Click chart to enlargeWe sold POT at 184 today and waited to buy it back lower. CF offered the better entry point, so we added a 25% position at 140.4 to replace POT. We're hoping the selloff intensifies so we can add more long Ag names, but we can't complain with today's action so far. It's the first day in the past nine that CF has pulled back at all. No doubt due to the increasing pressure on the indexes.
Above is a chart of MTL. We've been looking for an entry point into the steel names MTL and SID, both trading within well defined channels. We were not willing to buy either name above the center of the channel, as we don't think that the bull market in steel will last nearly as long as the bull market in Ag. We are going to get our feet wet with a small long position in MTL if we can get it at the center of its channel at 138 or so. How to hedge it? Simply add to SMN, the inverse of the Dow Jones U.S. materials index, which includes both MTL and SID.
We remain skeptical about steel in general because it is counterintuitive that sales of steel would remain robust enough to warrant sustained pricing in a lagging economy. Regardless of our vote on the future of steel prices, we aren't ones to fight the tape. MTL is the stronger of the two charts (recent highs compared to previous recent highs), so for now we will focus on buying MTL only. If steel is going to fail, the weaker names will warn us ahead of time as long as we stick with best of breed. Don't forget your hedge. The market's next move is more likely to 12000 than to 12600. All long positions should be sufficiently hedged in this environment, considering the path of least resistance is down.
5 comments:
What I don't understand: You go long in Mechel, a Russian steel conglomerate, which is completely unknown to you.
The Russian market has its own rules (and Mechel is mainly domestic demand) - while the buildup of the country continues (residential construction boom, railways, infrastructure), the country has seen the peak of steel demand; plus, China is gearing up production, too. Plus: You got in, while the stock was still at the top of the channel. This all sounds illogical to me.
Related question: Since POT has such a well defined trading channel - why don't you buy a put on top and a call at the bottom?
Thanx for the insights, newfrankyboy
We're not in MTL yet. We're waiting for 138, which would be at the center of the channel. You're right, we don't know much about the steel industry at all. We don't really know much about fertilizer or solar or tech for that matter, either. But then again, does anyone? Why is any of that relevant to investing anyway? Fundamentals only matter 4 days of the year. Those are the earnings report dates. Everything in between those dates is just a bet on the broader market. During that time, the stronger stocks will outperform the market and the weaker ones will underperform it.
We've adopted this approach to investing after seeing countless people fail miserably by applying logic to the market. Some of the smartest people we know have been beaten senseless by the market after doing hundreds of hours of fundamental research into a company and its sector. We've managed to outperform all of them by simply buying strength and shorting weakness.
If we did want to go out and read everything we could get our hands on regarding the market for steel, only one thing would be certain. Half of the articles would paint a bright future for it, and the other half would say that its future looks bleak. The effort would be wasted seeing as how we would be left with less information than we started with.
The need that traders feel to have a fundamental reason to back up their stock picks is purely a psychological need. For long term investors, it's a different story.
We do not buy for the long term. We trade in fairly narrow ranges, using the channel as a guide.
Buying strong charts on broad market weakness is a winning bet. All we aim to do is put the odds in our favor as often as possible. We attempt to be right 51% of the time, and very often beat those lofty expectations.
Your idea of using options would probably work well. We are just more familiar with our approach of buying strength (in this case Ag) and shorting weakness (in this case financials via SKF).
Snot, you have a counter under your complete profile view. 400 his so far...
Thanks Secret, didn't realize it was there!
Hi Snot,
of course MTL is a sort of unknown stock, yet with very nice a proven short history.
What do you think about USU, which seems very highly undervaluated and maybe going to rise, yet uranium is also political game. Could you make a short TA and share your opinion?
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