Some Golden Trading Rules
In my book “If It’s Raining
in Brazil, Buy Starbucks,†I counsel two golden trading rules: (1) “buy
fundamentally and technically strong stocks in strong sectors in an up
marketâ€; or (2) “short
fundamentally and technically weak stocks in weak sectors in a down market.â€Â But what do you do at a time like this
— a treacherous, cross-current
market — when there is no clearly discernible market trend?
One strategy is “don’t just do
something, sit there.†This is
essentially a flat strategy — stay mostly in cash with tight stops on anything
you own. At this point in time,
“just sitting†is not a bad idea at all. BUT this doesn’t mean that you detach from the markets.
On the contrary, what you should
be doing is regularly looking for stocks that will make strong moves up or down once
we get a clear indication of the trend. In fact, in such a time, you should likely be doing even more research
and preparation than you normally do. BE
READY TO POUNCE once the trend is revealed.
The second strategy is to more
aggressively hedge. The idea in
this kind of market is to be market neutral, but to still skew the odds in
your favor following my two golden rules above.
That is, you don’t just go long
some stocks and short some stocks to achieve neutrality. Rather, you go long only strong stocks in strong sectors — if the
market trend turns down, they will fall the least. And go short weak stocks in weak sectors — if the trend turns up, they
will be pulled up with the rising tide the least. This strategy is intelligent speculating — putting the odds in your
favor around market neutrality.
As for the market trend, it will
ultimately be determined by the macroeconomic environment. This week, here’s what to watch for:
1. Consumer confidence: Two
reports will be out this weak. Any
sign of a weakening consumer confidence, and the markets will likely react very
negatively. Consumption is 70% of
the GDP!
2. Alan Greenspan: Will the Fed
lower interest rates a 12th time? Probably not, based on Greenspan’s upbeat assessment last week of the
prospects recovery. But there is
something a little weird about that pronouncement because it came after
Greenspan’s own bearish assessment just days before. So maybe he will lower rates one more time — which the markets would
dearly love. You may be able to
play this possibility with little downside risk since the markets expect the Fed
to stand pat.
3. The January Unemployment Rate:
Since unemployment lags a recovery, the rate for January may increase.
That’s dog bites man. If,
however, the unemployment rate shows signs of stabilizing or even goes down,
that would be big news and give the markets an upward jolt.
4. Bush’s State of the Union:
There’s a big buzz that Bush will limit asbestos liability and announce it in
his speech. Minnesota Mining and
Dow Chemical bumped late last week on the anticipation. The
bigger reason to watch is that it might give some lift to the markets.
Stocks of the Week
1. Research in Motion
(
RIMM |
Quote |
Chart |
News |
PowerRating)Â
I did an earlier column about this
and predicted wireless e-mail, à la RIMM’s Blackberry system, could be a winner. So far, it’s still a no-go. However,
stock guru Abby Joseph Cohen (who a lot of people listen to for what appear to
be inane reasons) made a big deal about RIMM in this week’s Barron’s. Unless the Nasdaq goes totally in the dumper (a real possibility), look
for RIMM to get a little pop from the “Abby effect.†Echelon
(
ELON |
Quote |
Chart |
News |
PowerRating)
This is a pretty pure macroplay
based on using technology to improve energy efficiency. The “Lon Works†system can be used by homes and businesses to turn
lights, heating, cooling, and other energy functions off and on. Pretty cool stuff.
But be careful with your entry. ELON is flashing overbought signals, but otherwise, technicals are
excellent.LAST TAKE/FREE OFFER: I’ve
just completed a presentation called “The Art of the Macroplay.â€pnavarro@uci.edu. First ten folks to ask will get it.
Otherwise, sit tight and monitor
the macro pulse. And remember, I
want to hear from you.  https://www.peternavarro.com.