Tuesday, April 21, 2009

Look for the Gaps

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Gaps, in more ways than one, are the key to making money in this market. Gaps in logic of the media coverage and gaps in stock charts. We are at the peak of first quarter earnings season this week and you are seeing one media report after another with glaring headlines about how earnings are down for major companies as if somehow this is a surprise. What exactly was the press expecting to happen during the worst economic downturn since the 1930s? I am actually surprised that earnings are not down much more. The news is also leading to stock prices that gap up and down - sometimes two or three times in a week. This amount of choppy trading is unusual, but is great for making money trading, since gaps frequently get filled shortly after they are made.

Today we had earnings from big caps United Technologies (UTX), Dupont (DD) and Caterpillar (CAT). Earnings for United Technologies were down 28% and my reaction in contrast to the media's was, "Is that all?". Highly cyclical DuPont's earnings were down 59% and Caterpillar had a loss because of write offs. All of these stocks had have significant drops from their highs with CAT having fallen around 75% just in the last year alone. All in all, I would say the market has been anticipating a lot of bad news for a long time and has priced it into these stocks (and almost every other stock in the market for that matter). But does the media report, 'things not so bad, considering'? Not at all. The press coverage reads like the funeral scene from a Greek tragedy. You will also not read in most of the reports that these stocks are well off their lows. Why is that if things are going to be so bad in the future - the only thing the market cares about?

Hysterical media coverage is leading to short term panic selling on many stocks (and sometimes panic buying is taking place by the contrarians who are seeing the incredible bargains being made available). This has created very choppy charts that are filled with gaps. Unless you have a breakaway gap - a sudden move up (or down) to a new trading range, gaps usually get filled in the short term. When a stock has gapped down, it is likely to fill the gap on the upside later, so you can buy and wait for this to happen (two gaps down is an even better deal, usually rare, but common these days). I have also seen two or three gaps up. The stock is likely to fall and fill these gaps - and then you buy for usually handsome profits.

Helpful advice on making money in the market will almost never appear in the media (it is likely an accident if it does). What investors are more likely to get is this quote that appeared today from Noriel Roubini: "For people who say there are green shoots, I see only yellow weeds frankly," Roubini said from a conference in Hong Kong Tuesday. "It's not a true recovery. It's just a bear-market rally, it's a suckers rally." Roubini is an economist and not an expert on the stock market, so why is he being quoted. Has he ever made any money trading stocks? My guess is no.

NEXT: If It's Wednesday, It's the Oil Storage Report

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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