All I have known is the bear market, and now it's over.
I began my career covering U.S. financial markets on April 1, 2000,
less than three weeks after the peak of the Nasdaq bubble. I
watched hundreds of stocks go to zero and witnessed the collapse of
an entire industry of high-fee, growth-chasing tech funds. I saw
Johnny-come-lately Pets.com sink into nothingness and witnessed the
implosion of Worldcom, Enron, and later much of the U.S. financial
But something has been changing in the last few months. Bad news is
increasingly shrugged off or ends up being not so bad after
all. Greece and Spain have, for all practical purposes, already
defaulted, but the euro has rallied. The U.S. economy has slowed
but is still growing. China is worsening, yet steel, coal, and
copper appear to have bottomed.
It's hard to know how exactly how the new bull market will unfold.
Precious metals, agriculture, and domestic energy will probably be
involved, but so will countless other stocks that get less
attention, such as
(two groups that interest me). But they usually begin quietly with
large numbers of so-called experts remaining highly skeptical,
which has been the case for the last few months.
The fact they're skeptical means that those same people are not in
the market. That's actually bullish because stocks will go up as
these investors come off the sidelines. The recent lack of selling
pressure is another positive.
Since early August, the S&P 500 has ground higher, slowly but
surely, with plenty of opportunities for people to sell at the
highs. Yet it simply hasn't happened. This has been especially true
in the last week.
There are reasons, obviously, to be cautious. Most people will cite
"worries about Europe" or "a lack of stimulus from the Fed," but I
see things differently. For me, the main concerns are technical
chart patterns--namely, bearish momentum potentially affecting many
The euro is a case in point. The CurrencyShares Euro Trust (FXE)
has been getting squeezed higher and is now parked at its 200-day
moving average. Does it keep rallying straight up? There is a good
chance that the answer is no.
The same is true for a stock like Alcoa (AA). The downside risk
looks minimal because it has formed some substantial support around
$8 and could now be coming back from the dead. But it too is
sitting at its 200-day moving average.
In my view, options make it easier to play these names. For
example, we know that AA will probably hold $8. You can sell the
October 8 puts for $0.05 and buy the October 11 calls for the same
price, so you will pay nothing but the commission. If AA rallies,
you'll clean up. If it drops to $8, you'll buy shares, but you'd
want to buy at that support level anyway.
And if it does nothing, then the whole position simply goes away.
That way you have long exposure but don't have to mess with all the
back-and-forth that could occur at these levels over the next few
Alternatively, you can use the "strangled long" strategy: Say you
want to own 200 shares. You then buy 100 for about $9.40 while
selling 1 October 9 put for $0.23 and 1 October 10 call for $0.15,
lowering your cost basis to about $9.02.
If it pulls back to $9, you get assigned another 100 shares for
that price but, including the credit earned, that second block of
stock would cost you $8.62. If AA rallies to $10, you will have to
sell your 100 shares for that price. But including the credit, your
effective exit would actually be $10.38.
, two groups that have been grabbing some attention recently are
cruise ship operators
commercial real-estate management
companies. Both got battered by global economic worries, but
they've also been outperforming the S&P 500 in the last month.
And don't forget about
, which have pulled back after huge rallies and could now be ready
for more upside. Finally, here are two smaller individual names
trending higher that are now showing some nice pullbacks:
3D Systems (DDD)
: Seems to be bouncing around the same $37 level where it peaked in
early July. Earnings have been so-so, but revenue is growing around
50 percent a year and short interest is more than 30 percent of the
: It started lifting in July after its use of adult stem cells
showed promise treating Alzheimer's disease. Earnings were good in
August and more positive data followed on Sept. 4. Small drug
developers have been hot for more than a year now as potential
takeover candidates, and STEM could now benefit from that trend as
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Sept. 12.)