The Stock Trading Advisor; Back to Offense!

Robert Christy — Thu, 07 Feb 2008 02:41:00 +0000

I know that this time of year brings many mixed emotions for fans of all sports. The NFL season just ended and baseball is gearing to spring training and college basketball is working its way toward March Madness. While some are sad to see football end, others are looking forward to the rest of the year.

Just as the sporting seasons change, so do the seasons in the financial markets. While this is less predictable, the market does rotate from periods of high risk to periods of low risk. As painful as corrections can be, the ensuing period is often one of relatively low risk and above average upside potential.

The primary indicator that I use to determine the overall level of risk in the market is Bullish Percent. This indicator gives me a pretty good idea where we are risk-wise in the market and whether it is rising or falling. It also lets me know when we are of Offense or Defense.

For the past month and a half, we have been on Defense focusing on wealth preservation. This position has helped us withstand the day to day volatility and to weather the storm.

We did this in a number of ways. First, we trimmed positions in sectors where we had an overweighting. We utilized various stop loss tactics and we took on 2 different short positions [General Motors (GM) and Under Armour (UA)].

Earlier this week, the NYSE Bullish Percent flipped to Offense. Below is a graphic of the NYSE BP. For those of you not familiar with Bullish Percent, Xs represent rising prices and Os represent declining prices.

During the sell-off in January, the Bullish Percent dropped to level not often seen. The move into Xs at this point gives us the opportunity to pick up equities at one of the lowest risk levels that I have ever seen.

Source: Dorsey Wright & Associates

Is this the bottom? Only time will tell. If you turn on the TV or radio, all you hear about is how negative the news is. From the nightly news to the newsstand, all of the talking heads are touting that the worst is yet to come.

The latest Newsweek cover shows a long road with the title of “Road to Recession” on it. The Economist is out with a headline that says “It’s rough out there”.

These are the types of images and headlines that send the masses into a selling frenzy. One thing is certain – we see the most negative news at market bottoms and when indicators such as Bullish Percent are at such low levels.

The last time we saw magazine covers like we’re seeing now were back in 2002. BusinessWeek’s “THE ANGRY MARKET” in big, bold red letters with a picture of a growling grizzly bear on it is a prime example.

These types of headlines shouldn’t worry you nor should they affect the way that you manage your portfolio. The markets are forward looking and by the time a recession is officially declared, the markets have most likely bottomed and have started their next leg up.

Market conditions (great buying opportunities) like this come around only once every three to four years. Think back to the market bottoms of October 1998 and October 2002 and the buying opportunities that came also.

To be honest, I have no way of knowing how this will play out going forward. I also don’t know if the bottoming process will be orderly or a violent “V” shape.

What I do know is this – the indicators point to OFFENSE and that this is the correct course of action to take. I am not a predictor, but a reactor and it’s time to put the defensive playbook on the shelf and to pull out the offensive playbook.

In the image above you will notice some of the offensive plays that are appropriate for right now. Last week, in the accounts that are “option approved”, we went long the S&P 400 Midcap Index. We bought the MDY June 135 Calls in anticipation of higher prices.

This kind of position allows us to increase exposure without tying up a large chunk of capital. Over the next couple of weeks, we’ll close out our “shorts” and begin redeploying our cash position into the sectors showing the most strength.

If you haven’t reviewed your accounts in a while, now is a good time to do so. Make sure that your account is in the Offensive (wealth accumulation) position.

If you have any specific concerns you would like to address, including any individual strategies, just send me an email and we can discuss them. Also, we are at a major turning point and if you know of someone who would enjoy reading this, please forward it to them.

That’s it for now. Look for another Turret in a couple of days with a list of the best sectors in terms of risk.

R. A. Christy
The Stock Trading Advisor

The Intelligent Trader » NYSE

The Stock Trading Advisor; Back to Offense!