These are historic times, so let’s get down to business. Here is this week’s Rocket Stocks portfolio.
There are several reasons to be bullish in this environment. Stock prices have now dropped to 2002 levels. The only difference here is that corporate earnings and profits on the S&P 500 are about 50% higher since that time.
Oil prices and most commodities prices have more than halved since their July peaks. Corporate profits should improve, with the recent drop in input costs (such as oil, natural gas and metals) will acting as a tailwind to profit margins going forward. Companies such as Dow Chemical (DOW), which yields north of 7%, and Gushan Environmental Energy (GU), which is China’s largest biodiesel producer and a $3 stock with $2 in cash and $0 debt on the books, should see a positive effect from the recent drop in commodities prices. Also, inflation is low, which will give the Federal Reserve additional room to ease.
The VIX and VXO are at record levels, trading only at premiums only seen once or twice ever. Credit is slowly thawing: Three-month Libor is falling (albeit from extremely distressed levels), TED spreads are falling, and overnight Libor is at a multi-year low.
And 6% unemployment is a good thing! In fact, buying when unemployment hits 6% and selling six months later has had historically positive results in 33, or 80%, of the 42 occurrences of 6% unemployment since World War II, with an average return of 6.57% during the six-month period. In contrast, randomly buying and holding for six months has resulted in only a 3% return, with only 64% success. So an unemployment rate above 6%, for whatever reason, is statistically significantly bullish over the six months that follow, and the results have also been very good over one-month, three-month, and 12-month periods.
We are currently in a massive deflationary environment, which could give the Federal Reserve room to cut interest rates more. The largest single monthly decline in the price of commodities in the past 30 or 40 years is deflationary. The single most important factor in determining someone’s wealth is the price of his or her home, and a 25%-to-30% drop in the average price of one’s home is clearly deflationary. In addition, various economic studies have shown that when housing prices appreciate on paper people spend more, and when they drop, people spend less. Moreover, we are spending hundreds of billions if not trillions of dollars in aggregate sum on the Iraq and Afghanistan wars; this much money leaving our country and going elsewhere is another deflationary indicator. Plus, the Treasury Inflation Protected Securities market is yielding its lowest levels of the year, bolstering claims that inflation is abiding. All of this gives the Federal Reveres ammo to cut rates.
Short interest in the NYSE has reached historical leaves, at almost 7%. This represents about 18 billion shares sold short. With the market having gone down in a straight line this past year, the easy money on the short side of the market has already been made. Whenever a trade gets so one-sided, as it has with the short positions in the market, even the slightest bit of positive news could move the market substantially higher.
Hedge funds are reporting their lowest net-long positions since 2002. Things like this near market bottoms, not tops. Over the last two weeks, leveraged CEOs are being forced to sell their equity. This happens at market bottoms, not tops.
Are things bad in our economy? Of course, but if you wait for Mr. Market to ring a bell for you at the bottom, you are likely to miss a substantial move higher.
For specific stock ideas, including Arch Coal (ACI), CF Industries (CF), Valero (VLO), Cliffs Natural Resources (CLF) and Gulfmark Offshore (GLF), make sure to check out this week’s Rocket Stocks portfolio.
To find the snapbacks and potential breakouts on a regular basis, check out these Stockpickr portfolios, which I use in my own research each week:
Always check the Biggest Percentage Losers, a list of stocks that lost big the day before, because they can snap back hard.
When you check this list on Stockpickr, you can see which stocks are owned by the quality hedge funds and mutual funds. Pay attention to those. The funds will be buying at the lower prices and likely supporting the stock.
Ditto for the 52-week-low list. You must check the above two lists every day if you hope to find volatile stocks that can snap back
Biotech Short Squeezes: Dendreon and others can often be found in this category.Stocks Rising on Unusual Volume: These are potential breakout plays.
Stockpickr's System Trades of the Day: These are trades triggering that day in various back-tested trading systems we've developed.
Stocks With Unusual Options Activity: Perhaps someone knows something?
Latest Activist Situations: These are stocks that hedge funds are accumulating shares of and demanding change in. Believe me, these hedge funds piggyback each other. And once they start rocking the boat, things happen quickly. This should be on the must-view list.
One final place to frequent is the Answers section on Stockpickr, where ideas such as those presented in this article are thrown around daily. And you can further discuss your ideas and share opinions in Stockpickr's Member Forums section.
By James Altucher
At the time of publication, Altucher was long Cliffs.
