November 16th, 2008

Those "Perpetual, In-the-Money Call Options": Follow-up

I know you’re going to find it hard to believe but it’s the honest truth.

I wrote my previous post, Those “Perpetual, In-the-Money Call Options”, at 1:53pm on Sat, Nov 15. I just learned (Sunday, Nov. 16) that Mike Santoli of Barron’s Street Wise column wrote an excellent piece for the on-line version about the various signs indicating the market may be nearing a bottom. He concludes the article by saying:

“LAST YEAR, WITH THE MARKET near what would prove its ultimate high, I noted a perverse pattern in which triple-digit-priced stocks were consistently outperforming other issues, a sign of momentum-chasing speculation (Streetwise, May 14, 2007).

We’ve come nearly full circle, as single-digit midgets abound and stocks are pounded harder once they lose a digit before the decimal place. Ned Davis Research tracks the price of the 25th-lowest-priced stock in the S&P, which tends to mark a low as bear markets culminate, as a marker of speculative juices having been wrung out of investors. It’s now around $6, near levels of the 2002 bottom [emphasis mine], though not yet the 1974 low — near when Barron’s ran a story pointing to the abundance of sub-$2 stocks that were effectively warrants on the survival of American capitalism.”

This is exactly what I concluded, in different ways and to a different end. Ned Davis Research uses the abundance of low priced-stocks as a metric for marking the bottom; I see $’s in front of all those single-digit stocks and see them as opportunities to make large percentage gains through their “non-expiring call options” characteristic.

The Barron’s article, entitle “Welcome to the Mind-Numbing Market” is well worth reading. It was brought to my attention from a recent post again on Barry Ritholtz’s Big Picture.

Great minds do think alike.

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