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| Don't Be An Average Trader |
by Doug Sutton |
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We are in the midst of earning's season and the market could not be any more crazy. Today, most of the stocks that were reporting posted better than anticipated earnings and the Dow managed to break a 5-day losing streak. This week the housing sector posted good permit applications and sales numbers, two indicators that bode well for a continued strong housing market. Many of the basic economic indicators are weak and the latest rumor on the street is that the Fed MAY cut interest rates another 25 basis points to a 60 year low of 1%.
So, what are you going to do? The answer is, "Don't be average!" Don't do what everyone else is doing. Trade different stocks or indices, trade different strategies that adapt to the current market environment and follow Mr. Miagi's advice to Daniel san in "The Karate Kid"; "Daniel san, the best defense is to not be there when the punch is thrown."
In this market, there are two tacks that bear your scrutiny. The first is to take a look at defensive sectors, sectors where money goes to hide when there is so much uncertainty. Precious metals are one area you should watch. From the end of 2000 to mid 2002 most of the gold stocks doubled in price while the rest of the equities market hemorrhaged. Many of these stocks have consolidated or gone down slightly as we have had a weak recovery in the equities over the last few months. Today, amid fears of war in Iraq the gold stocks surged. This could be an area well worth your attention.
Below is a six-month chart of the Philadelphia Gold and Silver Index (XAU). After consolidating for several weeks, the index is once again testing resistance.
Another sector that has often been a hiding place for capital is the pharmaceutical stocks. These companies
have a license to steal and they exercise their license well. Case in point, many drugs that sell across
the counter in the U.S. sell at 50-75% discounts in Canada. There is a thriving business by Canadian
companies selling prescription drugs across the border. The drug makers are threatening to boycott
companies in Canada who participate in this practice and there appears to be a trade war brewing.
The point is that these companies will go to any means to protect their bottom line at the expense of the
consumer, many of which are held captive by the drugs they take. If you are on the drug consumption side
of the market it is not a pleasing position to be in. However, if you are on the investing side of the market,
not many positions could be better. Add to that the fact that the pharmaceutical lobby is one of the largest
in the nation's capitol and contribute heavily to both parties. It is unlikely, no matter how much the
politicians profess pending change; that any drastic changes will be made that will adversely affect this
powerful industry. You might want to head for this protective harbor right now!
Before I leave this chain of sectors to watch I will add one more suggestion that may have merit. I have been
promoting the utility sector for three months. It is also a defensive sector which appears to still have some upside potential.
Now to my second tack that you might take. For the last four months I have been trading under the radar stocks,
that is, stocks that are undervalued and have improving fundamentals. It has been a real winning combination so far. I
have created a scan that lays these undervalued stocks at my feet and when the technical indicators present
themselves I pick up a bargain.
Part of my reasoning for buying the stock was that the company lost $1.42 for the last 12 months and the
estimate going forward was for a loss of $.11. That is a BIG change. I know it is still a loss, but boy are they
getting better at not losing so much! Add to that the fact that they were trading at a price to book of .74.
That means that if I were capable of buying every outstanding share of stock, I could sell off all the assets
and make a 26% return on my money. With this fundamental information in hand I waited for the technical indicators
to show the right time to buy the stock, jumped in and four days later jumped out with a nice profit!
The point to all this is that many of the most closely scrutinized stocks have been trading above the radar.
Everyone watches them and they are subject to every whim of the market. In the meantime, many of these little
under the radar stocks just keep doing what they have been doing because they are not nearly as closely watched.
So far it has been a highly profitable strategy to be trading, especially in these turbulent times. Join me at
www.marketmastergroup.com for more commentary and access to a list of my upcoming events.
Good luck and good trading
Doug Sutton
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Next: Market Mind Games
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