Friday, July 24, 2009

Bottom Fishing Revisited

Back in early March, I managed to do something I didn't realize I was doing at the time. I called the bottom in equity markets almost to the day. But I wasn't actually expecting that to mark the bottom for the spring. That, I was convinced, wouldn't happen for at least 2 weeks thereafter. At the time I was riding a pretty unreal streak of calling tops and bottoms in the market. So confidence, was, to say the least, of little issue. I suppose it serves me right that I wouldn't participate in a monster rally (not much anyway). The market has a way of keeping one humble.

However, I did manage to do a pretty good job in picking which sectors would yield the best returns based on both fundamentals and technicals. In my March 3rd article, "on bottom fishing", I posted the following table:

The price data in the table above is from the close of March 2nd. The bottom would eventually come later that week. The rally in many of the names to date has been fairly impressive. Below are the returns (as of the close July 23):

INTC 58%, VMW 61%, MSFT 62%, CSCO 53%, GOOG 33%, AAPL 79%, BRCM 87%, QCOM 44%, JNPR 96%, ISRG 152%, ABB 56%, FLR 73%, PCU 102%, LO 30%, EBS (20%)

The average return of the above was 64.4%, handily outpacing the S&P 500, which from it's Mar 2 close at 700 has returned 39.5% in comparison. I see this as further justification for my method of choosing high quality companies without the burden of excessive debt and those which have been outperforming the overall market during selloffs.

My main hint for those stocks was that they, and the Nasdaq index in general, had not gone on to surpass their November lows while the large cap indices (Dow and S&P) had. Nothing fancy. Positive divergence.

One could argue, though, that buying financials or other distressed companies at the time would have done better. Yes, perhaps. The first few weeks of the rally, especially, would have been profitable. In fact, the only trade I made was taking a double on some JPM calls. The immediate upside is always greater on securities that have been under panic selling. But the increased upside also comes with increased risk. What if your upside trading vehicle was CIT, KEY or RF? It is a hit or miss strategy. Not to mention the fact that finding a bottom on something falling like a stone is no easy task and provides no common sense levels for putting out stop-loss orders.

So what now? After an enormous 18 week rally, perhaps longs would be wise to learn from my mistakes in March. In other words, don't look a gift horse in the mouth. The S&P has touched 980 as of yesterday. Everybody and their dog is looking for "round number resistance" at 1000. It very well may be time to take the trade and wait for better opportunities. Even if one is of the persuasion that "the bottom is in," after experiencing gains that most would be happy to see in 4 years, cutting loose should be fairly easy for now.

Picking up dimes in front of bulldozers is only profitable to a point.

For those of the opposite persuasion, there may be opportunities on the other side. With the major averages above their early January highs, finding relative weakness in various sectors may prove profitable. Financials, utilities, and REITs are all showing such weakness. It should be of no surprise that these are the most debt dependent sectors. Their weakness is very telling. Credit markets have not completely unfrozen - not for unworthy borrowers. And this suggests that the credit crunch of 2008 is ongoing.

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1 comment:

Roger J said...


Apologies for being a little OOT again. Just found this piece by Hugh Hendry (June 2009 Newsletter -- hard to find!), but he seems to have a very interesting chart there on CNY vs. crude oil. His other takes are also interesting, but that particular point attracts me the most.

Perhaps this could spark some idea in you?

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