"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
-
Sun Tzu

Saturday, February 2, 2008

Game Plan Week of Feb 3: it's Groundhog Day!

Today is Groundhog Day (or how we call it in Germany: "Murmeltiertag") and the predictions are quite controversial so far: Punxsutawney Phil is forecasting six more weeks of Winter, Malverne Mel predicts that spring is around the corner. If Groundhog Day is a proxy for the markets, I would go with Malverne Mel. Never forget: when we trade equities, we trade the future. Subprime, housing bust, deteriorating consumer spending: all that stuff is priced in. Sure, we will see declining housing prices this year, but the market is now pricing in, what'll happen in the second half of the year.

I was quite on the bearish side until even last week's game plan. I believe that the Dow will be significantly higher at the end of this month. Here are my points:

1) We have seen a classical market reversal pattern with all the bells and whistles, such as higher volume (a similar situation occurred in August, history is repeating itself):

2) We had a tremendous amount of negativity in the market, which is a contrarian indicator of a possible turnaround: a lot of people on this blog were searching for terms such as "market crash" or "panic" two weeks ago. The number of views of my blog was at record high.

3) The troublemakers of the past (housing, banks, consumer discretionary) are leading the market higher. I have to admit, I was wrong on housing last week. Fortunately, I got stopped out of my short position pretty quick.

4) Money is cheap: the FED cut interest rates to 3% and is still running auctions to fund struggling banks.

5) The international economies are still on the growth path (There was an interesting article about China in the WSJ today) and could offset the US "mini recession".

So: how to play this?

We might see the market taking a breath in the next weeks, which I will use to close down my short positions, since I'm still pretty market neutral. Despite my bullish post, I expect to see the DOW at 12400 again somewhere in the next two weeks. There are still some potential negative surprises out there. If that happens, it'll be a great opportunity to add to any LONG position.

On the long side: here are some of the stocks I like:

Monsanto
had 2 sell off days of panicking investors. Still strong fundamentals.

Blackrock
Investment management firm, saw the subprime mess coming two years ago. They are swimming in money now.

Genentech
Biotech is usually more a defensive play, but these stocks were beaten down a lot last year and seem to have some stuff in the pipeline. Good relative strength the last weeks.

Hudson City Bankcorp
Talked up by Cramer, but his arguments make sense: no exposure to subprime, regional bank benefiting from low interest rates. Technically: broke the $16 resistance level, so Hudson has room to run.

J.Crew
Premium consumer discretionary play. I like their sweaters :-) (better quality than Banana Republic IMO)

Happy Groundhog Day