We are dealing with a mad, mad market.
In an op-ed piece in the Wall Street Journal, Fed Chairman Ben Bernanke tells the world that he will keep interest rates low and still control inflation. The bond market yawns. He says the same exact thing to Congress the following day, and bonds rally and interest rates fall.
Wells Fargo (WFC) issues miserable data with its “record” earnings announcement, and the stock sells off a bit. But no one points out that the company refuses to have a live conference call to discuss anything, or questions how the company is going to support the portion of the more than $1.5 trillion in off-balance-sheet assets that will hit the balance sheet in January due to an upcoming change in accounting rules.
Meanwhile, Gilead Sciences (GILD) reports blowout earnings and double-digit growth — not to mention that it has yet to see the full impact of world’s concern over swine flu — and the stock sells off.
Simply madness.
How to Trade the Madness
You have a few options when it comes to trading this madness:
1. Don’t trade.
Instead of actively trading this market, you could buy long-term options, or LEAPS. Or you could do something really quaint — buy and hold a stock, selling calls along the way to generate cash.
2. Day or swing trade.
If you have a great PDA, a liberal boss or no day job whatsoever, you can day or swing trade. Otherwise, find a good trading desk or RIA.
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3. Take things one day at a time, one trade at a time, one segment or stock at a time.
Let me explain …
3 Steps to Making Money in This Mad Market
1. First, start with fundamentals, and then check the technicals, not vice versa.
On the short side, look for a company that is fundamentally flawed and a stock that is in a discernible downward technical trend, inside a sector that is flat or headed down as well. (Get 10 Tips to Getting Started With Technical Analysis.)
One such company is Wells Fargo (WFC). More on that later.
For a bullish bet, look for a fundamentally great company and a stock that is in a discernible upward trend, inside a sector in a flat or upward trend.
Take a look at the greatest biopharma company on the planet, Gilead (GILD), or the best unknown company, Cerus (CERS), a biomedical products company with a pioneer technology for cleaning blood. (See why CERS is One Penny Stock You Have to Own.)
Second, look for stocks on the bubble that you can trade for a few nanoseconds (too nerve-racking for this fella), or, better yet, you can short (more my game) once they have already broken their upward trend.
Look for bad outfits with bad futures, not simply overvalued stocks.
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Harley-Davidson (HOG) is one example. Who needs a motorcycle in the Great Recession? (See why the ride is over for Harley-Davidson.)
However, HOG is currently so heavily shorted that it is unable to go down due to short-covering. Wait until it breaks, and then short it.
And who wants a $300 Palm (PALM) Pre when you can get a $99 iPhone or keep your BlackBerry? PALM is another stock you should be shorting, but wait until the bubble pops, and then buy put options on PALM.
Third, trade your instincts.
The market has bid up bad stocks on momentum.
Visit Home Depot (HD) — miserable service from miserable employees. Or the Cheesecake Factory (CAKE) — great sliders, empty tables. Or how about Coach (COH)? It’s new “inexpensive” line is dominated by $200-plus handbags that no one needs.
And check out Wells Fargo’s financial statements from the first quarter. Look at pages 76-86 (a 10-page footnote) and you’ll see that they have more than $1.5 trillion in off-balance-sheet assets — more than Citigroup (C) — and, as of next January, some part of these will hit the balance sheet.
Your instincts should be screaming “dilution, dilution, dilution.” And that means lower stock prices. (
Find out why WFC is the short of the decade.)
So, you see, there is no reason to let the market madness stop you from making money. Just follow my three steps and you can beat this crazy market.
Let Michael Shulman help you make money on the short side of the stock market. Download a free copy of his new investing guide, Double Your Money — and Double it Again.
