The Gap Trade Continues

Many of you know I’ve been talking about I call “The Gap Trade” lately.  This is where the fundamentals continue to improve but the technicals and stock prices continue to deteriorate.  We all know that stocks aren’t every perfectly priced.  They are usually over or under valued.  It’s like a braid.  The job investors have is determining when stocks are over or under valued, either by looking at the entire market or by each stock individually.  Clearly in 2000, stocks were overvalued by any stretch of the imagination.  However, they kept going up because sometimes something you know is overvalued continues to get more overvalued.  Stocks were probably overvalued in 1996 but continued going up for several more years before they came crashing down, very similar to home prices in the past few years.  Conversely, stocks were undervalued for several years prior to their early 1980s run.  Eventually, the value (or the ridiculous overpaying for stocks) is recognized and the trend reverses.

More data that we follow confirms that indeed the economy continues to improve.  In fact, ECRI is showing more improvement in their numbers for growth going forward as well.  On Wednesday, durable goods orders came out better than expected and everyone was giddy in the morning because of it.  That’s just the tip of the iceberg.  The data that’s going to come out over the next few months will continue to astound people.  “How on earth can this data be real?  Maybe it’s just a one month blip.”  That’s what they’ll say.  They won’t believe it.  The consistency of the good numbers will begin to get stocks moving back up again though.

In the meantime, the gap will widen because the technicals are looking pretty pathetic.  In fact, they’re getting so bad, that I actually initiated some short positions this week.  I haven’t had short positions since late February.  Most of these are hedges right now for the few remaining positions I keep in the portfolios.  But, the rally yesterday was a perfect opportunity to initiate more shorts.  The rally looked impressive but was anything but.  Since May, the buying has been very lackluster, volume’s continued to weaken, the number of stocks participating in the rallies has weakened, and now the sellers appear to be awakening.  If that picks up any steam at all, we could be looking at a quick 10% correction from these levels, especially when the window dressing ends on Tuesday.  This will be the first up quarter for many portfolio managers in a while and they want to keep it that way.  So, money makes its way into stocks propping up prices.  On Wednesday, I’d look out below though.  We have the potential to go much lower.  Technically speaking, a head and shoulders is forming looking back to early May (left shoulder).  This is another potential problem that could have prices falling in the next few weeks.

It’s hard to say how wide the “gap” will get.  But, I think it’ll be big enough for us to make a lot of money over the next few months.  But, to get from here to there, there may be some pain first and that’s why protection mode is called for right now.  Let’s not give any gains back that we’ve worked so hard to get in 2009.

There are a few stocks worth going long for a quick trade.  The ones I’m watching closely (and some I have options on) are Lowe’s (LOW), Big Lots (BIG), Verisign (VRSN), & Gamestop (GME).  Again, these would be quicker trades.

Biz Radio Power Trading Workshop

On July 9th, Vince Rowe, nationally recognized trader & teacher will join me in San Antonio for an evening of learning and trading tips. We’ll be going over the investments that will actually make you money when inflation comes rolling along.  In addition, Vince will show how & why stocks generally fall 3-6 times faster than they rise.  What is the big money doing?  He’ll show you.  It should be a great evening and I’d love to meet you.  Just go to www.bizradio.com to register or call 1-877-8BIZRADIO.  It’s a FREE evening.

Biz Radio 1130AM Struck Down

I apologize for those in San Antonio.  Our tower was struck by lightening multiple times on Thursday knocking out our signal.  We’re hoping Monday morning, the transmitter will be replaced and we’ll be back on the air.  In the meantime, you can stream the network at www.bizradio.com

This post published at www.karleggerss.com

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2 Responses to “The Gap Trade Continues”


  1. 1 James June 28, 2009 at 10:57 pm

    Are there any natural gas ETF/ETN alternatives that track natural gas better? The rollover cost on the futures contract on UNG have killed those holding for a longer period of time. Futures traders would buy the next month contract in anticipation of the roll and sell it to UNG as they roll over to the next month.

    • 2 keggerss June 29, 2009 at 6:32 am

      Unfortunately, I don’t know of any. Perhaps using an ETF of nat gas stocks would be best for you or take the time to learn about opening a futures account.


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