February 10th, 2009

A Basket of Low-Priced Stocks

Looking at the “important” headlines that Charles Kirk so kindly aggregates on his blog, you’d think that this market is far from bottoming and, perhaps, will not turn around for another decade. I accept that these are the opinions of pro’s with more credibility but I just can’t help but wonder about all the stocks that seem to be sending out positive signals if only you’re open to seeing them:

  • Some are in various stages of forming bases be they channels, symmetrical triangles, wedges or double bottoms.
  • There are the stocks that have crossed over 60-day, 90-day and a few even 180-day moving averages indicating that their downside momentum has abated somewhat, even if temporarily

Even with these signs, it’s still tough playing the long side in a big way because the market has yet to develop solid, relatively low-risk upside momentum. According to the our Market Timing Indicator (the MTI), that will not happen until the S&P 500 Index crosses above its 180-day moving average. As of today’s close, that Moving Average was still at 1092, more than 25% higher than today’s close.

So until this gap is closed, what strategies are there to capitalize on a substantial upside move that in prior years would have been called a “major bull market” in its own right but this year could only be categorized as the final step in “building a base”?

I’ve suggested it is possible to edge out by starting to own some stocks (my portfolio is still about 80% in cash). Some ideas include stocks in the Model Portfolio, Golden Cross stocks, or those listed in recent postings (see February 8 and 4, January 31).

However, the “Pertual Call Option” strategy is worth revisiting (see November 15 for a description). I had suggested that a basket of stocks then priced less than $5 had a high probability of making money even if some of the stocks in the basket turned out to be rotten. Here’s a follow-up report on those 12 stocks:

While the S&P 500 hasn’t progressed much over the past 3 months, the basket grew by 26%. As we anticipated, 3 of the stocks have declined while the rest increased. The largest increase was the nearly double by Tyson Foods.

Perhaps this was purely luck but I suggest the result is typical at market bottoms. There’s no guarantee that this group will continue to surpass the Index but, today, approximately 1200 of the Russell 3000 stocks are still under $10 and more than 600 are uner $5. It’s like being a kid in a candy store (but be careful; a little tastes good but too much can make you sick).

Here’s another list of some of the largest capitalized, low-priced stocks I pulled together as another example of what a basket of “perpetual call options” might include:

Some low-priced stocks will continue to decline, some may fail altogether but the basket itself will, in all probability, generate a profit …. so long as the market doesn’t, in fact, resume its descent to even lower levels. There are many stocks to chose from so good luck, happy hunting and try not to upset your stomach.

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