With a strong earnings report yesterday Baidu surpassed analysts’ expectations but seemingly didn’t surprise investors. Despite beating on the top line by 4c, revenues by a small margin and guiding revenues up for the next quarter, the stock was a relative laggard today. Revenues growth of 74% over the last year was still exceptionally strong for a company of this market capitalization.

The total Chinese search market grew by 53.2% in the second quarter alone, which seems to attribute massively to the revenues jump of Baidu’s latest quarter. Only the second reason was the decreasing competition from Google.

During the last 6 month Google lost 5.5% market share of the Chinese search market down from 32.8% and Baidu gained 6% over the 64.8% it had at the end of 2009. Due to Google’s semi-exit in the Chinese search business, Baidu was able to abruptly reverse the longstanding trend of the years before, where Google ate slowly but steadily into Baidu’s market share. For comparison here is the long term chart of GOOG since its IPO.

Google seems to be already a mature company, while Baidu’s fundamentals are still shooting up. But after the hesitance BIDU showed today to reward investors for this phenomenal quarter with an exploding price, my conclusion is still the same: For Baidu it is probably better to wait for a breakout of the base in the long term trend and Google is the inferior investment compared to Baidu.

After the close yesterday Apple reported a strong quarter. Visible in this weekly chart, the first two quarters of this year didn’t fall back from the Christmas sales peak (blue – revenues, pink – earnings). Apple ignited the afterburner.

The Cupertino company is already the tech vision leader and will soon surpass Microsoft with regard to revenues. Especially astonishing was their revenues guide for the next quarter. Apple used to play it safe and predict only a modest outlook. This time they seem to expect sales far above analysts consensus.

Either they want to color the negative headlines of Antennagate more positively and convert them into free advertising. Or the iPad sales were constrained this quarter mainly by supply and not demand and they expect the situation to improve. If it is the latter, Cirrus Logic may even be the better investment or trading vehicle.

CRUS follows Apple’s stock more closely on an intraday basis than justified by fundamental data. In the longer run it shows relative strength compared to AAPL. The market seems to expect a bull run in “gadget chips” for the next years.

Directly after the earnings report of Cirrus Logic this morning the stock didn’t react much. It was down with the whole market and with Apple. The correlation of Cirrus’ and Apple’s stock is remarkable. Cirrus’ rally today was more attributable to the move of AAPL ahead of Apple’s earnings release after the market closed than anything else.

Cirrus Logic beat by a penny and guided revenues for the next quarter up. The weekly chart demonstrates that this company is on the move these days.

The pink earnings line shows something else, namely a relatively small PE ratio (15 for the latest quarterly results extrapolated to a full year). The market still fears the cyclical semiconductor nature of this stock and is not willing to let its price shoot up more. Should the smart phone and tablet computer craze continue and Cirrus be profiting from it, Mr. Market may finally change its stance on this.

The chart above of the last 9 years shows clearly that CRUS used to be a cyclical stock. However, the rise of the blue revenues line and the driving growth prospects behind it are encouraging. Eventually this is a semiconductor stock and it will regain its cyclical character, but there is potential for an intermediate growth ride.

With starting the category “System” of this blog, I am going to give you a short overview about quoTrader’s trading philosophy.

People seem to understand very different things when it comes to trading systems. Some main interpretations go like this:

1. A formula or an algorithm that puts all trading decisions at its best completely into the hands of a computer, in order to build the most automated trading robot.
2. A simple but ingenious trading trick or piece of knowledge that gives its user an advantage, to which all trading behavior than could be adapted.
3. A complex description of how to become a better trader or investor.

The first route is the enticing one. Nothing more to be done and the money keeps on rolling in. It looks logical, because you just have to explore the universe of all possible trading methods, possibly again with the help of a computer, and then you have something all others don’t have. This secret is a relatively simple algorithm and as such it can be transformed easily into a program.

So far so good, there is just a little problem. If there is indeed a secret trading strategy, made up of a few parameters of a simple program, it will not remain very long secret. There are large trading houses, creative and hard working programmers, and similar wizards who search with tremendous effort the markets for such auto-traders. Very soon too many exploiters of this regularity will smooth it away. This approach is in my opinion more wishful thinking than anything else.

The second idea, looking for the trading trick, is not much better. It is merely a clone of its predecessor in this little abstract list of trading systems, just without the computerization aspect.

Naturally we arrive at item number three, the one that is not the magic bullet and that still sounds like much work and risk of failure. Right! Think about it, if you expected it to be easier, you will eventually find that a market consisting of many smart participants inherently means the opposite. Making money with trading and investing can’t be as easy as hoped by admirers of the first two magic money ways.

Consequently the quoTrader system is only a type 3 trading system. It tries to embrace as many algorithmic pieces and trading tricks as possible, but it concentrates on the individual trader who has to put all this together. So far I have not been able to create the magic bullet system consisting of a very few mechanical things.

In order to make it better understandable what is wrong with the first two approaches, I plan in this blog category to introduce various great traders, interesting trading systems and also pieces of them like type 2 trading methods and compare all these with the quoTrader system.

On Thursday Google presented its quarterly earnings. It disappointed expectations at the bottom line and only beat a bit on the revenues side. The stock went down in after-hours trading and during the next day. The year-over-year growth looked good at a quick glance, but as the blue revenues curve of the long term chart shows, it came partly from the dip during the financial crisis.

Google is since two years a slower growing company and since more than four years its stock price didn’t move substantially. If we look at the market cap of 146B, this is no big surprise either. Something like a few hundred billion dollars seems to be a wall for companies, at least in this era.

Compared to Baidu, Google is clearly the less interesting investment and trading target.

Yesterday Apple got hit by news that a prominent consumer organization recommended to skip the iPhone 4 because of its faulty hardware. In their eternal search for the coolest appliance Apple seemed to have found a phone that does not work anymore as such. Really cool. Anyway, what I want to show here is the linkage between Apple’s and Cirrus’ stock:

The top chart is from CRUS and at the bottom we have AAPL. Yesterday the market was way up, but AAPL dipped and CRUS was also relatively weak. But overall CRUS shows a hefty relative strength compared to AAPL. Both react of course to the whole market with Apple being at least relatively strong against that benchmark.

So far CRUS is nicely up since my last post about the gadget mania. Earnings will be reported next week on 7/20 before the market opens. Hopefully the new era of small and cool hardware will propel it even more into the sky – to the place where it belongs.

This morning Baidu takes a hit premarket and Google jumps up, because Google’s license for operating a web site in China has just been renewed. Looking at Google’s weekly chart reveals that the stock has been a laggard compared with the indices over the past months. The main reason has been the problem with the Chinese authorities, but there were also other clouds visible on the horizon.

Baidu’s chart shows that the stock has risen 6-fold over the last 18 month. Given the news today, the price could have exhausted its shorter term potential for now. So, GOOG has perhaps some snap-back potential, but isn’t at a high, while BIDU is at a high, but seems also to be expensive, at least in the short run.

Pricewise this is the classical situation, which leads so many to believe that the stock that fell back is the better investment candidate. Wrong, at least generally. In this case, however, there is new information involved. Google’s prospects in China don’t seem to be so dim as many have argued in the past.

Conversely there is still a risk that Baidu gets crushed by Google in the long run. It was the perceived elimination of this risk that made the stock run up so much, and not only the possible gain of Google’s current market share of web search in China.

Conclusion: For Baidu it seems better to wait for a real breakout of the base in a trend formation. Google may have some short term potential right now, but its growth also slowed down considerably since two years.

During the last half year and especially the last month SanDisk’s stock has had a remarkable relative strength compared to the whole market.

This maker of flash memory is one beneficiary of the strong trend towards smart phones and tablet computers. Right now its chart has also the promising pattern of a restart in a longer trend.

However, there is a big caveat with this stock. As the long term chart reveals, SanDisk has a highly cyclical product, memory chips, which is probably the mother of all cycles. It remains to be seen whether this stock will be able to convert its cycling nature into a secularly trending growth monster, at least for some time.

Yesterday’s spooky break down of the markets culminated in some stocks having losses of nearly 100%. The exchanges now try to “correct” this implosion after the matter of fact with a crude rule that cancels all trades with more than 60% movement in a time frame of 20 minutes. They seem to call this ad hoc rule the “Clearly Erroneous Ruling Policy”.

But were these trades clearly erroneous? Most of them were probably caused by stop and market sell orders that didn’t find buying counterparts. From an exchange-technical point of view this is business as usual – nothing erroneous. Viewing it from the flip side, the legal angle, most likely exchanges are completely within the law with their invention of ad hoc policies like this.

But does such a ruling make sense for traders and investors?

• For traders who rely on a stop loss system, a monster drop like this may be demoralizing if they lose their position near the low.
• Aggressive traders using margin may be put out of business. Their broker may liquidate their position at exactly the wrong time. Or they do it themselves with a market order that gets delayed under fast market conditions. Both likely profit from the trade cancellation.
• Investors not knowing about a stop loss are mostly unaffected by temporary crashes like this.
• Those professionals who think they can buy dirt cheap, may find themselves with one leg chopped off if their sale occurred outside of the arbitrary trade busting time frame.

Overall, I think, it indeed makes sense to protect the ordinary trader who tries to prohibit substantial losses with stop sell orders.

For visualization purposes let’s have a look at the weekly chart of URE, a real estate ETF. Yesterday it seems to have crashed by more than 90% in a few minutes before rebounding to a day loss of only 10%. One year ago it got devalued by roughly the same factor 10 during the financial crisis.

Investors would have lost in half a year the same amount as traders in half an hour. But investors do this regularly, because stopping a position is nothing they have in their toolbox.

The conclusion for me is that, while yesterday the traders were worse off than investors, generally it is the other way round. In other words, it still pays off to use the stop loss technique.

Another conclusion may be that many ETFs seem not to have built real trust with regard to inherent value. The market apparently views them more as trading vehicles whose fundamental value is more or less unknown.

And the final conclusion for quoTraders is of course to use a system that concentrates on bigger stocks with real value and promising growth outlook, but doesn’t rely on fundamental analysis while the ship is slowly sinking.

Among the things a quoTrader should never do, is trading stocks that depend on the FDA. Just look at this terrible chart of InterMune. Yesterday news came out that ITMN received a “complete” letter from the Food and Drug Administration, the stock got halted – especially nasty, namely intraday – and reopened with a loss of 75%.

All this after it made two days ago a restart in something that can only be called a violent trend. Of course it is also a suspicious trend, because of the double gap that essentially accounted for the whole move.

If you had shorted it some weeks ago, you could have incurred a loss of even 200%. Here we have another thing a quoTrader won’t do: Going short, at least not with single stocks likes this one.

The reason for the up and down is the same medicine and a “slight” change of opinions from officials about it. In this case it seems to be a law that requires studies and not only one study that show that a drug is overall a gain for patients. This prompted the FDA to demand a third phase III trial after external experts (an outside panel of the FDA) recommended an approval earlier.