The Key to Profitable Trades in This Market

A media giant to add to your watchlist … where is its stock price going in the short-term? … a market approach that simplifies and improves results

Over Labor Day weekend, which film won the battle at the box office?Here’s your clue: “I feel the need for speed.”Yep, Top Gun: Maverick – which has been out for 15 weeks, mind you – still raked in the most dough.When we add it all up, where does Top Gun: Maverick rank on the list of all-time-highest-grossing-films?Number 5.At $701.2 million in domestic sales, it just passed Black Panther (Avatar is number 4). Worldwide, it’s racked up a cool $1.44 billion.And what’s the point of this movie trivia?Well, these massive sales from Top Gun: Maverick are enriching the bottom-line of Paramount Global (PARA, the company behind the hit sequel.It turns out, our macro expert Eric Fry of Investment Report recommended investors keep Paramount on their watchlist just a month ago.From Eric:

Paramount has had four major movie releases this year, the biggest by far being Top Gun: Maverick which, following its late-May release, crushed its budget of $170 million by grossing $1.325 billion at the box office.But whether the rest of the movies Paramount has planned for 2023 and beyond will be just as successful is moot; I believe Paramount has become a compelling and undervalued speculation.This famous brand is the owner of many other famous brands, like CBS, Nickelodeon, and Showtime. Collectively, these media brands create a formidable competitive moat that surrounds what is fast becoming an impressive citadel of streaming services.Although many investors view Paramount’s streaming services, Paramount+ and Pluto TV, as also-rans, these also-rans are sprinting ahead of most of the competition.There’s a lot to like here. And yet, on most metrics, the shares trade at a steep valuation discount to peers like Comcast Corp. (CMCSA) and The Walt Disney Co. (DIS).

I’ll add that Warren Buffett agrees with Eric.Last month, we learned that Buffett’s Berkshire Hathaway boosted its investment in Paramount to 69 million shares worth nearly $2 billion, or roughly 15% of the company.Best of all, Paramount is now trading at its lowest level in two years. For a longer-term buy-and-hold investor, this appears to be a fantastic set-up and entry point.

Meanwhile, let’s say you’re a shorter-term trader and you’re wondering about Paramount today

How might we analyze the opportunity through this lens?The answer points us toward a powerful new market approach from Luke Lango.Let’s begin by looking at Paramount’s chart since the spring.

Chart showing PARA's price action since the spring
Source: StockCharts.com

What is this telling us?Well, on one hand, the stock has sold off substantially since April. This is in keeping with our earlier analysis about this being a great entry point for a longer-term, buy-and-hold investor. The valuation is part of the reason why it made Eric’s watch list.After all, Eric’s Investment Report is focused on longer-term investing. To beat the market, he looks for big-picture trends that drive huge, multiyear moves in entire sectors of the market. He then zeroes in on select stocks within those trends that are best positioned to soar – and that involves finding stocks with great valuations.So, from this angle, you could argue that Paramount is already a “buy.”But from a short-term trading perspective, what is the chart showing us?Well, we’re not yet seeing sustained bullish momentum – but from the looks of things, we could be getting close to a fantastic trade…To learn why, let’s turn to Luke Lango and what’s called “stage analysis.”From Luke:

There’s always a bull market somewhere. You just have to find it. And the best way to find it is by performing something called “stage analysis.Long story short, every stock at any given point in time is either going up, down, or sideways.To that end, every stock is always in one of four unique stages: 1) going sideways at a bottom, 2) going up, 3) going sideways at a top, or 4) going down.Stage analysis is the science behind figuring out which of these four stages a stock is in at any given point in time.

Stage analysis stages

Obviously, the key to scoring consistently big returns in the market is to find stocks on the cusp of entering Stage 2 – or stocks that are about to break out.

Luke and his computing team have just developed a quantitative system that’s programmed to find stocks on the cusp of entering Stage 2 – or stocks that are about to break out. It algorithmically scans the entire U.S. stock market every single week, checks every stock against a set of parameters consistent with a Stage-2 breakout, and returns the stocks that are breaking out every week.Luke ran the scan on Tuesday after the long weekend, and noticed several sectors that lit up the algorithms. One of them was natural gas.Here’s Luke with more:

If you look at the First Trust Natural Gas ETF (FNG) – which is a collection of natural gas stocks – it’s no wonder our system flagged so many natural gas stocks this week.The whole sector has been in a technical Stage-2 breakout ever since late 2020, and momentum has not slowed at all in 2022.With the ETF currently trading at the midpoint of its uptrend channel, our technical analysis suggests natural gas stocks could rally another 40% into the end of the year.

Chart showing FNG's stage analysis
Source: Bloomberg

A second sector lighting up Luke’s algorithms this week is biotech

Actually, it’s not just this week, it’s the past handful of weeks.Here’s Luke to explain:

The market is shifting from “inflation” fears to “recession” fears. This shift benefits biotech stocks.Lower inflation fears mean lower interest rate forecasts, which means higher valuations for long-duration assets like biotech stocks.Simultaneously, higher recession fears mean higher investor desire for recession-resilient stocks, which means higher demand for biotech stocks since their drug development pipelines are often recession-resilient (people need drugs in good and bad economies – and maybe even more in bad economies).

Before we keep going, I want to highlight a fascinating aspect of this stage-analysis approach…Knowing “why?” a stock or sector is surging is great – but it’s unnecessary.When you’re utilizing stage analysis, your focus is on the one thing that matters: the price action itself, and whether it’s headed in the direction you want with robust momentum. Knowing “why?” a stock is just icing on the cake. But at the end of the day, it really doesn’t matter.The only thing that matters is whether a stock is moving in the right direction, making you great returns.Back to Luke on biotech and its Stage-2 breakout:

Looking at the technical picture for biotech stocks, the breakout is very clear.The SPDR S&P Biotech ETF (XBI) bottomed in June and has soared ever since. Yes, it’s undergone a minor pullback recently, but that pullback is very small relative to the rally, and the ETF remains well within its newly formed uptrend channel.If this new uptrend persists, biotech stocks could soar another 55% into the end of the year!

Chart showing XBI's stage analysis
Source: Bloomberg

So, coming full circle, what then can we conclude about a Paramount trade right now?

First, remember that we’re not commenting on the stock’s merits as a long-term buy-and-hold position. It already makes the grade there. We’re merely looking at it from a short-term, stage analysis “trading” perspective.As you can see below, over the past 15 months, Paramount’s stock has gone from a Stage-4 decline, into an attempt at a Stage-1 basing area, back into another Stage-4 decline, into another Stage-1 basing area.Here’s how that looks:

Chart showing PARA's stage analysis
Source: StockCharts.com

So, what’s the takeaway?The stock is in in Stage-1, and we’re watching closely for its Stage-2 breakout. The tight Stage-1 trading channel that began earlier this summer, combined with the attempted breakout in last month, suggests Paramount is getting closer to a bullish breakout.The price-action isn’t there yet, but it could be coming very soon. After all, based on Paramount’s fundamental strength as a company, its stock price isn’t likely to stay low for long.Bottom line: from a long-term perspective, give Paramount a look today – it’s a strong company trading at a low valuation. From a trading perspective, keep a close eye on it because a Stage-2 breakout could be right around the corner.

Meanwhile, despite the recent bearishness in the broad market, Luke is seeing plenty of Stage-2 breakouts

In fact, he just recommended a new one yesterday.Here he is explaining:

There’s this misconception out there that if the stock market is going down, you can’t make money in the stock market.That couldn’t be further from the truth.The stock market is a “market of stocks” more than it is a single “stock market.” Just because the market is going down, doesn’t mean every stock is going down.In fact, to my knowledge, there has never been a day in the history of Wall Street where every stock in the U.S. market went down. Every day, regardless of how much the market drops, there is always a group of stocks that is rising.The key to making money when the market is down, then, is to find those stocks.

That’s what stage analysis is all about.If you’re interested in learning more about this market approach, Luke just put together a free presentation with loads of details. The way that this approach simplifies and clarifies investing is remarkable.In any case, natural gas and biotech are breaking out – and keep your eye on Paramount.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2022/09/the-key-to-profitable-trades-in-this-market/.

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