August 27th, 2006
I hate to say “I told you so” but in my post of February 23 entitled Metals and Mining Stocks, I said:
“Jim Cramer devoted nearly his entire February 21 show (click here for a recap of this and all other shows) to his bullish view of materials and select earth moving equipment stocks. The reasons given for the bullish opinion was the growth in international trade, world economic growth and strong world demand forcing prices up (does that mean inflation in our future?). Cramer always says “I don’t care where a stock has been, I only care where it’s going.” Looking at the 11 stocks making up his list of metals and mining it’s clear that Jim doesn’t look to see where these stocks
have come from. What Cramer didn’t say was that buying these stocks now means jumping on the bandwagon long after they’ve already increased an average 400% in less than 36 months since 4/1/03!…..I don’t know about you, but I get a bit queasy buying a stock that’s shot up 50% in a short time, let along stocks
that have gone up 400%. Of course, I could have said the same thing any time during 2004 or 2005 and missed out on some fabulous gains. So, other than the
laws of probability, there’s nothing to say there won’t be more significant gains over the next 6-12 months. I’ll be watching …. but not participating. We all love watching Jim’s crazy antics every night but often he’s late to the party.”
My February 23 posting included the 11 stock Jim picked as buys. And, just like clockwork, Jim’s timing was inversely perfect, again. About 25 trading days after that show, the group started to tank. That was over a month before the current market correction beginning in early May so he can’t use that as an explanation for this bad call.
(Compare the charts included in my February posting … available by clicking on the stock symbols … with updated charts for those stocks included below.)
Machinery-Construction and Mining, IBD’s Group containing many of the names on Jim’s list, has dropped in rank precipitously over the past couple of months from 10th in March to nearly the bottom rank of 182nd today. If you had acted on the groups slide in rankings over the past several months and sold members short, you could have had some handsome profits.
As contrasted with the two groups mentioned in my preceding postings (Aerospace and Shipping), if the Machinery-Construction and Mining Group breaks below the support trendline indicated on the composite chart below (courtesy of Investors Business Daily), further declines for stocks in the group is highlight likely:
These stocks have had huge run-ups since March 1, 2003 with JLG and JOYG showing increases exceeding 1200% (most of which came long before Cramer’s recommendation). The percentage gain to April 1, and the subsequent percentage retracement for each is:
|BUCY||Bucyrus Intl (a)||221.3||-2.4||213.5|
|JLG||JLG Industries Inc||1210.2||-44.0||634.0|
|JOYG||Joy Global Inc||1219.4||-38.1||716.8|
(a) since 7/23/04
Even though many have given back a significant proportion of their earlier gains since April 1, if your stomach can take the thrills and anxieties of selling short, the charts show there’s a strong possibility of still making some money being on the short side of some of these stocks (if and after they break the indicated support trendline levels).
The one in this group I’ve shorted is TEX. Although a current member of the IBD 100 and one of Jim Cramer’s favorites, and possibly because of that support, the stock has lagged behind it’s competitors in this Group in succumbing to a correction. The recent chart shows a double head top nearing its completion which, if the neckline at 38 is violated, could lead to a 40% drop from current levels:
CAT benefited from both the construction boom of the last 4 years and from the $US’s decline making its exports more affordable in the burgeoning Chinese and Indian markets. However, for most of this year, CAT been forming a descending triangle consolidation pattern; at 66, it is currently at the bottom of that triangle. A downside breakthrough of this classically bearish
chart pattern usually indicates substantial further declines. Depending on the state of the overall market, I could see another reversal bottom consolidation forming between 45-50:
JLG Industries (JLG), Joy Global (JOYG):
These two stocks have already suffered reversals from their peaks and are now at support trendlines. Breach of these support levels could lead to additional declines on the order of an additional 50% from currently levels to support/resistance levels formed in 2004. This bearish assessment is based on my understanding of the time required to heal the overbuilt condition in real estate:
Gehl (GEHL), Bucyrus International (BUCY):
Rounding out the industry picture are two stocks with interesting chart patterns. Here, too, violation of the support trendlines indicates further downward momentum for the stocks: