Buying Mania, Selling Lunacy

China.com (CHINA), Daily Chart

In order to simplify my life I watch just a dozen or so futures contracts and a handful of stocks. In the past I'd keep an eye on over a hundred stocks to get a feel for things, but I'm getting too old for that. I'm not as quick as I used to be; I can only keep a couple things in my mind at once now, including what's for lunch, so I've had to adapt.

The handful of stocks that I watch are the ones that I've determined are "unusually active." I keep a list of these and it changes dramatically over time. When I look back at the highfliers of a year or two ago, I'm startled by how many names are now either in drill-bit territory, or gone altogether. Over the last several months the list has been dominated by the China-related Internet stocks.

Sina.com (SINA), Daily Chart

It doesn't make sense to trade the usual suspects (Microsoft, Intel, Cisco, Dell, etc.) when you can simply trade the Nasdaq 100 futures instead. The unusually active stocks generally make for good trading because they're liquid and volatile, like the usual suspects, but unlike the usual suspects they're not so closely connected to the Index.

Sohu.com (SOHU), Daily Chart

The unusually active stocks are often headed straight up, and these Chinese Net stocks are no different. For month after month folks who "bought the dip" have made out like bandits. Obviously the music will stop at some point, but no one knows when and it pays to follow the trend.

UTStarcom (UTSI), Daily Chart

The worst thing anyone could do when it comes to these screamers is start yacking about "fundamentals" or "valuation." As Keynes said: Markets can remain irrational longer than you can remain solvent.

It's better to join the party, hit and run in the direction of the trend, and make a buck off the bubble instead of bemoaning it. As my trading buddy Jono used to quip during the dot com heyday: "You gotta buy mania and sell lunacy!"

Previous Entry >>> Contraction Precedes Expansion