By: Pej Hamidi
Straight from the Market-Neutralist (aka: MarketWizard, MacroTrader, Pej), here is a top-down view of the market that should give you a good understanding of where the money is flowing and where it’s not. Thus, you should be able to find your long/short trades without me having to do the leg work for you. Everyone is on the edge of their seats going into the week, but I’m finding lots of opportunities out there on both sides, and as long as you’re trading both sides simultaneously, there’s no reason to be terrified like some of you are.
One thing I wanted to go over first, and I’ll do a training module and a webinar on this when I return to New York, is the difference between being “BETA Neutral” and “Dollar Neutral”. Market Neutral traders focus on the former. Their books are always “BETA Neutral”. Here’s a simple example: If you’re long $1mm of a stock with a BETA of 2, and short $1mm of a stock with a BETA of 1, are you neutral in this example? Absolutely not. You’re dollar neutral but not market neutral. If you don’t know why, go do some homework until I do a webinar.
Ok, so onto the Top Down view of the market sectors:
A few like Gas and Utilities have broken through their final line of defense, while others like Healthcare Equipment, Hotel & Restaurants, and Technology are displaying signs of classic bull market pullbacks. That is why they keep referring to this as a “stock picker’s market”. Because some sectors are in bull markets while other sectors are being pulled up with the tide with no justification. This is a Long/Short traders’ NIRVANA!
Beverages rallied 100% off their lows, mainly because Coca-Cola runs Mexico and other 2nd and 3rd world countries, including many in Africa, and the index has only managed to pullback about 6%. What does that tell you? There are bidders out there accumulating the group so step in on the dip and add to your positions or start building new ones.
Internet Software & Services has experienced its first 20% pullback since the March low and is very close to its 200 day EMA after punching through the faster moving averages. So the Trend Follower’s are about to jump all over this group on the long side whether discretionary or systematic with models about to give Long signals.
Software has been a strong sub-sector of Technology. Look for those names to outperform after a classic 10% pullback that was an “ABC (aka 123)” correction: viscous, violent, and fast. I love those. This is where you step in and start scaling into your position. Same with Technology Hardware & Equipment.
Biotech has actually been range-bound since 2005 and never really participated in the bear market. I believe without a doubt we are on the verge of multiple cancer breakthroughs. So the smart money is buying up any supply that comes on the market. It’s impossible to tell the winner’s from the loser’s so smart money is building diversified portfolios unless of course the chart tells us insider buying is rampant.
Try and stay away from Telco and Insurance, as these sectors just don’t have enough interest and are flat-lining. In other words: dead money.
If you noticed, automotive and their related sub-sectors didn’t pull-in. Either they were too oversold or the contrarians continue to accumulate stock, knowing in the long-run, the United States will dominate the automobile sector, just as it has after every blip in its history. Remember the 80’s?
I’m very bearish on Oil and Petroleum based chemicals, which means Oil and Gas stocks are on the short side of my book. Transport looks like it’s finished testing the tops put in last year and rolling over just as one would expect them to both technically and fundamentally. Dry Bulk Shippers are leaving port empty, train carts are half full, and Wet Bulk Shippers are in deep trouble.
Real Estate, which includes REIT’s, remains in its downtrend so they also remain on the short side. No bottom pickers here. Don’t bottom pick housing stocks. We’re not done yet there. I’m in Irvine, Ca. where Lennar is based and owns a lot of raw land that they’re sitting on, which they acquired at the peak. The finance charges on that land are huge and they’ve got these big “For Sale” signs on the empty lots. Something you just don’t see around here.
Textiles, Apparels, and Luxury Goods have rallied almost 100% from their March lows and there’s no reason for it. Look in there for your short side.
Consumer Staples have rallied 40% but remain below their ’08 highs. So be careful.
Tech remains on my Long side because their pullbacks have been so fast and furious they resemble bull market pullbacks. Moreover, the macro backdrops are highly bullish for technology. Names like DELL, APPL, AMZN, PCLN, CSCO, JNPR, GOOG, and other top names are definitely “buy on pullbacks”. In other words, step in and start buying when everyone is selling. Don’t be afraid. When you’re afraid, you’re probably right. It’s when you’re complacent that you need to worry.
Internet Catalog & Retail has been the hottest sector in the market, with the index at all time highs (mainly because of AMZN and PCLN). Stay with the winners. I would stay away from Telecom though. That sub-sector can’t seem to figure out what the prevailing standard is going to be, including INTC. I know INTC is not a Telecom name but they make the chips that go in the towers and WiMax boxes, so avoid that one too. This includes Wireless.
Computer & Peripherals were able to hit their 2007 all-time highs by rallying 100% in the sector (meaning many stocks rallied 3 or 4 times that), and have just pulled in the standard bull-market 10%, so start looking at names in the group. If you need me to list them for you, then you’re one lazy m.f..
Not surprising, Food/Beverage/Tobacco didn’t pull in much at all on this retracement in the market. Everybody eats, drinks and smokes, even in a recession.
Insurance has put in a bottom but there’s a bit more work. Nonetheless, now is the time to start accumulating initial long term positions.
Without a doubt, my favorite sub-sectors to be long are: biotech companies involved in cancer research, specific technology as mentioned above, aerospace/defense (especially on this pullback, we are at war). Don’t give me that “war profiteering crap”. We’re traders. We buy and sell based on the macro theme that dominates. It’s like saying “shorting is un-American”. If you believe that, you probably voted for Bush in 2004.
Commercial Banks continue to provide value for those willing to put these stocks away for the long-term. But don’t bottom pick. Buy the leaders and stick with them, short the weak names. Try to remain BETA neutral as much as possible and you’ll be almost risk-free and you’ll score a killing because your short names will probably go bankrupt and your long names will probably pick up their carcasses from bankruptcy. Think JP Morgan and Bear, or Wells Fargo and Wachovia, or Chase and Washington Mutual.
Unless you’re a specialist in these sectors, get thoughts like “China is in trouble” and “Obama is attacking proprietary trading” and other commentary that you hear and repeat from the talking heads on CNBC. China’s GDP is on FIRE and Goldman Sachs runs the world. Anyone trying to short GS because they think it hasn’t come down DOES NOT UNDERSTAND THE MARKET and how the market’s micro-structure is built. So go apply at Starbucks or something. Running money is not for you. If you think Goldman Sachs is going to come down just because it hasn’t yet, you’re helpless.
“Market-Neutral” trading is neither PAIR trading, nor is it “Dollar Neutral” trading. The objective is to keep your book BETA Neutral while carving out a few dozen basis point of ALPHA each day all year long such that you finish up anywhere from 18% to 24% for the year on a $10mm trading book. If you take home 50% of that, you just made between $900,000 and $1,200,000 gross for the year without having much V.A.R. (Value at Risk). If you can do this, then you’ll be able to raise billions from institutional investors, and it’s not hard to do. The impediment is human psychology.
That is what gets in your way and that is why not many people are able to achieve such a modest goal. However, I’m going to put together training modules, classes, webinars, seminars, you name it, so that YOU can do this if you choose. You have to pick the right strategy for your mental make-up. Not everyone can be a Momentum trader like Sperling and be one of the best traders in the world at it. If you are under-capitalized, or don’t have the discipline that Red Dog, Laz, or Sperling have, Market-Neutral may be the answer, with a little Behavioral Psychology thrown in there. And since I run a Market-Neutral desk at T3, which is in its infancy, T3 Live is giving you another tool to add to your arsenal of becoming a Master Trader.
Signing Off for now,
Pej
