Speculation Versus Gambling?

The NADSAQ closed up 7 points on heavy volume of 1.7b shares and breadth was positive at 17 advancers to 12 decliners. The Dow Jones was essentially flat with slightly negative breadth. The out performance of the NASDAQ should warm the hearts of the nervous Bulls. The Small Cap sector was solid, but Semiconductors lagged. Overall it was consistent with recent action.

There were a few sharp intraday negative reversals in key stocks i.e. Texas Instruments (TXN), which raised some eyebrows. However, fundamentally strong stocks are allowed to show negative reversals after recent declines as an indication of a final rinse. We expect TXN to be a good case in point.

Baidu (BIDU) was up approximately 16% today, making three straight days of significant gains. Speculative names like this one usually come in three different flavors: (1) unknowable growth potential, (2) quantifiably outstanding growth potential, and (3) market participants feeling more knowledgeable than company's expectations of growth potential. Your friendly neighborhood Kcap Team is willing on occasion to take long positions in the first two speculative scenarios. However, when traders run a stock up based on future growth potential that is greater than what the company is forecasting the risk/reward ratio is too substantial. Although companies are often conservative in their guidance, traders ignore their forecasts at their own peril especially when playing extremely high multiple stocks.

If You Held a Taser to Our Head:
BIDU's recent guidance morphed its stock from scenario one, unknowable growth expectations, into scenario three, ignoring management's growth expectations. Therefore, traders who buy BIDU stock at this time will most likely be subjected to disastrous pain when it becomes clear that the company wasn't lying. This will be the case even if the company delivers an excellent earnings report. There is a difference between speculation and gambling and BIDU stock just crossed over.

Have a good night.

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