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Beth Gaston Moon Beth looks for timing opportunities by studying fundamental and technical variables and a range of indicators that measure investor sentiment.
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Journal: Tuesday, April 18, 2006
• Set a stop-loss on Apartment Investment and Management (AIV, news, msgs) to a close below 42.
• Set a stop-loss on Oregon Steel Mills (OS, news, msgs) to a close below 45.
• Close the entire AT&T (T, news, msgs) position at the market.
• With the proceeds, buy $12,000 worth of Rambus (RMBS, news, msgs) at the open.
• Buy $15,000 worth of JAKKS Pacific (JAKK, news, msgs) at the open.
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I'm profit-hunting in toys and semiconductors
It's earnings season, bond yields are at historical heights, oil prices continue to rise (just in time for summer travel season!), and the Fed's long-term strategy is anyone's guess. It's a wonder that market averages have been able to hover close to historical heights, with only the mildest of setbacks in recent days. Technical support is a critical variable to this resilience; the S&P 500 Index ($INX) ended last week atop its 50-day moving average, while the Dow Jones Industrial Average, (INDU) has successfully rebounded from its 80-day trendline.
Meanwhile, there are some creeping signs of pessimism in the market, which could be a bullish short-term indicator. Last week, the short-term trend in the odd-lot short interest indicator began to rise toward levels not seen since early March, which was immediately prior to the market's rally to annual highs. This indicator warrants attention, as negative sentiment tends to unwind quickly following any positive momentum in the market. Combine this factor with structural support on the major indices (in the form of out-of-the-money put open interest) and bullishly configured mutual-fund activity, and the market may find little resistance to another upside drive.
New positions
It's finally springtime, so I'm doing a little cleaning in my portfolio. I'm releasing AT&T (T, news, msgs) which has failed to deliver, and closed last week below its 20-week moving average. With the proceeds, and with some of my remaining cash holdings, I'm opening positions in semiconductor concern Rambus (RMBS, news, msgs) and toy manufacturer JAKKS Pacific (JAKK, news, msgs). Both are solidly uptrending names that score an impressive Schaeffer's Equity Scorecard rating of 9.0 (on a scale from zero to 10).
A vote of confidence from the Street sent Rambus shares higher Monday morning; the stock rallied to its highest point since March 2001. The stock has been in sharp rally mode since early October, gaining strength along its ascending 10-week moving average and more than quadrupling in value. Despite this monster uptrend, sentiment indicators suggest that Rambus could still have more room to run. The stock's Schaeffer’s put/call open interest ratio (SOIR) of 0.57 is higher than 93% of the past year's worth of readings, suggesting an overwhelming air of pessimism among the options crowd. What's more, the stock's individualized volatility-index reading is at an annual high, which is a bullish contrarian indicator. Short interest is hearty, representing 9.5% of the company's float, and only three analysts currently cover the stock, offering up one "buy," one "hold," and one "sell."
The one caveat to the Rambus position is that it will visit the earnings confessional after the close Wednesday. As anyone who watches the market during earnings season is painfully aware, earnings reports can often be make-or-break for the underlying stock, at least over the short term. In eight of the last 10 quarters, however, Rambus has managed to exceed analysts' expectations, according to Briefing.com.
Guarded confidence in toys
JAKKS Pacific shares have maintained a tight and steady uptrend for the past several weeks, benefiting from the support of their 10-day and 20-day moving averages. Since bottoming out in mid-October, the stock has rallied nearly 90%. Earlier this month, the company broke out to post a new all-time high. Nevertheless, several sentiment factors suggest a backdrop of pessimism. Nearly one-fourth of the equity's float has been sold short, amounting to a short-interest ratio of 15 days to cover. In other words, at the stock's average daily volume, it would take three weeks for all of the existing shorted positions to be eradicated, heightening the odds of a short-covering rally. Additionally, Wall Street has not yet warmed to the equity, awarding four "hold" ratings, one "strong sell" and only one "buy." Additional positive coverage or an upgrade or two could therefore be in the offing, as the stock explores new-high territory.
Questions? Comments? Predictions? E-mail me at strategylab@sir-inc.com.
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