Capitalize On Bear Stearns and JP Morgan
“Sector Watch”: While The Market Agonizes Over Bear, Here Are Two Stocks That Could Capitalize
by Jim Stanton
Technical & Quantitative Analyst, Smart Profits Report
Recovered yet?
No, I’m not talking about this weekend’s college basketball “March Madness” (although some of the results did live up to the “madness” tag perfectly, leaving many brackets in tatters).
I’m talking about the stock market madness in the wake of the Bear Stearns (NYSE: BSC) fallout. It’s just a week now since BSC shares did their best impression of the Titanic, sinking all the way down to $2 a share - an astonishing slump from the $80-85 level seen at the end of February.
As you know by now, JP Morgan (NYSE: JPM) collaborated with the Federal Reserve and arranged a buyout deal for $2 a share to prevent Bear from collapsing altogether.
As my colleague Karim Rahemtulla wrote here last Thursday, while the government-assisted bailout didn’t play too well with folks who thought the company should have just been left to fail like any other firm, this was a necessary bailout in order to prevent a catastrophic worldwide meltdown.
As it was, the deal was struck over the weekend, before the Asian markets opened on Sunday night, to ward off widespread panic. And it worked.
Of course, BSC soared today on news that JP Morgan has upped its purchase offer to a more reasonable $10 a share in order to placate angry Bear shareholders who think JPM grossly undervalued the company.
The news has obviously dominated the financial headlines over the past week, so before I move onto my top bullish and bearish ETFs for this week, let’s take a closer look at how this is affecting the broader market to see if we can pick up some clues…
Sell! No, Wait… Buy!
As the Bear news hit the wires, the initial reaction among investors was a mass selloff, which pushed the S&P 500 briefly below its January low. However, once the dust settled and the Fed slashed interest rates again last week, the indexes reversed course and heading higher. By the end of last week, the S&P 500 had traded above the previous week’s high.
Here’s what I wrote in the inaugural edition of “Sector Watch” two weeks ago:
“Since setting their lows in late January, the stock indexes have traced out a sideways consolidation pattern that could last a while longer. While the Dow Industrials and S&P 500 have held up slightly better than the Nasdaq indexes, they all have similar chart patterns. After last Friday’s big selloff, it looks like a test, or break, of the January lows is in the cards.”
The Nasdaq indexes had already taken out their January lows in the first week of March but on the Bear Stearns announcement, the S&P 500 did indeed make new correction lows before it reversed higher. The Dow Industrials fell short of doing the same by less than 100 points.
The Trouble With Consolidation
This is typical action within a consolidation pattern (i.e. a trading range) - within which the indexes have traded stubbornly for about two months now.
It’s notoriously difficult to forecast the price action within these patterns, or how long the patterns will last but, after last week’s showing, it tells us that the Dow and S&P 500 were not ready to break down yet and were just testing their January lows.
From here, the consolidation pattern could drag on a while longer - and this one looks bearish. However, the Fed’s intervention with Bear Stearns may have speeded up the correction process. Now it’s up to the indexes to either trigger new buy signals, or break back down once the next resistance levels are reached.
This does not mean that the indexes do not have to reach their downside targets. But sometimes, surprise news like this can effect the chart patterns, so it’s possible that the bailout could have created an important low.
Even if the indexes are still in a bearish consolidation pattern, there’s a good chance that they could test the February highs before the selling resumes.
Okay, let’s dig into a couple of market sectors for some more specific opportunities…
Hi-Ho, Silver
Looking for a bargain-basement opportunity in a truly beaten-down sector? Try homebuilder stocks, or financials.
These two have endured the most pain over the past few months, but both some relative strength last week, despite the Bear Stearns fiasco. They might have some additional upside over the near-term, but in a volatile market like this one, I’d shorten my time horizon to days, not weeks.
For a lower risk buying opportunity, take a look at the silver market.
Last week saw plenty of liquidation in the commodity markets, due in part to highly leveraged funds needing to raise capital. As you’d expect, both gold and silver spiked to new highs on the Bear Stearns news, but quickly reversed lower because the funds needed the capital to stave off margin calls in other areas.
It’s possible that the bull market in precious metals has ended, but since almost all the other commodities also got hammered last week, the selling appears to be a case of forced liquidation rather than for fundamental reasons.
Either way, the iShares Silver Trust (AMEX: SLV) is approaching critical support levels and may be setting up a low risk buying opportunity.
As you can see, the stock closed at $167.01 last week and is quickly heading back down to one of its previous highs at $157.20. In addition, that’s close to the 50% retracement level ($158.49) of its move up since last August, and to an uptrend line, drawn off the August 2007 lows.
Since all the support levels come in around the same area, it should present a low-risk buying opportunity if SLV stabilizes around $155 to $160.
Grab Some Green From This Green Fund
After running some technicals through my ETF list, I noticed that many of them are oversold. When this is the case, the prudent course of action is to wait for a rebound to short an ETF that has a bearish chart pattern.
That’s the scenario we have with PowerShares Wilderhill Clean Energy (AMEX: PBW). The stock has a bearish chart pattern, recently tested its January lows, and appears oversold in the near-term. It should make new lows before a meaningful reversal can take place.
Even with the surge in oil prices this year, PBW has endured a surprising slump (with oil prices high, one would expect alternative energy resources to gain in popularity) - and doesn’t show much sign of rebounding anytime soon.
The stock should eventually trade below $17, but the question is: Where to short it? The smart play is to wait for PBW to bounce up to some sort of meaningful resistance level, which greatly reduces your risk. If that occurs, watch the 50-day or 200-day moving averages. A test of the February high at $23 is a possibility, so a move back up to the $21 to $23 area would be a good, low-risk entry point.
That’s all for this edition. Catch you again in two weeks.
Jim Stanton
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One Response to “Capitalize On Bear Stearns and JP Morgan”
[...] in the spring (March 24, to be exact), I highlighted the performance of PBW in my “Sector Watch” piece. At the time, the stock was trading around $21 and had recently tested its January lows. With the [...]