Sector Watch: Two Ways To Dodge America’s Mid-Year Malaise With iShares
June 30, 2008
Monday, June 30, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Take out a piece of paper. Write January 1 to June 30, 2008 on it.
Now wad it up into a tight ball and launch it across the room as hard as you can.
Feel better? That should help relief some of the tension from a truly awful first half of 2008 - and even worse month of June alone.
As the first half of 2008 comes to a close today, the major indexes are staggering along, with several major negative forces still continuing to pummel them.
Following last Thursday and Friday’s relentless selloff, the Dow Industrials dropped to a new low for the year and the index just recorded its worst June performance since the Great Depression. It shed 10% in June - which in technical terms signals an official correction.
It’s also within a whisker of dropping 20% from its 2007 peak, which economists define as a firm bear market signal.
As for the broader S&P 500 index, it got to within 15 points of breaching its own 2008 low, so it’s just another bad day away from joining the Dow.
Another index that made new lows last week was the Russell Top 50 index (^RTF). Although the Russell indexes are smaller-cap indexes, the Top 50 is constructed in a very similar way to the Dow, so it’s not surprising that it’s also at new lows for the year.
It’s certainly tough to find much good news on US shores at the moment. Aside from the Nasdaq, Dow Transports and smaller-cap indexes, which have held up pretty well so far, many investors can’t wait for the July 4 long weekend.
So I’ve focused my radar on potential overseas opportunities. And although the picture isn’t much prettier, there is one area that could offer some respite to weary American investors…
So Much For American Independence… We’re Heading Abroad For This Opportunity
A quick scan of the world’s leading indexes reveals that most of them are still trading above their 2008 lows.
I have to admit, however, that none of the indexes, both here and abroad, have particularly good-looking charts. For example, when I checked out Europe’s major indexes, I saw that France’s CAC-40 index had also made new lows. Since this index does not include such stocks as Bank of America and American International Group, it raises the odds that the correction has further to go.
Most other indexes are trading below long-term, weekly trendlines. However, I did find one ETF that hasn’t broken down… but is at a very critical area that offers a couple of opportunities…
At The End Of A 400% Run, This Market Now Has A Decision To Make
Over the past five years, one stellar ETF performer is the iShares MCSI Emerging Markets Fund (AMEX:EEM). Over that time, it’s surged more than 400%. Since May, however, it’s endured some selling pressure, along with the rest of the world’s indexes.
The fund’s major stock holdings come from assets in Brazil, China, India, South Africa, Russia, Mexico, Taiwan, and South Korea, which make up about 80% of the fund. So you can see that it’s well diversified. However, no more than 15% of its assets come from any one country.
This means EEM is at a critical decision point.
The Bearish Angle: A weekly close below the trendline, which is $133, would be bearish, bring on more selling, and should see a continuation of the worldwide correction.
The Bullish Angle: There is resistance at the $140 level and if EEM can manage to stay above the trendline and then close above $140, it would provide a good,
low-risk buying opportunity. If this occurs, I would use a close below $133 as a stop.
Enjoy the short week and your July 4 holiday.
Jim Stanton
Sphere: Related ContentCommodities Corner: Midwest Floods Trigger Corn Crisis… What It Means For Consumers And Commodities Investors
June 23, 2008
Monday, June 23, 2008
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
Welcome to the latest edition of our bi-weekly commodities roundup. This is just our seventh column - but we picked a good time to start giving you regular updates and profit-making tips.
We’re currently experiencing some of the wildest action and biggest moves ever seen in many markets. The price of oil and corn commodities alone have recently hit all-time highs, and as we forge on into the busy summer months, don’t expect much let-up in the action.
Let’s get started…
Midwest Flooding Claims Homes, Lives and A Piece of The Commodities Market…
While the energy market has continued to grab the bulk of the headlines, one massive regional event has resulted in the grain market grabbing more attention.
What started as merely a wet spell of weather in the Midwest quickly turned into a major disaster, as persistent rain and storms have resulted in catastrophic flooding across the region.
With thousands of residents forced to evacuate their flooded homes, towns submerged, and 24 lives lost, it’s a devastating situation. And make no mistake… although this has occurred in the Midwest region, the shockwaves are being felt across the whole country.
… And Leaves The Commodities Corn Market In Ruins
The Midwest is a major agricultural center, with Iowa the largest corn-producing state in America. And with millions of acres of cornfields flooded, this season’s crop is in serious jeopardy and the grain market has quietly made all-time highs.
We probably will see a total loss of the remaining corn being grown for this season. And as the media attention has propelled the market to the forefront of the news, it’s little wonder that the front-month corn futures contract just hit an all-time high over $7.50 a bushel. That’s $2 a bushel higher than the previous all-time high, hit in 1996 when the last great floods occurred in the Midwest.
So what does this mean for consumers and commodities investors?
The Trickle-Down Effect Of The Corn Crisis
Because corn is such a staple foodstuff, this will certainly have a trickle-down effect on other foods that rely on corn as a basic ingredient. For example, the cattle market (live cattle and feeder cattle) will be hit, as corn is the main feed ingredient.
The result of higher corn prices will likely cause farmers to lessen the numbers of their herds, thus reducing the supply of cattle on the market. In turn, this will no doubt cause the price of all meats to skyrocket at the grocery stores.
For investors, the situation poses a conundrum. While most markets are forward-looking entities and much of the loss in the corn crop may be factored into the price of the futures contracts, this is nevertheless an unprecedented loss to the crop, so it’s tough to say whether we’ve seen a top in the corn market yet.
The end of June brings a very important government supply and demand report, so we should see what the market holds when the report is released. Once farmers have had time to assess the damage, we may have a potential opportunity to short the corn market. But given the nature of this market, make sure you do so with limited risk option strategies like credit spreads, for example.
Let’s switch to the sticky stuff, and talk about the current price of crude oil…
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Price of Crude Oil Set To Break Past $140
Crude oil continues to chug along to even newer all-time highs.
The August crude oil futures (the current front-month contract) hit a high of $140.42 a barrel on June 16. This contract will act as the new benchmark for crude oil prices.
The surge means the price of gasoline has plowed through the $4 a gallon mark in many states - and may not come down any time soon, since we’re well into the summer season now.
Sure, there was an impromptu OPEC meeting over the weekend, but Saudi Arabia (the world’s largest oil producer) said it will only pump more oil if it feels it’s necessary.
While many folks would probably say “now!” is a good time to start, the theory is that the supply and demand factor is in balance for now, with price speculation and the low US dollar to blame for the runup in price.
The Saudis’ comments haven’t helped at all, as oil is up another $1 a barrel in today’s trading.
In technical terms, the crude oil chart is making a textbook “flagpole” pattern - one of the most reliable and bullish chart patterns you’ll find.
Don’t be surprised to see oil tack on a few more dollars rather quickly - and possibly blast through the $140 a barrel in the next few trading sessions. I know it’s hard to believe it could go higher than it already has… but we’re in uncharted waters now, so anything is possible.
Corn and oil aren’t the only commodities cruising higher…
Long On Natural Gas Commodities? Good Call!
Natural gas continues its continual climb, with hardly a breather - just look at this chart since February. With hurricane season officially underway and the southeastern portion of the United States again under threat, we might not see any significant pullback until the late fall. If you’re long this market, you’ve made the right bet. It will likely keep going.
Rangebound Metals
Gold and silver seem to be working themselves into a new trading range, with some large intraday swings along the way.
Once they find their breakout direction (higher or lower), they should continue in that direction for the foreseeable future. Both are still taking much of their activity from the oil market, so it’s wait-and-see for now.
But with both metals getting close to hitting their long-term support areas of the 200-day moving averages, they could eventually move higher.
A “Soft” Breakout
Finally… some potential breakout action in the “softs” market!
Having meandered along in a very narrow (and to be honest, boring) trading range over the past three months, coffee finally switched into bull mode last week when it popped 700 points higher on Friday.
This may be the catalyst that sends the coffee market in a new and sustained upward direction.
How about a big dollop of sugar in that coffee? The sugar market has suffered a merciless downside pounding recently, but as I’ve said here before, it was due for some kind of bullish correction.
It’s certainly seen that over the past nine trading days, blasting over 225 points. That’s a very large move in such a short time for the sugar market. Let’s see if it can sustain the momentum.
Finally, we turn to the strongest of all the softs contracts: Cocoa. The market recently hit a 28-year high and although it’s tough to tell if it has more room to run, the chart certainly looks very toppy.
We may see a near-term pullback, as traders lock in profits before embarking on another bullish leg up. If you’re looking to play the downside, buying put option contracts could be your best bet.
That’s all for this edition. Catch you back here in two weeks.
Lee Lowell
Sphere: Related ContentLow-Risk Play In The Financial Sector
June 16, 2008
How To Profit in the Slippery Financial Sector…
‘Pairs Trading’ Between Banks and Brokers for Safe Gains…
Monday, June 16, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
The troubles continued in the financial sector last week as Lehman Brothers (NYSE: LEH) was forced to raise $6 billion in capital ($4 billion in shares and $2 billion in convertible stock) just to keep its head above water. This increased the firm’s shares outstanding by 25%.
The stock, issued at $28 a share, quickly dropped below $22 before rebounding on Friday to close at $25.81.
This is just another sign that investors remain very concerned about the financial sector.
What’s interesting, however, is that more banks made new lows last week than brokerages.
A spread chart of the iShares DJ Broker-Dealers (AMEX: IAI) and the PowerShares Dynamic Banking ETF (AMEX: PJB) shows a jump of about 10%, which means that the brokers outperformed the banks. Take a look…
Spread charts are really quite simple. They plot the difference in price between two different stocks. In this case, it shows the price of PJB subtracted from IAI.
A rising price means the brokers (IAI) are outperforming the banks (PJB). Conversely, if the spread price is dropping, it means the banks are outperforming the brokers.
Accordingly, last Friday’s 10% jump in the spread demonstrates the brokers’ recent strength over banks. What’s more, the spread is approaching the downtrend line, currently at $21.25, drawn from December of last year. If the spread can close above the downtrend line (I’d like to see two closes), it should continue to move higher.
A Profitable, Low-risk Route Into the Financial Sector
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With the major brokerage companies due to release their second-quarter earnings over the next couple of weeks, followed by the larger banks in July, we should have a much clearer picture on where financial stocks are headed once the earnings hit the tape.
I suspect most of the banks and brokerage companies will use this quarter’s earnings to purge all of the bad news they currently know about. And they’ll try to put an end to the rampant speculation about more failures, like the one we saw with Bear Sterns.
Although, even if they do put all their cards on the table, there’s no guarantee that the stocks will rally.
So how can we use the bank/broker spread information to make some money? It’s called “pairs trading.”
Simply put, pairs trading has the potential to achieve profits through simple and relatively low-risk positions. The pairs trade is market-neutral, meaning the direction of the overall market does not affect its win or loss. The goal is to match two highly correlated securities (IAI and PJB), trading one from the long side the other from the short side.
As such, if the IAI/PJB spread can close above the downtrend line, buying IAI and shorting PJB (in equal amounts of equity) could be a profitable, low-risk play in the financial sector. If so, the first resistance level comes in around $25.50.
That’s all for this time.
Jim Stanton
Crude Oil Price Update
June 9, 2008
This Commodity Just Hit A Record High (And It’s Not Crude Oil)
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
Because of the Memorial Day holiday and then swapping columns with Jim last week, it’s been a month since my last commodities update. And boy, is there plenty to update you on… starting with Crude Oil.
It takes real courage to be invested in this market right now, given the volatility involved. Just a few years ago, trading sessions were comparatively sedate affairs, with the price meandering up and down, but not lurching around like we’re seeing today. Multiple dollar moves higher and lower have become the norm.
Crude Oil’s Volatility
For example, when I last wrote, crude oil prices had just topped out at another all-time high of $126 a barrel. Not content with that, it continued to race higher, breaching the $135 mark on May 22 - a level considered unheard of at the time.
The pundits promptly began speculating feverishly on oil’s next move, with even higher dollar values tossed around like confetti. $150! $200!
But it wouldn’t be the crude oil market if it didn’t spring a surprise - and futures then backed off big-time. Over the following two weeks, crude oil shed about $14 a barrel - a development that had the stock market cheering.
And with the national average price per gallon of gasoline having risen every day over a three-week period, motorists also spied some relief at the pump.
Not so fast. On Thursday and Friday last week, crude oil decided to tease investors and consumers alike, shooting off on an unprecedented two-day run. Out of nowhere, oil prices leapt over $17.50 a barrel during those two days - the largest two-day move in the history of oil trading at my former stomping ground, the NYMEX.
On Friday alone, oil prices spiked $10.50 - as you can see on this chart. Even crude oil market veterans and industry experts were taken by surprise. But why such a strong move?
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The reasons for the wild two-day crude oil price spike were varied. But it didn’t take much.
The first dagger came early, with the news that the unemployment rate jumped half a percentage point in May, to 5.5% - the biggest monthly spike since February 1986. This whacked the US dollar to the downside.
Then a Morgan Stanley analyst boldly proclaimed that oil will top $150 a barrel by July 4. Given the way it’s traded recently, this might not be so bold after all! And picking the symbolic July 4 date is nothing more than an attempt to grab some headlines.
As if that weren’t enough, there were yet more strong words and tensions in the Middle East, triggering fears over oil supplies.
All it takes these days is a little bullish news from any given source, and it’s off to the races.
Crude oil is back down again today - and by a hefty $3 a barrel. This is still a very volatile market, so if you dare to get involved, make sure you know your maximum risks ahead of time.
Natural Gas Is Rising And The Winds Are Set To Start Blowing
Thankfully, we haven’t seen such rampant volatility in the other main energy market - natural gas.
The market has held its own over the past few weeks. However, that doesn’t mean it’s not worth keeping an eye on. The truth is, while oil continues to overshadow pretty much everything else in the commodities world, natural gas is also charging to higher levels - as this chart shows.
The perception here is that supplies might get bumped down a bit faster than most would like. And of course, as the weather heats up, so too do the tropics, with hurricane season having officially begun, too.
Feeding From The Crude Oil Frenzy
Gold and silver have almost taken a back seat recently, as crude oil dominates the headlines.
But it’s true that the two metals have taken many of their current directional cues from oil over the past few weeks.
For example, just as gold looked like it was getting ready to make a sustained move higher, it fell back over $70 an ounce in tandem with oil. However, that down move took gold to a key support level at its 200-day moving average line (not shown on the chart) and it has since bounced back… right on cue along with the oil market.
From here, there’s a chance that we could see a prolonged upside move for gold, now that it shaken out some of the weaker investors holding long positions in the market.
Silver has traced out a similar move, enjoying a rebound shortly after its decline - and it could also now see some prolonged upside action. Note that gold and silver will move in tandem, so you will see almost identical chart formations.
Soggy Midwest Sends Corn To Record
The biggest news in the food-based commodities world is that corn prices hit a record high last Friday, as heavy rain the Midwest threatens to hit production.
Farmers in the region are have endured their soggiest spring since 1993, which has severely affected corn planting. Of the 86 million acres in US due to be filled with corn, four million are currently sitting idle, with corn still waiting to be planted.
As you can see on this chart, that has resulted in corn futures shooting up to a record high of $6.67 a bushel. Corn prices are up 40% this year - a spike that Americans are seeing reflected at the grocery store through higher food bills.
If farmers are unable to plant their remaining corn crop, they will likely plant other crops in its place and still leave corn prices under pressure.
Scouring The “Softs”
As for the “softs” market (coffee, sugar, cocoa, orange juice & cotton), we’ve seen a mixed bag lately.
Coffee continues move in a very narrow trading range between $1.3000 & $1.4000 per pound - a trend we’ve seen over the past three months now.
However, the market is due for a significant breakout in one direction pretty soon, as a large harvest is coming up, coupled with the yearly frost season in Brazil. These fundamental factors should give this market some life, but for now, the status quo remains.
Sugar continues to see a relentless selloff - one stretching back over the past two months. Each time the market tries to head to higher ground on an intraday basis, it’s quickly smacked back down by the end of the trading session.
One consolation that sugar bulls might have right now is that based on the chart, this market has become extremely oversold and it may be ready to embark on a sustained upside move.
We wrap up with a quick look at orange juice and cocoa…
OJ: The market has dropped a long way over the past few months and may be carving out a bottom here. Like with natural gas, we’ll need to watch OJ closely, since we’ve now officially entered hurricane season in Florida. Any mention of sustained storms (even the fear or perception) and you’ll see orange juice quickly pop higher, as the short sellers try to cover their positions.
Cocoa: This appears to be the strongest market of the softs segment. As you can see here, it has regained almost all of the value it lost in those four frantic trading days back in the middle of March. The combination of a weaker dollar, good foreign demand, and a good technical chart picture may allow cocoa to break out to newer highs in the near-term.
Good trading,
Lee Lowell
Sphere: Related ContentTwo Good Stocks To Invest In
June 5, 2008
Two Stocks For Your Watchlist In A Wobbly Market
Thursday, June 5, 2008
The Smart Profits Report Issue #529 -
by Aaron Lehmann, Contributing Editor, Smart Profits Report
Managing Editor’s Note: I’m thrilled to introduce you to the newest member of our Smart Profits Report team: Aaron Lehmann. As a 40-year stock market veteran, Aaron brings an outstanding investment pedigree and track record. He’s worked as a senior securities analyst for Goldman Sachs, Bank of America and Steinhardt Partners, one of the most successful hedge funds of all time. He was also director of research for Westinghouse Pension Investment, where he co-managed a $3 billion portfolio. At Chase Investors Management, he was vice-president and portfolio manager, where he ran a $170 million small-cap fund and in 1987, his defensive strategy helped his clients avert the stock market crash. Between 1993 and 2000, managing a hedge fund, he notched up a 23% compound growth rate, without using leverage or IPOs.
And now, he’s is set to give you the benefit of his vast stock market knowledge and experience, showing you how to make money, too. So without further ado, I’ll hand today’s column over to Aaron…
Martin Denholm, Managing Editor, Smart Profits Report
Invest In A Different Kind Of R&D (Recession & Dollar)
Are we in a recession or going into one? The question has flooded the financial news headlines this year.
The Federal Reserve is certainly fearful - and has been extremely proactive in trying to stave off a recession over the past nine months or so. The bank has injected vast amounts of liquidity into the market in order to aid the real estate sector, prop up the sagging stock market, and rescue the financial system via JP Morgan’s acquisition of Bear Stearns.
I actually don’t think the economy slipped into recession, aside from a few industries enduring particular hardships. Corporate balance sheets are in the best position in modern history and there are trillions of dollars that could potentially be invested in the market.
Therefore, I believe the economy will escape a classical recession and begin firming up in the first half of 2009. In fact, I think the Fed is now done with its rate-cutting program and, in all likelihood, will have to increase rates again later this year to combat inflation.
This would bode well for the US dollar, which will feed off the rate increases and strengthen against the world’s other major currencies over the next 12 months.
This year’s presidential election will likely impact economic policy to a greater extent than in previous elections, since Senators McCain and Obama have limited experience in that area. This will influence the investment environment, too, so the outcome and subsequent appointments in that field will be crucial.
Two more projections and two stocks to consider…
The Market’s Potent Twin Combo In 2008
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It’s tough to fight against demand.
In the oil market, for example, even if the US manages to reduce its consumption modestly, others are likely to pick up the slack. Specifically, this includes the BRIC countries (Brazil, Russia, India, and China) and a host of smaller countries that are also major oil consumers.
Consider that China now has a larger middle-class population than the entire United States population… Russia and India may have more billionaires than the US… and with its vast natural resources, Brazil has become the powerhouse of South America and a catalyst for the rest of that continent.
Having zoomed past $100 a barrel at the start of the year on its way to a record of $135 just a couple of weeks ago, we’re now seeing a pullback in the market. As our commodities expert Lee Lowell has noted, this kind of profit-taking is common in the oil market. And after a possible decline close to the $100 level, we expect a resumption of the uptrend.
On the other hand, the US real estate market is suffering from an excess of supply. A record inventory of new and existing homes, plus the enormous number of foreclosures, will affect pricing, as well as more stringent rules on borrowing.
But the sector could be within 15% of the bottom, so if you’re a prospective homebuyer and qualify for financing, the next 12-24 months may be an opportunity of a lifetime. Speaking of opportunities…
Two For Your Watchlist
Two stocks that have caught my eye in the current market are Verizon (NYSE: VZ) and Walgreen (NYSE: WAG).
As you may know, Verizon just offered to buy wireless rival Alltel for a total value of $28.1 billion ($22.2 billion of which is Alltel’s projected debt at the time of closing later this year). This would give the firm access to Alltel’s 13 million customers and wipe out competition from the fifth-largest wireless operator in the US.
Given that #2 carrier Verizon currently has 67 million subscribers, compared with 71 million at top-ranked firm AT&T, the deal would vault Verizon to the top of the network heap.
Right now, Verizon is trading within 10% of its bottom and 20% from the top. It also pays a 4.6% dividend and should also benefit from the expansion of its FIOS network, which should generate significant cash from the increase in subscribers.
Walgreen is the largest drug chain in the US. Having slowed the pace of new store openings, the firm is now committed to boosting same-store sales. The stock is currently about 10% above its low and 25% off of its high and could benefit from an increased focus on same-store results.
I look forward to sharing many more investment ideas and strategies with you in the future, so you can invest with more knowledge and confidence - just like the pros.
Talk to you again soon.
Aaron Lehmann
Sphere: Related ContentThe Stock Market’s Worst Industry
June 3, 2008
Can You Profit From The Market’s Worst Industry?
The Smart Profits Report Issue #528
Tuesday, June 3, 2008
by Marc Lichtenfeld, Senior Analyst, Smart Profits Report
It can often be quite a lonely place and the investment crowd may call you all kinds of derogatory names - but when it comes to stock picking, nothing beats the feeling of striking out on your own, going against conventional wisdom and being proved correct.
And you know what? The rancor you may receive along the way is actually a good thing - as I’ve discovered at first-hand. When I wrote for TheStreet.com, the more hostility I encountered from readers, it usually meant that I was on the right track.
For example, during the height of the real estate boom, I recommended shorting Florida homebuilder and landowner St. Joe Company (NYSE: JOE). You should have seen the reaction I received! I got so much hate mail (and even a few threats) that I was sure it was a slam-dunk. It was. Within months of my column, JOE shares plunged about 50%.
I’ve enjoyed many calls like that over my career. But this one could be the most ambitious and optimistic one yet.
That’s because if there is one market industry that is so unpopular and so universally hated right now that you’ll probably think I’ve lost my mind to even suggest that it can bounce back. Can you guess what it is?
Ladies And Gentlemen… Welcome Aboard As We “Struggle For Survival”
I believe you need to keep your eyes on the airlines.
There… I said it.
I can imagine the incredulous look on your face at the moment - and I can understand why. Let’s deal with the bad news first…
The biggest and most obvious pressure right now is oil sitting at $126 a barrefl. Jet fuel has soared 50% since January alone and it doesn’t take a rocket scientist to know that this is disastrous for the long-term health of the industry. On Monday, chief executive of the International Air Transport Association (IATA), Giovanni Bisignani said, “The situation is desperate” and the entire industry is “struggling for survival.”
Already, 24 airlines have folded since the start of the year, with Britain’s business class-only airline, Silverjet, becoming the latest victim on May 30.
The group says the airline industry’s fuel bill will soar by $40 billion this year to a total of $176 billion. If oil prices edge back towards the record of $135 a couple of weeks ago and continue to trade there, it says that would turn the industry’s $5.6 billion in profit last year into a $6.1 billion loss. However, if oil drops back to $107 a barrel, that loss would “only” be $2.3 billion. But no matter what the price is, the problem is compounded by the weak economy and soaring consumer costs.
For sure, the industry is praying that oil is not just taking another temporary breather at the moment on the way to $200 (as some economists believe).
That’s the bad news. Now let’s look at the other side…
The “Nickel And Diming” Continues… But Planes Are Still Packed
Have you flown lately?
As I write, I just arrived in Lake Tahoe, where I’m speaking at an investment conference after another long plane ride from Florida.
I’ve been on an airplane at least once a month (and usually more) for the past year. But despite all the gloom and doom projections, I can’t remember the last time I had a vacant seat next to me. In fact, I can’t remember ever seeing many empty seats at all.
With record high oil prices squeezing profit margins, airlines are figuring out new ways to maximize revenue.
Many have imposed passenger fuel surcharges, which are increasing in line with oil prices (just today, British Airways’ latest surcharge increase came into effect - the 11th time the airline has hiked it). Some are now charging for checked bags, meals, even headsets.
While this “nickel and diming” approach doesn’t make customers happy, airlines know that many folks have no other choice. Sure, they can take Amtrak if they don’t like it - but that option is often unrealistic.
So while others may scoff, I’m going to ask whether it’s possible to profit from the airline industry…
A Two-Year Tale Of Woe… But Watch For “Basing”
In a word: Awful. And just as I expected back in September.
In my September 25, 2007 column, when the index was trading in the mid 40s, I said:
“I expect the index to slip back to support at $40. But with oil prices rising in what is usually a quieter period for airlines before the busy holiday season, I wouldn’t be surprised if the index breaks that support level - particularly if the broader stock market (still under some pressure) turns south. In that case, we could see a serious selloff.”
Yep, I’d say so! I certainly don’t suggest that you try to “catch a falling knife” here. However, don’t forget that the market is a forward-looking mechanism. This means that if stocks are rising (or simply stop falling) during a recession, it’s because the market is projecting a recovery.
Keep an eye on the XAL chart. Should the index “base” (stop going down and then flatline), or even reverse the downtrend and head higher, the market is likely signaling a recovery.
I wouldn’t necessarily get into airline stocks for the long term, as I believe the business model is flawed, but an intermediate-term trade seems quite reasonable once the bleeding stops.
And if you’re looking for a couple of the best individual companies (or at least ones whose charts don’t look as abysmal as their peers), check out Alaska Air Group (NYSE: ALK) and Southwest Airlines (NYSE: LUV). Keep them on your radar, as they could be early indicators for the broader sector’s recovery. At that point, you might be able to pick up some bargain basement airline stocks and turn it into a meaningful gain.
Buckle Up… The Seat Belt Sign Is On
I acknowledge that this call may be a bit early, but I want you to think about it now, so that when the time comes to act, you’ll be ready to pounce and know what to do, rather than considering the idea for the first time.
But be warned: Buckle your seatbelts and make sure your seat and tray-table are in the upright and locked position. The airline outlook is likely to be turbulent for a while longer. However, once it stops, the skies may be quite friendly to your portfolio.
Hoping your longs go up and your shorts go down.
Marc Lichtenfeld
Sphere: Related ContentInvest In These Pharmaceutical companies
June 2, 2008
Sector Watch: One Hot Sector… One Cold Sector… And How To Profit From Each
Monday, June 2, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Talk about being timely…
When I last wrote to you two weeks ago, it came on the day that the Dow Jones Transportation Average (^DJT) broke out to a new, all-time high.
I remember it well, because the pace of my typing could barely keep up with the pace of the index! Just as I wrote a sentence and crunched some numbers, the market promptly changed again!
The bottom line is that the new high was a bullish, longer-term event that should eventually take that index up to its next price target around the 6,040 area.
Following that high, the price of oil proceeded to race to a new high of its own, topping $135 a barrel on May 22.
This made the Dow Transports’ climb to new highs even more improbable.
But you can usually count on the hyper-sensitive big boys to react in a more predictable way…
Indexes Slip On An Oil Patch… But Bounce Back Up
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Given that the major indexes were already in shorter-term, overbought territory, they began to correct. When an index makes new highs and then reverses quickly, it tells us that it was just testing an old high and needs some time to consolidate before making another move up to its next price objective.
And because the overbought conditions coincided with oil’s charge to $135, the indexes sold off for several days.
However, when crude dropped by about $10 a barrel last week, stocks rallied again.
Not all stocks, though. Some of the biggest players remain in a funk - and that’s where we find this week’s opportunity…
A Tale Of Two Sectors: Big Pharma Vs. Biotech
Pfizer (NYSE: PFE)… Eli Lilly (NYSE: LLY)… Bristol-Myers Squibb (NYSE: BMY)… Schering-Plough (NYSE: SGP)… some of the largest and most recognizable names in the Big Pharma industry.
But biggest doesn’t necessarily mean the best. All four stocks are trading near multi-year lows, as they endure a desperate struggle against changing industry dynamics.
Specifically, a demoralizing twin comb First, their existing drug patents are expiring, which has opened the door for their rivals to make generic versions of the same drugs. Second, their once-beefy drug pipelines have eroded dramatically, leaving them with increased competition, but fewer ways to combat it.
So what’s the solution? As my colleague and healthcare expert Marc Lichtenfeld discussed just a couple of weeks ago, Big Pharma firms are flashing their best smiles and looking for a partner.
The reasoning is something like this: “We need new revenue streams, but why go through all the research and development costs to create new drugs, then endure years worth of expensive FDA clinical trials when we could just buy a smaller biotech firm, which already has promising new drugs in the pipeline?”
This works well for biotechs, since they often need a bigger, richer partner to help them pay for the cost of R&D, clinical trials, and marketing.
One For The Bears: Big Pharma
Although Big Pharma’s troubles may already be baked into the stock price, the fact that PPH has been unable to gain much ground over the past couple of months, and is now trading below its 200-week moving average, tells us that it’s still under selling pressure and is probably in a bearish consolidation pattern.
From here, a weekly close above the 200-week moving average would be the first sign of a potential turnaround, but the stock probably has to make new lows for the year before a sustainable rally can get underway.
But if we turn to the biotech sector, it paints a different picture…
One For The Bulls: Biotech
In contrast to PHH, IBB bounced strongly off of its March lows and is trading back above its 200-week moving average.
It appears to be in a bullish consolidation pattern and should move higher once the consolidation pattern is complete.
The Trend Is Your Friend
While this divergence between the Big Pharma companies and smaller biotech firms is interesting now, the trend actually goes all the way back to 2002.
For example, since the end of the bear market in 2002, PPH has gained just 18% while IBB has doubled in price. So how do you profit?
As you may know - and as Marc has cautioned in his previous biotech-based columns here - you have to be careful when buying individual smaller-cap biotech stocks.
While it can be very rewarding if you buy the right companies, you really have to know what you’re doing to avoid getting burned. It’s an inherently risky sector because it only takes one drug failure to crush a company’s stock.
However, the conservative way to play it from here is to buy IBB - especially if it pulls back near the 200-week moving average.
That’s all for this time.
Jim Stanton
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