Tuesday, November 4, 2008

Don't Be An Average Trader, Use Better Trades

It is all enough to drive the average trader nuts. Then, add into the mix an Iraqi dictator whose defiant stance has the whole world wondering when the first bomb will be dropped, by whom and what will be in it? Many of the basic economic indicators are weak and the latest rumor on the street is that the Fed MAY cut interest rates another 25 basis points to a 60 year low of 1%. This week the housing sector posted good permit applications and sales numbers, two indicators that bode well for a continued strong housing market.

Today, most of the stocks that were reporting posted better than anticipated earnings and the Dow managed to break a 5-day losing streak. We are in the midst of earning 's season and the market could not be any more crazy.

Miagi 's advice to Daniel san in "The Karate Kid"; "Daniel san, the best defense is to not be there when the punch is thrown." Trade different stocks or indices, trade different strategies that adapt to the current market environment and follow Mr. The answer is, "Don't be average!" Don't do what everyone else is doing. So, what are you going to do?

In this market I think that there are two tacks that bear your scrutiny. The first is to take a look at defensive sectors, sectors where money goes to hide when there is so much uncertainty. Precious metals are one area you should watch. From the end of 2000 to mid 2002 most of the gold stocks doubled in price while the rest of the equities market hemorrhaged. Many of these stocks have consolidated or gone down slightly as we have had a weak recovery in the equities over the last few months. Today, amid fears of war in Iraq the gold stocks surged. This could be an area well worth your attention.

Another sector that has often been a hiding place for capital is the pharmaceutical stocks. These companies have a license to steal and they exercise their license well. Case in point, many drugs that sell across the counter in the U.S. sell at 50-75% discounts in Canada. There is a thriving business by Canadian companies selling prescription drugs across the border. The drug makers are threatening to boycott companies in Canada who participate in this practice and there appears to be a trade war brewing. The point is that these companies will go to any means to protect their bottom line at the expense of the consumer, many of which are held captive by the drugs they take. If you are on the drug consumption side of the market it is not a pleasing position to be in. However, if you are on the investing side of the market, not many positions could be better. Add to that the fact that the pharmaceutical lobby is one of the largest in the nation 's capitol and contribute heavily to both parties. It is unlikely, no matter how much the politicians profess pending change; that any drastic changes will be made that will adversely affect this powerful industry. You might want to head for this protective harbor right now!

Before I leave this chain of sectors to watch I will add one more suggestion that may have merit. I have been promoting the utility sector for three months. It is also a defensive sector which appears to still have some upside potential.

Now to my second tack that you might take. For the last four months I have been trading "Under the Radar" stocks. Stocks that are undervalued and have improving fundamentals. It has been a real winning combination so far. I have created a scan that lays these undervalued stocks at my feet and when the technical indicators present themselves I pick up a bargain.

A couple of cases in point. I invested $1000 of my daughter 's savings in Corning when the stock was trading at $3.33, the dollars into the trade were $999. Four days later I sold 200 of her shares for $4.33 that was a 20% profit. I have held onto 100 of those shares for her portfolio. I fully anticipate that when she returns from her mission to Brazil that this stock will be trading well above the $4.33 price where I sold her other 200 shares.

Part of my reasons for buying the stock was that the company lost $1.42 for the last 12 months and the estimate going forward was for a loss of $.11. That is a BIG change. I know it is still a loss, but boy are they getting better at not losing so much! Add to that the fact that they were trading at a price to book of .74. That means that if I were capable of buying every outstanding share of stock, I could sell off all the assets and make a 26% return on my money. With this fundamental information in hand I waited for the technical indicators to show the right time to buy the stock, jumped in and four days later jumped out with a nice profit!

A similar thing happened with Vitesse Semiconductor VTSS. I bought my daughter 300 shares of stock for $2.64 and five days later sold it for $3.13. Fundamentally the stock was a value when the stock was trading just barely above its book value. It was 42% institutionally held and showed it was going to go from losing $4.78 a share to just losing $.15 a share. It was also trading at a current ratio 20% above the rest of the sector.

The point to all this is that many of the most closely scrutinized stocks have been trading "Above the Radar". EVERYONE watches them and they are subject to every whim of the market. In the meantime, many of these little "Under the Radar" stocks just keep doing what they have been doing because they are not nearly as closely watched.

So far it has been a highly profitable strategy to be trading, especially in these turbulent times. Join me at www.marketmastergroup.com for more commentary and access to a list of my upcoming events.

Good luck and good trading

Doug Sutton


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