies like, I can’t believe I am going to write this, Sirius XM Radio (NASDAQ:SIRI).

If you can handle the throng of annoying, Howard Stern-obsessed shareholders and the risk associated with the penny stock, today’s report that the company managed to meet expectations and increase its top-line by 1% is some of the best news the company announced in a long time.

Basically it is like this: You can burn down your house to lower your monthly utility bills, but when it is time to crawl into bed, you may regret the move.

Just because a company manages to cut its costs further than expected does not mean its share price should rise. The bewildered market is making a lot of mistakes these days.

Source: Burning the House to Save Money

At All About Trends, the action in leading stocks — stocks that have delivered solid returns during this rally — is what we use to gauge the health of the market. That’s because in order for the market to continue to advance, the leaders must lead the market higher. And lately, those stocks have struggled — just look at AMZN, SNDA, NFLX, BWLD, JOSB.

That said, it’s not surprising to us to see what’s happening in the NASDAQ. And since the NASDAQ often leads the market, we expect to see topping patterns in the Dow and S&P very soon.

As you can see above, the NASDAQ has formed a Change In Trend pattern — from up to down.

Typically, there are three short sell set-ups that provide the best opportunity for low-risk gains. They are:

• Double Tops
• 1st Thrust Down
• Pullback Off Low’s

The above chart of the NASDAQ sports all three. The first clue that a change in trend is near is the formation of a double top (the red lines). Then, we have the first thrust down, which you can see from the second top down to the start of the pink line — the stocks that have led the NASDAQ higher are also now showing a first thrust down which explains the selling in AMZN, SNDA, NFLX, BWLD, JOSB.

And finally, you have a Pullback Off Lows pattern (the pink line). When a stock or an index completes its First Thrust Down, it will eventually find support and attempt to rally. This rally attempt is called the Pullback Off Lows pattern.

All of these set-ups are tradable on the short side.

Let’s start with SNDA first.  SNDA formed a solid Double Top pattern. This is what it looked like before it triggered a short-sell trade:

When it broke its pink uptrend line, it began its First Thrust Down.

JOSB is another example of a stock that is in the First Thrust Down phase.

As you can see, JOSB formed a double top as shown by the red line. The blue box is the first thrust down which is often a steep, quick sell-off — in this case JOSB has lost 14% in just two days.

These First Thrust Down moves start when a stock tops and then breaks its upward trendline. The place to take the trade is at the trend line break.

Finally, after a stock completes its First Thrust Down, it will eventually attempt to rally back. When they do that, they will form the third short-sell pattern we look for called the Pullback Off Lows pattern. LOPE (NASDAQ:LOPE) formed this pattern back in March and here’s what it looked like as it triggered:

This pattern is the exact opposite of the Pullback Off Highs pattern we’ve discussed in the recent past. It’s also usually the start of many trades we can do on the same stock. As you can see here, when a stock reverses course and starts making lower highs and lower lows, each rally attempt is a new short-sell opportunity.

Sincerely,
David Grandey

Source: Three Ways to Short Stocks