Keep Your Cool

I’ll be honest, I’m swinging for the fences with the ideas and setups I trade and discuss here.  I’m using a lot of leverage and hoping to be compensated for the risk.  It’s basically a big psychological game of chicken against my own fear and greed and various other emotions that all occur when winning and losing money.  That’s my version of trading in a nutshell.

In order to bear the psychological strain I like to plan ahead and work in some contradictory research just in case all of my best laid plans go to hell.  If I feel like I have too much one sided exposure I want to be able to quickly deploy a few ideas contrary to my primary thesis – as a hedge.

As you probably know, my forecast is for more blood, basically a test of the 2007 high’s on the Russel 2000 Index before we see a nice bounce in equities.  In this article I’m going to share how I’m planning for the eventual bounce by monitoring which companies are holding up well.  As I mentioned in my last article (with a horrendous cover photo much to Le Fly’s displeasure) I discussed buying strength and selling weakness: One Weird Trick to Pick Stocks!!

In a similar fashion to the exercise in that article, I find it valuable to evaluate companies that are trading UP in a hugely DOWN tape.  These are the companies that I will go long either for a bounce, or to hedge my short exposure.

Therefore, I ran another screen using the following metrics:

• +Mid-sized market cap. (over $2bln)
• Average Volume over 1M
• Optionable and Shortable
• Price over $5
• Priced above 200 day simple moving average
• and most importantly: Price UP

I then removed the Utilities and Gold companies (which may honestly be good buys here) and the Oil & Gas companies.  Remember, I’m not going long commodity exposure until this happens.

The results included about 25 companies that I then scanned for 2 qualities: 1) Solid Charts, and 2) Option liquidity.  The last part is qualitative and everyone will have their own opinions, likes and dislikes.  Note: option liquidity is important; there’s probably only around 250 companies with enough option volume to have tradeable bid/ask spreads – which substantially shrinks the universe of possibilities.

Here’s the results (in no particular order):

1. Allstate Corp. (ALL) – Financial
2. Altria Group Inc. (MO) – Consumer Goods
3. Comcast Corp. (CMCSA) – Services
4. Lockheed Martin Corp. (LMT) – Industrial Goods
5. Raytheon Co. (RTN) – Industrial Goods
6. Verizon Communications, Inc. (VZ) – Technology
7. AT&T Inc. (T) – Technology

So Here’s the Trade:

Going forward, I’ll monitor these names for continued relative strength.  If I think the market is going to turn or I need a hedge simply to reduce the psychological stress, I’ll go long one or more of those companies – following some sort of structured plan.

I’ve provided two examples below.  The first is Raytheon (RTN) – refer to the long term chart first, then the short term structured setup:

Pretty simple here – enter on a break of the green line, scrap the idea on a break of the red line.

Next up is Lockheed Martin (LMT) – long term, then short term:

Same idea – enter on strength (green line), scrap it on weakness (red line).

As an aside, I’ve been trying to come up with long term “investor” type ideas.  If I had a lot of money to manage I’d be focusing on three areas:

1. Military/Defense Spending
2. Health Care
3. Water

I’m still researching these areas, and it’ll be a future article topic, but I’m glad my screen turned up some companies from these sectors.

Last note: Monday is extremely important, the markets are hovering on short term support.  If we break down below it there should be a significant flush.  So sharpen your swords and put on your best armor Monday morning, it should be interesting.

Follow me on Twitter @dyer440.

 

 

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