9/09/2006

Black, white and lot of grey

We are not in an environment where one can load up on a good earning/sales/momentum play and hope to double money in few months. The market lacks broad based momentum. What is working is selective stocks. Selective earning plays like GROW, NVEC, SIM,IAAC etc. Moves are of smaller magnitude.

At some stage the market will again set up for broad based momentum either before or after the upcoming earning season. If lot of companies do not pre announce bad results or warn, we may be in for interesting times. Or post earnings if we find most companies are handily beating earnings then we will again have a good rally.

What if the market breaks down? The short opportunities will emerge amongst three types of groups.

a) Stocks still trading at top of range . These are mostly concentrated in oil,steel, silver and some technology sectors where stocks have rebounded. They will get pushed back to bottom of range to form possible double bottom.

b) stocks which are already down and consolidating near their bottom of their range. Sectors like home builders, leisure, retail (some), transport etc. There is little proof of this happening currently.

c) New high priced IPO's in recent years will break below their all time low. e.g. BIDU,BOT, ICE and many stocks in energy sector which have IPOed recently.In my experience shorts work only if the entry is synchronised with the general market decline or one shorts very close to the top and holds on for six months or a year.

I am mentally prepared for either of the scenario. It might happen that the market will do neither and continue to trade for long time in a range.

Macro calls and economic analysis is a nice pre occupation to generally engage your grey cells, but if you want to make money I believe it is much better to use statistical patterns and edges to generate trades. I have several tools I use to generate trading ideas and most successful traders I know similarly use some sort of patterns to make consistent money irrespective of the trading conditions. A overall market drift in either direction is a nice bonus.

My objective is to look for out sized returns irrespective of market direction and I am more proactive in finding opportunities and quickly entering them or exiting if they do not work. In a range bound market it is still possible to make money but you need a lot more anticipation.

You have to look at opportunities at bottom of range or in beaten down stocks as they rebound from bottom. You have to be very quick to identify or anticipate an emerging sector and enter. When normal methods do not work you have to look at other things in your bag of tricks. So I am revisiting several approaches which I have researched in the past but sparingly use to find opportunities.In bull market it is easy, you just buy breakouts and market takes care of the rest.

So where are the possible opportunities:
Trucking and transportis one sector which has been driven down majorly, I am anticipating a bounce now that oil is retreating.

Technology is one sector where you will find some nice opportunities. Many technology stocks have been consolidating for a year or two and some are breaking out. Like RIMM did recently. Similarly if you look you will find many more stocks like RIMM.

Stocks breaking out of multi year range like SYX, VSNT, LNN, ERJ etc.

4 comments:

AJ said...

Hi easyguru,
What are your thoughts about the coal sector? They've been beaten down recently. Do you see more downside or a possible bounce?
Thanks,
AJ.

Pradeep Bonde said...

More downside. There were too many energy bulls. It will take time for the seling to play itself out. Transport is very different sector, most of the time when it reaches lower end of range, it is good buy. Run some quanti tests on the sector and you will see what I mean.

amit said...

Hi Pradeep,

With todays sell off in metals, would you say SIM is a good buy or 'stay away for now' kind of stock? (at 12-12.20 levels)

Best regards,
Amit

Pradeep Bonde said...

Stock (SIM) is up 100 since last earning. Plus when you see a move like that in the sector run, unless you want to committ suicide. You can always enter it later if it sets up for another rally.