'Steel' Yourself Against Becoming Bear Food
Thursday, May 14, 2009 | Bob De DeaRating:
Are You an Iron Man or a Woman of Steel?What a difference a couple of weeks makes, huh?
When last we visited our sector of steel in his arctic fortress of the potential bearish decline, he had just turned to Os on his Bullish Percent Index chart:
I said then that "There's no telling what could happen," although I had initiated an options position when Sector Hunter alerted me to the reversal below 70%. I also asserted that "The history of the steel/iron chart tells me that, typically, once resistance is reached, it heads down, down, down. (The two exceptions took place in April 2008 and again in May.)"
Here's what actually happened:
Whoops!
The sector reversed back up very quickly. Add this to the exceptions list.
As of this writing (Tuesday), the sector is way, way, way overbought, at the unprecedented level of 95.45% on the BPI.
This is why it's important to follow up on any positions that you've initiated because of a Sector Hunter alert. In this market, with a limited amount of investment capital, I don't need a 150% return on every option I buy; I'm willing to settle for smaller profits. So, I cashed out my position when it hit 18%, before the put options started their downward trend.
As of Tuesday, however, those same options were down only about 2.5%, even though the sector moved up. In fact, the stock, United States Steel, went from a closing price of $27.03 on April 23 -- the day of the SH alert -- to $28.87 today, a 6.8% increase. (The intraday high was $32.97 on May 7.)
This goes to show you that Chris Rowe is right on the money when he talks about the benefits of buying options in lieu of trading a stock outright.
There's no telling how long a sector can remain overbought. But this kind of volatility and a BPI reading this high in a sector like steel/iron has me chomping at the bit.
A traditional Sector Hunter sell/short alert will come when a sector moves below the 70% level. (For more about overbought and oversold levels on the BPI, see my series on point-and-figure charting.)
A move at this level back to Os would therefore not trigger an alert. But that doesn't mean the savvy (and less risk-aversive) investor couldn't move on the column switch. In that case, I'd keep my stop losses tight, just in case it whipsaws back up again and you get your paw caught in a bear trap.
Remember, this is not a recommendation to sell the farm and use the money to short steel. I'm merely giving my personal assessment of the steel/iron sector.
Going Over the Falls in a (Cracker) Barrel
Now, let's turn to the other sector we looked at a couple of weeks ago in the same article.
Last time we visited our favorite restaurant (sector), we saw this picture:
I said then that "This is as high as this sector has been for the time line in this chart (i.e., since 1999)." I also said it wasn't time to start shorting the sector yet, even if "the first dive took place over a three-month period (first circle)" and "the second dive also took place about two months after the peak ... and then moved downward in fits and starts for the next five months (second circle)."
Wait, I said.
Here's that sector today:
Wait, I said.
Here's that sector today:
The sector hit its highest historical point and headed south. This is the exact situation I was describing above: Sector Hunter won't send out an alert until it's breached the 70% threshold. Trusting in its successful track record, members of that service can sit back and wait for these alerts. But experienced investors with a little more of an "iron" stomach could decide to take the plunge here with the column change to Os -- with tight stop-losses in case of another reversal back to Xs.
The rest of us can take this time to prepare a list of candidates for shorting or buying put options on.
A couple of ETFs that I've traded in the past are the PowerShares Dynamic Food & Beverages ETF (PBJ) and the PowerShares Leisure & Entertainment ETF (PEJ). While neither of these Exchange-Traded Funds is a pure play on this sector, they could be considered for this move instead of a stock. Below I've listed their holdings.
In color are the restaurant-related stocks, with their total percentage at the bottom.
I have to admit that I may have missed a name that I didn't recognize as a restaurant owner.
PEJ gets you closer with about 36% of its holdings in the restaurant sector, and it's the only one of the two that is optionable (i.e., it has options available to trade on it).
Charts for both PBJ and PEJ were trending up since March; both show a recent Moving Average Convergence/Divergence (MACD) sell signal with a concomitant Relative Strength Index (RSI) start of a decline.
The point-and-figure charts, however, do diverge -- with PEJ in a column of Os (although still on a P&F buy signal), while PBJ is still in a column of Xs (although still on a P&F sell signal).
Stock investors can check out the charts of some for candidates highlighted above and do a peer relative strength comparison to find the weakest stocks in the sector.
And keep watching the "behavior" of the BPI charts, like a diligent Sector Hunter, so you'll be ready to capture the big game.
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Bob De Dea
Guest Contributor
The Tycoon Report
