Trading High Potential Stocks

As the title implies I am not eager to trade the markets aggressively here. I am still in ‘wait and see’ mode and I patiently wait for trades with superior odds in order to take action. Otherwise I prefer to stay in cash. That being said, high odds are typically present when the ’stars align’. That is, when both the overall market and individual stock patterns set up accordingly. I’ve talked about this numerous times in the past, strong stocks tend to perform very well in up or sideways markets. When the markets are headed downwards it is best to stay on the sidelines or to be short.

There are basically two reasons why I am not willing to be very aggressive here although the market are in a strong up trend.

1. Everybody, and I mean everybody, has figured out this is a bull market and that you have to buy everything in sight.
2. Sell in May and go away is approaching fast.

To make a long story short, the only way I think things could work out well if you go long is to be extremely selective. We need to see decent sector rotation kick in in order for the market internals to improve. That makes picking stocks even more difficult. The main problem I see is the potential this could be very choppy for quite a while. I have no business in being aggressive and seeking exposure in what I deem has the potential to get very choppy. I am not a daytrader, so whenever odds are not in my favour I need to take a step back, watch and wait for stocks to set up again.

Regarding the first point one could make an argument for a crowded trade. If the dreaded sell in May thing actually occurs and QE2 ends (I think quantitative easing will go on in one form or another, but this game is all about ‘perception’) this will make for a very bad combination. As far as I am concerned, right now I prefer to stay very cautious and have no long exposure or a very low exposure to the markets.

A few thoughts:

• SLV vs. SLW: SLV – Silver ETF is making new highs. SLW- Silver Wheaton is not although it is supposed to be highly leveraged to silver prices. The first signs of divergence are building.
• Uranium vs. Solar: As I outlined in my March audio commentary, Uranium will need quite some time to set up again. Solar stocks are somehow not benefiting as much as I would have expected. The ones I am keeping a close eye on are TSL – Trina Solar and SOLR – GT Solar.
• Uranium vs. Natural Gas: Natural gas is clearly profiting a lot more from the breakdown in Uranium. GLNG – Golar LNG, CLNE – Clean Energy Fuels and MTZ – Mastec are the ones to watch in that space. As LNG – Cheniere Energy has recovered very well I will actually keep it on my public list. MMR – McMoRanExploration which I traded in the past might be worth watching again.
• Fiber Optics: IPGP – IPG Photonics needs more time to set up. The sector is experiencing much more pressure than expected as EXFO – Exfo Inc. an important player in that group gapped down recently. Now we have both FNSR – Finisar and EXFO – EXFO Inc. that have significantly dragged down the sector. I still see great potential but due to those warning signs it is clearly not blue skies ahead. Let’s see what happens.

Related sector overview charts: