Profit Taking or Capitulation?
Friday, November 9, 2007
So the market just had one of its worst weeks in years, with indexes of leading stocks (IBD 100 and Barron's 400) getting hammered the hardest. When the leading stocks can't hold up in market pullbacks it raises questions about whether traders are taking profits on some of their most liquid assets or whether fear has overwhelmed the market.
What I think is happening right now is that fear is starting to seep into the market. Investors are liquidating positions in their biggest winners like Apple (NASDAQ: AAPL), Research in Motion (NASDAQ: RIMM) and Dryships (NASDAQ: DRYS). These stocks are up huge this year, so smart money is locking in some of the gains. Most of these stocks were so extended past key 50 and 200 day moving averages that these pullbacks are buying opportunities in my book.
I don't, however, think that capitulation has hit the market yet. When that happens, people will start dumping even the best of stocks for one simple reason: it is just too painful to hold onto them and investors, desperately seeking relief, will call their brokers and say, "I can't take this anymore, sell EVERYTHING!". On August 17th I blogged that I felt like capitulation had hit the market. In hindsight, it looks like I was right, as the market went on to rally to huge gains after that day.
If capitulation riddles the market again, I think it could be an opportunity to great stocks at big discounts. To identify when this occurs, I've come up with a basket of three stocks. If these stocks start selling off on high volume for no apparent reason other than fear, I think it is an indication to start jumping into good stocks with both feet. Here are the stocks to watch:
NYMEX Holdings (NYSE: NMX) - This one is my favorites. The stock is range bound with long term support at about $115 and short term support at about $120. Exchanges are big beneficiaries from volatility in the market, and NYMEX, home of crude oil futures, should be benefiting hugely from the recent interest in crude oil. When markets get volatile more trades are executed through the exchanges and, in theory, they should be raking in the money. When this stock starts selling off for no reason it is a pretty good sign that the market is dumping anything and everything.
Altria Group (NYSE: MO) - A popular consumer staples stock and generally considered recession proof. Historically, economic recessions have little effect on cigarette demand, some even argue that smoking increases in times of great stress like economic recessions. If the market sees a recession coming they should gradually move money into stocks like this one; however, if they start dumping this for no reason, it is probably a sign of capitulation.
Chevron (NYSE: CVX) - This stock should trade in a similar pattern to crude oil. If crude stays above $90 per barrel but Chevron starts selling off it could be a sign of fear. This one is tricky though, because if crude futures start falling, Chevron might have a justifiable sell-off; but at only 10x forward P/E, there is a real question about how much downside this stock has. This is one of the stocks that got beaten down hard during the August capitulation but came roaring back once the market realized what it had done.
Posted by Rob Pitingolo 8:38 PM
