December 16, 2003
Hey Dave, They Got Him!....What Should I Buy?
I got an email on Sunday (actually more than one):
"They got Saddam!!....What should I buy on Monday!?!"
My reply: Nothing!
Do not chase news events. Often, markets gap higher (lower) on these events but quite often this turns out to be the high (low) for the day. A better play is to look for plays opposite to the news events. Let's look how this created an opportunity in Pulte Homes (PHM) (and in other homebuilders), a stock mentioned as a potential short on Friday. Notice that the stock gapped higher on the open but the stock quickly found its high (in fact, the open turned out to be the exact high). In a case like this, day traders or nimble swing traders can look to short the stock on a break down of its opening range and use a tight stop just above intra-day high. For more on this, see my recent column "How To Get A Head Start On A Swing Trade", written on 12/05/03.
Looking to the indices, on Monday, the Nasdaq gapped open on the Saddam news but quickly found its high. It then sold off hard for a solid trend day lower. This action has it closing poorly and puts it back below its 50-day moving average.
The S&P tailed to new highs but reversed to close poorly and in the minus column.
Looking to the sectors, as one would expect, the "mother-of-all-turnarounds" is a major negative. This action has virtually all of tech, like the Nasdaq itself, stalling below multiple tops. It also further confirms that weaker areas (lately) such as the semis are poised to continue lower out of a First Thrust. Many other areas also look poised to continue lower out of a transitional setups (i.e. early trend). Retail and the homebuilders are two notable standouts.
So what do we do? Since I wrote a bearish column on Friday, I have to admit I cringed yesterday (after my initial excitement quickly wore off) when I heard the Saddam news. However, after collecting my thoughts (it was nice of them to do it on a weekend so I had time to think!), I realized that markets often have news reversals--as suggested above--the real reaction is often opposite of the initial reaction. And, as implied above, it created opportunities in areas such as the homebuilders. I think there could be something much bigger than a one-day affair though. As implied above, many sectors could be in trouble. Therefore, on the long side, stick with commodity related stocks. On the short side, look for opportunities in those stocks that could be attempting to make a transition lower from high levels. Again, the semis, retail and the homebuilders stick out here.
Looking to potential setups, Cypress Semiconductor (CY), in the aforementioned semis, looks poised to continue lower out of a First Thrust/Inverted Cup and Handle.
Best of luck with your trading on Tuesday! |
