Airport Security Macroplay

  • October 22, 2001
  • Peter Navarro

Peter
Navarro is an active swing trader who trades using a methodology he developed
which identifies sharp moves in stocks that are triggered by major events. When
he’s not trading, Peter is a business professor at the University of
California-Irvine. He holds a Ph.D. in economics from Harvard University and is
the author of “If
It’s Raining in Brazil, Buy Starbucks: The Investor’s Guide to Profiting
From News and Other Market-Moving Events.” “Give
a man a fish and feed him for a day.
Teach a man to fish and feed him for a lifetime.”
That will be my philosophy in this column as I present
you with a variety of examples in the “art of the macroplay.”

Sometimes these examples will be historical as in my
last column when we reviewed how to “chess play” the proposed
acquisition of U.S. Air by United Airlines.Other
times I will discuss stocks and industry groups where a potential macroplay may
be setting up. These will be situations under development that you should keep
an eye on.

For the most nimble
traders, there will rarer times at which an event takes place and I will let you
know what macroplays I am looking at.

But my broader point here is that I will not generally be in the business
of “picking stocks” for you, but rather helping you develop a macrowave
perspective on the markets. This
macrowave perspective should ultimately — and greatly — improve your stock-picking
capabilities.

Let’s dive in, then, to this week’s macroplay.
The key teaching points will be assessing downside risk and the
importance of “basket trading.”

Right after the Sept. 11 terrorist attack, the savviest of
Wall Street professionals started combing the equity markets for stocks that
specialized in airport security. Out of
that search, at least four of these stocks would dramatically gap up when the
markets reopened on Sept. 17: Invision
Technology
(
INVN |
Quote |
Chart |
News |
PowerRating) makes 3-D baggage scanners; Magal Security
(
MAGS |
Quote |
Chart |
News |
PowerRating) specializes in
airport perimeter defense; Viisage
(
VISG |
Quote |
Chart |
News |
PowerRating) focuses on
face recognition systems; Visionics
(
VSNX |
Quote |
Chart |
News |
PowerRating) markets
face-recognition technology as well as
other “biometric” identification systems such as live scan fingerprinting.

As a rule, I don’t like to open positions in stocks that experience
large gap-ups.
In addition, all four of these stocks passed both my technical analysis
and fundamental analysis screens (more about that in another column).
Thus, it seemed to me a low-risk speculation to open positions in all
four.

These charts show what would have happened if you had opened positions in all
four of the stocks a day or two after the initial gap:


Note these three points.

  1. Of the four
    stocks, none turned out to pose any real downside risk.The
    gains from both
    (
    MAGS |
    Quote |
    Chart |
    News |
    PowerRating)         and
    (
    VSNX |
    Quote |
    Chart |
    News |
    PowerRating)
     were modest at best after the gap-up.
    However,
    (
    INVN |
    Quote |
    Chart |
    News |
    PowerRating)         represented at least a “double” in baseball lexicon,
    while
    (
    VISG |
    Quote |
    Chart |
    News |
    PowerRating)         was an absolute home run.

  2. The best
    way to play this basket trade as a short run swing trade might have been to
    close your positions in MAGS and VSNX after several days and then add to
    your positions in both VISG and INVN. (More
    about scaling in and out of trades in a later column, too.)

If you have
a favorite macroplay you would like me to feature in this column, send me an
e-mail from my Website (https://www.peternavarro.com).
I’d love
to hear from you.

Peter