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 Purchase Jon's new book. Related Sites Stock Charts.com Silicon Investor Raging Bull message boards SuperModels Recent articles: • Which price is right: $108, $10 or $1.37?, 6/11/2003 • Hey Modelman, would you buy this stock?, 6/4/2003 • 3 picks from a prosperous Amex, 5/28/2003 More... | SuperModels 3 ways to profit when the rally falters Right now, momentum players are red-hot, pushing stocks to new highs on an almost daily basis. But the market fires won't burn this brightly forever. By Jon D. Markman With the money-humming vibe of late-90s speculation in the air, a revitalized army of amateur and semi-pro day traders is back in the market. Theyre burning up the message boards at Silicon Investor again, sending the prices of low-priced micro-cap stocks to new heights by 15% to 30% per day, and gunning the fortunes of guru newsletter sites. Our business is back, said Larry Connors, the veteran swing trader and columnist who runs TradingMarkets, one of the best and longest-lasting traders sites. Among the latest round of day traders and swing traders are battle-hardened veterans of the past three years bear market -- men and women for whom the term buy and hold refers to two-hour to three-day intervals, and for whom recklessness and risk control run hand in hand. For the past few weeks, Ive been receiving multiple unsolicited e-mails a day from someone named Apex Charting who pounds out target and stop-loss recommendations for penny stocks such as SunnComm Technologies
Some of the stocks this guy tracks are actually worth less than a penny, so when they reach a penny or better, theyve doubled. But penny stocks are not as uncommon as you might think. Of the 10,263 stocks in the MSN Money database, about 20% are priced under a buck and 1,834 of those are priced at less than 50 cents. Traders of these stocks, as well as more mature names, are all about momentum. The broad definition of whether the current market is labeled bull or bear is irrelevant. To them, a bull market is one in which advancing stocks that temporarily slow down to hit their average price over the past 21 or so days are aggressively bought, and a bear market is one in which stocks that rise to prior price resistance are aggressively sold. As long as dips are bought, the bull lives. As soon as dips are met with apathy rather than enthusiasm, then the bull is snoozing, comatose or dead. How to play the mo-mo game So far, 2003 has been electrified by the dip-buying of this momentum crowd. Virtually every time the Nasdaq Composite ($COMPX) has declined two days in a row by more than 1.5% since the end of January, it has been pushed up the next two days by a greater amount. The most recent example came in the past week. On Friday, June 6, and Monday, June 9, the Nasdaq declined 1.13% and 1.4%, respectively, to close at 1,603. The next two days, it advanced 1.5% and 1.1%, respectively, to close at 1,646 on June 11. One prior example: The Nasdaq declined on May 7 and May 8 by 1.11% and 1.13%, then advanced the next two trading days by 2% and 1.4%.The only span of time this year since Jan. 15 during which the Nasdaq declined four days in a row -- May 16-21, from 1,538 to 1,489 -- buyers came rushing back to push the index up nine of the next 10 days, from 1,507 to 1,646. Connors, of TradingMarkets, is the sort of trader at the forefront of this push. He said he focuses on finding stocks in strong uptrends that have pulled back to a major short-term moving average and holding them about three days. In plainer English, this means he looks for stocks that are up a lot over the past one to six months but have recently declined or flattened out a bit. The shorter the time that you hold, the less likely that something crazy will happen, he said. Its easy to find stocks like these using the Screener at MSN Money. One I created on Sunday night on these specifications, which Ive nicknamed Dipsy Doodles (click here), found the following stocks:
Some of these should be familiar to readers, as they have come up in prior columns this year about momentum. Delta Financial, which looks pretty good by this method, rose as much as 22% since being listed in my May 28 column about the strength of the American Stock Exchange, while Time Warner Telecom has risen as much as 108% since being listed as one of my Nasdaq All-Stars on April 9. Both have recently backed off, potentially providing a good entry point for latecomers. 3 ways to play a turnaround All good things must end, at least temporarily, however. Just as great symphonic works are characterized by both flashy allegro passages lifted by high-spirited woodwinds, as well as somnolent largo passages weighed down by basses, so do great markets pass through cycles of strength and weakness. And so, even if 2003 ultimately ends as well as it has started, it will ultimately hit a patch during which a two-day decline is met with another two-day decline and a four-day decline is met with a long patch of flat or negative performance. In other words, one day soon the energized and enriched momentum players -- now happy to push stocks up -- will turn around and push stocks down for a spell. The year 1999, the greatest in Nasdaq history with a gain of 89%, had two major periods like that. On April 29, the Composite hit a high of 2,677 and then went into a serious three-day tailspin. A one-day advance followed, but then Nasdaq flattened and fizzled and didnt eclipse its April level until two months had elapsed, on June 30. Next came a flashy advance, but again soon came a period of prolonged decline. The high of July 19, at 2,874, was not meaningfully eclipsed until late October. Such turnabouts, which seem harsh and unfathomable at the time, are best explained by a U.S. Army combat veteran-turned-day trader of my acquaintance. He likes to point out that trading is not so much a game as a joke. If the market isnt behaving the way you think it should, he says, its because you dont get the joke. The trader -- former tank commander James Lackey -- tells friends they need to get the joke to survive the trading wars. If you dont get the joke, he says, the jokes on you. If this years market hits a prolonged slide this week or next, as I proposed in my last column (What price is right: $108, $10 or $1.37?), then the joke will be on momentum players who continue to try to buy the two- to four-day dips. There are at least three ways to play this scenario, if it does transpire. The first is to hunt for short-sale candidates by reversing the Big Dippers screen. Look for stocks that are down over the most recent three to six months, but reversing upward at present. My Reverse Dippers screen (click here) found the following stocks on June 15.
A second way is to sell, or short sell, formerly strong stocks that have fallen and failed to hold expected levels of price support. Its harder to screen for these at MSN Money, but I used the sophisticated Advanced Stock Scan engine at StockCharts.com to find the following names to consider:
A third and, for many, more palatable way to play a temporary lapse in momentum is to lay in wait to buy favorite big stocks at much better prices. The following table lists 20 leading companies in order of their 2003 performance, and three prices at which you could potentially lie in wait for purchase: their average price over the past 50 days, their average price over the past 200 days, or their low price of the past year.
Whether the joke is on dip-buyers or bounce-sellers over the next few weeks, the lesson is that a volatile market provides ample fare for traders, and even investors, willing to stay flexible and go with the flow of momentum. Ill keep an eye on all these ideas over the next six months, and report back. Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supermodels@runbox.com. At the time of publication, his fund was long Globespan Virata and Legato Systems, but positions can change at any time. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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