MSW follows the trend and isn’t shy from covering stocks that I feel will drop in price. Late last winter (2004-2005), I turned bearish and started to cover stocks that I felt would drop in price and present us with shorting opportunities. I am bullish by nature as are most humans but I am also in the market to make money so I must follow the path of least resistance. The table inserted in this blog post shows us the top shorting opportunities on MSW in 2005.

You will notice that we stopped covering our short stocks at the end of April 2005, precisely the time that many of these stocks bottomed before starting to move higher. I am not taking credit for calling the market low but my NH-NL ratio started to change direction so I quickly changed my perspective. The NH-NL ratio nailed this low on its head!

The week ending on 4/30/05 had a NH-NL ratio list that looked like this:
Monday showed a ratio of 92-142
Tuesday showed a ratio of 76-204
Wednesday showed a ratio of 64-296
Thursday showed a ratio of 66-336
Friday showed a ratio of 68-341

The following week (5/7/05), the week I started to turn from bearish to bullish looked like this:
Monday showed a ratio of 105-176
Tuesday showed a ratio of 97-159
Wednesday showed a ratio of 128-121
Thursday showed a ratio of 152-85
Friday showed a ratio of 141-106

I also started the 5/7/05 weekly screen with this quote:
“Last week we highlighted a “sea of red flags” while this week we will highlight stocks that are showing solid relative strength versus their peers and the rest of the market. Typically, stocks that show the strongest characteristics and relative strength during corrections, bear markets and sideways markets, are usually the stocks to lead the next rally.”

Stocks that were making screens at this time were HANS, CBG and TS and they all became leaders.

My three prime tools for conveying market direction are:
1. Price and Volume of the Major Indexes
2. NH-NL Ratio
3. Behavior of Individual Stock Market Leaders

Piranha

Why do investors buy low priced stocks, thinking they can double quicker than a stock priced over $100?

Over the past three months, Tenaris (TS) has gained 46% even though it is priced over the triple digit threshold. It is up almost 200% in one year! Too many times I see investors shy away from solid investments due to the high price level and/or the large prior advance. I have added strong stocks to the MSW Index time and time again that are priced relatively high when compared to most stocks but not high when compared to what the market believes they are worth: (i.e.: AAPL, HANS, TS, WFMI, GOOG). CME may have looked high at $100, $200, $300 and then again at $400 but it continues to move higher. Learn to forget about actual price and start to focus on actual percentage gains.

Realize that 46% is the same whether a $123 stock increases to $179 or a $5 stock jumps to $7.30. By the way, take Sirius as an example, it has actually moved from $7.12 on December 2, 2005 to $5.08 today. Doing a quick newspaper search, you will see many analysts and talking heads hyping that stock prior to Howard Stern leaving the air. What happened? People were trying to buy speculation, not fundamentals and technicals. TS is up 46% since 12/2/05 while SIRI is down almost 30%.

Don’t buy into the idea that lower priced stocks move faster and can provide quicker routes to riches – THAT IS FALSE! They will most likely provide quicker routes to ruin! In the past week, I have actually heard someone say that they were buying more shares if SIRI broke below $5 and couldn’t wait to do so! Good money after bad has never made anyone a profit. Good Luck, I am happy with my money in BOT (even if it doesn’t work out because my sell rules will protect me from dropping 30% in my position).

***Look at the chart comparison of a stock we recommended at $65 one year ago today and one that was priced near $6 per share with a TON of speculation! The high priced $65 stock is now trading above $180 in a strong up-trend and the low priced stock is now trading at $5 in a down-trend.

Here is a link to an article by another trader I respect: He talks about the reason why traders could afford Google last year (note: I started to cover the stock at $172 and cut it at $281 – I wasn’t in at the bottom or out at the top but I made a profit).

*Note that the article is from 2005 (not present day)
Yes, You can Afford Google

Piranha

I wrote a new case study earlier today on CBOT Holdings (BOT) and realized the huge upside potential based on the lack of support by institutional sponsors in its early days on Wall Street.

The stock debuted in October and has since developed a cup shaped base without a handle (at this time) and has resistance at $120. A breakout above $120-$122 is a buy signal and the “high” price at this level should not discourage investors.

What is high to some investors may be low to others. If you question this theory, take a quick look at the multi-year chart for Chicago Merchantile Exchange (CME). That stock has moved from $60 to more than $400 in the past two years.

Here is a simple snapshot of the Institutional Sponsorship for BOT:

Number of Institutions (most recent reporting period):
% Shares held by Institutions: 3%
Total Institutions: 69
Money Market: 49
Mutual Funds: 19
Other: 1
Top Institutional Holder: Mazama Capital Management, Inc. (606,932 shares) 0.01% of portfolio

What interests me the most is the fact that only 3% of the shares on the market are held by major institutions such as money managers and mutual funds. When compared to CME, we can see that 280 money market mangers, 486 mutual funds and 24 other institutional investors currently hold positions in this stock. If BOT was to follow in the footsteps of CME, based on these stats alone, I am eager to establish a position right now! CME also has a 72% institutional sponsorship rating.

Piranha