Month: January 2012

Change of character refers to a potential change of a longterm trend. One simple way to find stocks that could be labeled as such is to scan for:

• 5%+ movers
• on higher than the average volume
• if they make new 20-day high, this is a bonus that improves the odds of success

The same criteria could be reversed and used to find short candidates.

This equity selection approach involves higher risk, but the potential reward could sometimes be justified, because you could catch a new trend at the very beginning of its development. In today’s fast paced market, “repricing” tends to happen lightningly fast. 80-90% of the move happens in 15-20% of the days one trend is sustained. The rest is nothing else but noise in a range. The fastest price appreciation or depreciation happens at the beginning and at the end of a trend.

It is true that you don’t have to be first to notice a new investment theme in order to profit from it, but in today’s environment of frequent fading the 52week high breakouts, it is wise to have another approach to find trading candidates.

Don’t buy anything blindly. Always think in terms of risk to reward. Risk a $1 to make $4.

The most important trading or investing advice I have ever received was to “never say never”. It helps me not to argue with the market when it tells me that I am wrong.

My “change of character” list from today follows below:

$BID – Auction house for high-end art. Missed earnings last quarter.
$BWA – Auto parts supplier. Very cyclical business.
$IPI – US potash producer. The whole fertilizer group has staged a comeback as of late
$MPEL – Casino operator in Macau. Asia continues to be the single bright spot for the industry.

The year is still young and there are already some interesting divergences between assets with high historical correlation. The textbook definition of an uptrend is a low correlation market aka market of stocks. I don’t want to make any striking conclusions based on a few days of data, but here is what I am seeing so far:

1. U.S. Financial stocks have their issues, but in 2012 they are like a breath of fresh air compared to their European counterparts. The number of regional U.S. bank stocks ($KRE) near 52week high continues to expand, while in Europe the most popular bank has become the mattress ($EUFN). Maybe this is why all home furnishing stocks are doing so well at the start of the year ($SCSS, $TPX, $LZB, $PIR..)

2. U.S. equities and the Euro Index ($FXE) are parting ways for the first time in years. Over the past 6-7 years, there has been very strong correlation between the two, backed by trillions of dollars of carry trade money. The divergence here is certainly a major change of character that will impact the capital allocation of a lot of macro managers.

3. The U.S. Dollar Index ($UUP) and gold ($GLD) are rising together. This has happened before, but not for an extended period. No major conclusions to make here. Just a temporary blip that will be arbitraged over time.

And finally for dessert, $SPY and the Shanghai Composite have separated paths once again. In the past, $SPY has been the index to follow Shanghai. Only time will tell if the situation today will be any different. As the saying goes, divergences could continues longer than you could remain solvent.

The month of January traditionally tends to give way to some unlikely winners: small caps, low priced and/or striking underperformers from the past 12 months. These types of stocks were sold in the later part of the year for either tax loss or reputational purposes. No fund manager wants to report to his/her clients that they own the year’s most striking losers or small caps with questionable business practices. As a result there is some forced selling in the 4th quarter and buying back in the first weeks of the new year.

For example, the first two trading days of 2012 were especially beneficial for some Argentinian bank stocks that were beaten down in 2011:

Weight loss stocks are also having a comeback. Not surprisingly, after taking into account many people’s New Year’s resolution to get in shape and the fact that $MCD went up 30% in 2011. A lot of calories have to be burned 🙂

Some of the declining stocks reverse course near the end of the year as the selling for income tax purposes subsides. Typical recent example is $OPEN.

This is something that happens consistently every year. A good setup to keep in mind.