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The Bull, Bear Debate and the Best Trade of the Week

By minds will significantly outperform, and particularly those tied to the most nimble traders because there is a possibility that both the bulls and bears are wrong.

Forget for a second how tricky and volatile the daily swings in this market have become for some very smart people. In my career I have never seen such disagreement about what kind of longer-term market we're even in to begin with. I don't call those, but I will say a lot more of my buy-stops are getting hit than sell-stops. I operate under an assumption that I cannot be helped by any economic tailwinds, only hurt by headwinds and then plan accordingly.

Click here to enlarge.

I must admit to a good deal of surprise, however, when I read how convinced a lot of folks I respect greatly are that we are already in a bear market, and that a recession is either happening now or a foregone conclusion, and that a depression is a possibility. I don't rule out anything and consider everything but on these subjects I think, at the very worst, the jury is still out. The chart above means little to me, frankly, but it's hard for me to see the certainty the bears do, and strangely to me this community is far more convinced, perhaps even bordering on complacent, than the bulls.

Louise Yamada, who ran the technical analysis department at Citigroup when I was there and now runs her own shop, points to the fact that since 1900 rallies within bear markets have never exceeded 48%. Consequently, in her view, it is plain to see that since we have rallied off the bottom over 90% in the NYSE, 150% in Transports and 60% in the S&P something different is happening.

Hummingbird Market

Click here to enlarge.

I just have very little interest in being convinced of anything in here. Reading trends on overall markets, not just the S&P, is gumming up the works on a lot of brilliant black boxes right now.

I think red boxes are about to be valued at a premium again, and by that I mean what sits between our ears. I think open minds will significantly outperform, and particularly those tied to the most nimble traders because there is a possibility that both the bulls and bears are wrong. A wise young scientist named Matt Catalano came home and asked his dad, my partner, what is the only bird capable of flying forward and backwards?

A hummingbird. I'm not sure he didn't just call this market perfectly. I think the amount of head scratching right now is setting up as neither good nor bad – but rather, different. It has been, and I believe will be, an exquisite trading environment instead.

Carving Station

There are a lot of questions about whether it's time to dig in your heels and be a buyer or a seller of this market right here, with great points on both sides of the debate. My answer is still the same (as it always is) - I'm a buyer and a seller, not of the market but inside the market.

Looking inside the market, especially when the tape has been the bloodiest, offers several interesting tells. I run relative strength filters on those days the most. Consistently and conspicuously, Technology and Health Care (highlighted by some select Biotech) have been stubbornly flat or even green on some messy red days. Looking back even further offers a better clue of some sector rotation when you consider the Nasdaq 100 is outperforming year-to-date all of the broader averages, and almost quadrupling the S&P 500's return.

I respect those who choose to get defensive in periods of time like this but my approach is to get more selective. I will tighten some of strings on my traps that I set, requiring more and more from potential candidates from the long side. Mine is just a different version of defense, I suppose.

I'll give you an example and hopefully something to chew on. Consider that the Nasdaq 100 is now up 12% on the year. I sent each member through my carving station to find what has been even stronger inside this group. I set it to yield only the stocks which have outperformed their own index over that same year-to-date time frame, but also the last three months, last month, and last week. 18 finalists beat the number over every time frame. Then, I set the blade even thinner to slice off only those stocks whose top line revenue growth was accelerating (that's different from growth, it means its growth rate is growing year-over-year) and whose bottom line profit margins were expanding. Here is what was left on the cutting board:

Oracle (ORCL), Cisco (CSCO), Dentsply (XRAY), Citrix (CTXS), Intuitive Surgical (ISRG), Teva Pharmaceutical (TEVA) and Biogen (BIIB).

Despite running these numbers the day of the 280 point decline this week, you would have still found that Biogen sits pennies away from its 52-weeek high and Dentsply is less than a buck from its all-time closing high.

Back to School Means…

"Sports, sports, sports, sports."
-Homer J. Simpson

Our little girl just entered kindergarten, which of course means my wife was incredibly nervous… about what I would do to embarrass her at orientation. I cannot help it, but am I the only one who still feels trapped in the exact same brain as I lugged around back then? Sure, there've been a few synapses firing and making new connections over time, but why do I have the exact same urges to disrupt a teacher? I bit my lip hard and kept my promise (this year) and didn't act up. I just passed around several notes of questionable taste to others at our table, who became fast friends.

My wife was not the only one throwing around disgusted looks that night: there may have been a few momentum investors in attendance by the looks I noticed on faces when the principal announced that Crox (CROX) shoes were now outlawed in the school district.

In other unrelated rambling retail thoughts, my younger son Big Jack has a lot of spare time now that hours spent terrorizing his sister will drop considerably. He's ready to play sports, he tells me. We are eagerly awaiting the arrival of our first Dick's Sporting Goods Stores (DKS), just recently announced.

Sports dominated my school years. Playing a game is also completely responsible for me getting the only job I've ever had. Yet with a gun at my head I couldn't drive you to a sporting goods store in Houston, a city with more than 5 mln consumers, a lot of whom play sports year-round. I wear shorts in December and not just for the ladies.

Dick's is going to be a huge success down here, and has a wide open field to dominate. My friend Prof. Macke and I were discussing this week how poorly run the sports space in retail has been for so long. The former sports star and current TV star Prof. Adami notes that when taking his son to Dick's it's a challenge just to get to the register without wanting to grab more and more stuff. The stock is up five times more than the market over the past two years for a reason. It's up ten times more than the market this year for a reason. It sits near all-time highs in this messy tape right now for a reason.

The American consumer can be accused of plenty. Their decision-making skills can be questioned often.

Heck, I'll do it for you. How about that poor mom and dad who loved their son playing sports so much they got fired from their jobs for traveling with him to the Little League World Series? Their son hit the game-winning homerun in the U.S. Finals. And his mom and dad got multiple job offers after the story got out.

You see, bad economic policy doesn't mean you still can't make great trades any day.
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Positions in DKS and BIIB.
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