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Market Direction: Most Every Stock Is The Same, What To Do? Some StockBlade Thoughts

October 18, 2008 11:49 AM

perplexed.jpgWhen there are huge moves in the market as we have seen, virtually all stocks move in the same direction and have the same basic buy/sell points. Meaning until the market becomes rational again and people begin to trade stocks based on earnings prospects, it does not make much of a difference which stock you are long or short. The moves have been very similar regardless of which stock you examine. Therefore, virtually all stocks are a short under Tuesday’s high and a buy above Friday’s low.

There are exceptions to this, such as SMH, the semi ETF. it did not make a decent low until Thursday. It’s relative strength in this sell-off is suspect, at best. With that said, the question is, should people simply buy the index or be selective and choose names? My personal view in this severe uncertainty is this:

1. Financials: My view on these was posted 6 months ago and has not changed. If you want to be involved in this sector you should only choose an ETF because of the risk of an individual name going under or reporting severe losses. Owning an individual name is not worth the risk in my estimation. XLF is a non leveraged ETF for this sector and UYG is leveraged.

2. Dow: I think owning the Dow, long term, is possibly a bit safer than the overall market as if we enter a severe recession, which I believe is a certainty, the bigger market caps should fair better. My only issue is GM and F. A long lasting recession will likely put severe financial strain on both and will likely require a merger and/or government assistance to save both, in my estimation. The only other possibility I see is that the “green” cars are a huge hit and saves GM.  The financials in the Dow are under the government bailout plan so default is almost impossible, but further huge losses are still possible/ likely. The financial with the most exposure to a severe downturn in the Dow is American Express. They will report Monday and my guess is what they have to say may move the entire market.

3. If I knew for certain that oil would not hold under $50, I would consider putting some money into oil and  natural gas trusts.These trusts pay all profits to shareholders. These trade like stocks and will move in relation to the price of the commodity, in general.

Permian Basin Royalty Trust (PBT) has a current yield of 14%.

Hugoton Royalty Trust (HGT) is a Canadian natural gas trust that currently yields 23%.

Here is the huge problem with these. Trust yields are based on the profits of the trust for that period. Therefore, a 22% yield can, and may, plunge to a low number. PBT seems to be more exposed to a severe drop in oil prices because their wells are in west Texas and they may have marginal producing wells, but not certain. If that is the case, marginal wells profitability is significantly related to the price of oil. Without doing further study of each, my guess is that HGT offers a better risk/reward because of the high yield. But everyone needs to do plenty of their own research on these before plunging in.It would be nice if we had a firm number for both oil and gas prices where they would no longer profitable. Perhaps an analyst has done that research and is available.

In summary, most people are far better off in these uncertain times to choose an ETF to reduce their exposure to a company collapse because of some yet unforeseen financial risk. The returns should be similar and you take much of the downside risk out. If you want to be more particular than just the Dow or SP500, choose a sector. I have the links for ETF’s on my site that you can examine.

Written by Tom@StockBlade.com · Filed Under General Investing/Trading Commentary 

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