Periods of Weakness Offer Traders Best Opportunities

by: Brandon Fredrickson posted on: February 27, 2008 | about stocks: BNI / FXE / GS / GWR / SNDK / TLT / TOL

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American Stock Markets started off lower on Tuesday after the Conference Board's Consumer Confidence Index fell sharply to 75, following an 87 reading in January. Next came the Core CPI, the Core CPI excludes food and energy costs since none of us really needs food and driving is bad for the planet so we should not do that either, which rose to 0.4% which was double the expected 0.2%. By late morning though the market was looking better after IBM announced a share buyback program and a talking head from the Fed had some dovish remarks suggesting they are less worried about inflation. This makes a lot of sense, because as I pointed out earlier obviously we don't need food, and Oil is evil and bad anyway. The Nasdaq gained 17.5 points, closing at 2344.99, the Dow Industrials gained 114 points, closing at 12,685, while the more broadly based S&P500 gained 9.5 points, closing at 1381.29. Volume was slightly higher on both exchanges, up about 1% on the NYSE and a bit over 8% on the Nasdaq. For the first time in awhile New Highs led new lows on the NYSE, though on the Nasdaq New Lows still outnumbered NH.

Investors Business Daily has already called the market as being one that is now in a confirmed rally. This suggests that Investors and Traders should be looking to add exposure to the long side of the market to partake in a bullish phase. While I've been a bit more cautious overall I can not ignore that the market has now started to rally on bad news, often the best signal of strength. I'm still heavily invested in cash, which is appropriate I feel until we see how the markets handle the inevitable pullback after this rally. Should that pullback be one that occurs with light volume then the obvious play is to be a buyer of strong stocks. I will at that point start building larger positions in leading names to take advantage of an up market.

Periods of weakness present traders with the very best opportunities out there for isolating pockets of strength in the market, similarly periods of strength allow for the isolation of the weaker names. With relative strength being one of the few technical measurements that holds up to vigorous testing this is very important. On the long side of the market Housing and related types of names have shown some very impressive strength. Names such as NLY and TOL are doing very well. Transport stocks too, especially the railroads, are performing nicely. Names like BNI, CSX, UNP and GWR have shown leadership even when the market itself was not. Finally some retailers have also shown some good strength in spite of a lot more bad news than good. Stocks like BKE, TJX, URBN. The Euro too has broken out of a long base, while the US Dollar has fallen. Investors and Traders can easily take advantage of the weak dollar with a long position in the FXE which represents ownership of Euro.

Isolating area's of trouble and weakness has also proven easy the last few days, and a number of important stocks are not taking part in the rally. They should be watched closely for shorting opportunities, because as I said earlier I do not buy into rallies until after they prove themselves by performing well on the first pullback after the follow through day. Since by my own set of rules then the overall market is still bearish until after this first pullback is well taken, I continue to look for short positions. Names like FRE and FNM, MRO, ADI, BUD, SNDK and GS all have shown poor gains even with the stronger market. Additionally the long bond is looking as though it could break down from these levels. This is playable with an ETF called the TLT.

Disclosure: My portfolio is currently about 82% cash. Stocks mentioned here that I have positions in are BNI, GWR, FXE, TOL, GS and SNDK.