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September Strategy And What A Difference A Month Makes

09/08/11 09:21:47 AM
by Billy Williams

Beginning in August, weakness from July's trading was carrying over but now it's spreading like a contagion. Learn how to prepare and profit.

Security:   SPX, PSMT
Position:   Sell

Just over a month ago, I detailed in an earlier article that as July ended on weakness to prepare for that weakness to carry over into August. I came up with a stock list that contained a combination of weak stocks to short mercilessly if and when that weakness forced a market downturn as well as a list of fundamentally strong stocks that were trading near their all-time price highs to go long on if the market turned upward again. By being prepared, you would have been ready to short the market with either stocks or put options while still having a hit list of viable long candidates, though no bullish strategy was possible during August.

Looking back over the last several weeks, I have to wonder what a difference a month can make. The Standard & Poor's 500 closed at around 1286 on August 1, 2011, before declining more than 180 points down to 1101 and is now trading in the range of 1200. See Figure 1.

FIGURE 1: S&P 500. The SPX has recently appeared to be climbing back from a steep decline but with the 200-day overhead serving as resistance and the price action forming a bearish flag, the SPX could be preparing for another move down.
Graphic provided by:
The lackluster summer trading days in the US have now turned ugly, with fear spreading over the nagging uncertainty that is Europe, and another potential banking crisis looming over the horizon from across the Atlantic will likely mirror the financial crisis in 2008. This time, it will be made worse by several zeroes added to that total figure.

While many Americans were enjoying the Labor Day weekend, German elections dealt a horrible blow to Chancellor Angela Merkel as the Democratic Christian Party was virtually gob-smacked as young Germans rejected bailing out any of the beleaguered EU partners -- Ireland, Spain, Italy, Portugal, Greece -- sending the message that though Germany may control the euro, its citizenry would not support any bailouts for indebted EU nations.

Add to that the announcement that another economically strong European nation -- Switzerland -- would tie the Swiss franc to the euro in order to support it from a strong decline so that if the euro does crash, then the resulting flight to safety into the franc from the euro would not force the Swiss franc so high that it would make its exports too expensive for Europe and the rest of the world to buy. Since Switzerland is dependent on tourism and exports to maintain its strong economy, this move keeps their exports from becoming too expensive for the rest of the world to buy or keep tourists from being unable to visit due to a rise in costs.

The writing is on the wall for those who watch Europe in its massive troubles, but the question arises -- how do you make money on it?

FIGURE 1: PRICE SMART. Despite the market's decline, PSMT has been a strong performer trading near its all-time price highs. Though you might not want to buy any equities on the long side right now, stocks such as these are worth keeping an eye on for when the market turns upward again.
Graphic provided by:
As stated a month ago, look for stocks that are likely to be affected by a European downturn or have financial exposure such as Bank of America, which bought untold amounts of loan default swaps from European banks.

The second part of the strategy you want to adopt is to look for the stocks that are holding up during these steep selloffs. Equities may not be the place to put your money now on the long side, but the stocks that are holding up the strongest now are likely to lead the market higher when the market finally does turn back to the upside.

A good stock to look at is Price Smart (PSMT), which is a solid value on the fundamental side and well poised to compete in its market while trading near its all-time high while the rest of the stock market is struggling with many stocks experiencing crushing blows to their values (see Figure 2).

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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