LESSON 5

After a monster move in a stock market sector, we all look back and kick ourselves and wonder why we didn't see that train coming. Let's look at some examples:

A) During the housing boom/bubble - many of the home building stocks went up 500% or more.
B) Similar gains have been made in the past three years in Chinese stocks and in just the past two months there have been stocks in this sector that have gained up to 100%.
C) In the past few months, many steel stocks have seen moves of 100 to 200%. (For example, Oregon's Schnitzer Steel has gone from the low 30's to the high 90's since January 2007.
D) And in just the past few weeks and months, many of the solar energy stocks have moved up 50 to 200% and more. (Example: Canadian Solar is up from 10 to 44 since last fall.)

But there is one big problem in finding these kinds of life-changing stock buys.

I don't seem to get the word from brokers, advisors, TV pundits, and stock publications on these kinds of moves until they are largely over.

So let's see if I can help you to nail down one of these big market sector moves.

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When the price of oil & jet fuel goes up -- airline stocks will accordingly suffer. And right now this group is in the dumpster.

Recent High Current Price

American Air (AMR) 17 9
Delta Air (DAL) 18 7
US Air (LCC) 31 7
United Air (UAL) 41 13
Continental Air (CAL) 37 18
Jet Blue (JBLU) 12 5

There are few things in financial markets that yield more than the rate of inflation, plus a point or two, that are a one way street. At some point the price of oil will fall. (There will be a speculative bubble that will take the price too high and too fast. A recession will dampen demand. Alternative energy development and conservation will affect demand.) Some would agrue this point with me, but from the tulip speculation of the 1600's to the internet bubble of Clinton years, there is a pattern. The dips in oil may be short lived but there will be dips.

Oil prices may well advance to much highier levels (I'll leave others to speculate on this.) But at some point, the price of a
barrel will go too high and we will have a correction. And when this happens, I want to be ready to pounce.

Based on history, when oil prices come down, airline stocks will respond in the opposite direction. I'm not suggesting a long term hold on airline stocks -- these are companies that will be struggling for profitability into the forseeable future.
But if oil drops from $125 to, let's say, $75 to $90 a barrel -- we will see a trading opportunity in airline stocks that could move the stocks from 50% to 200%.

WHEN WILL IT HAPPEN? I have no idea -- but I am watching carefully and I'm ready to pounce. (If I had to guess, I might go with next fall - after the summer driving season. But it counld very well be a year or two down the road.)

WHEN TO BUY? My strategy will be to buy two or three airline stocks on any $10 per barrel decline in the oil price.
I would not argue with anyone who picked a different trigger price. But develop your strategy and then execute it when the dip in oil prices comes. There may be multiple, smaller, false moves - but if/when a serious decline in oil comes, it may have the potential to change your financial life, and you don't want to miss it.

WHEN TO EXIT? Once again, I teach my students to always go into a trade with a strategy. In this case, because of the volatility of oil and airlines, I would pick an exit point that would limit my losses to 5 to 10%.

This is not investing for widows, orphans, and people who like to hold onto stocks where they are showing a loss!
If you venture into these waters, the profits could be serious -- but you certainly want to go in with a very well defined plan and the discipline to execute your plan.

(Note: On the date of this blog, the price of oil was $127.21 - a record high close.)

Stock Market Competition Winners

LESSON FOUR

LESSON FOUR

The results are in and Canyonville Christian Academy (that's us) swept 1st, 2nd, 3rd, and 4th places in the spring 2008 Oregon Stock Market Game. Nearly 300 teams were entered in this competition sponsored by the Securities Traders Association of Portland, Oregon Council on Economic Education, Portland State University, et al.

1. Canyonville Christian Academy $182,881
2. Canyonville Christian Academy 168,814
3. Canyonville Christian Academy 141,882
4. Canyonville Christian Academy 141,301
5. McLoughlin High School 122,019
6. Canyonville Christian Academy 120,580
7. Jesuit High School 117,027
8. St. Mary's Academy 116,583
9. Crow High School 113,515
10. McLoughlin High School 113,497

In the 10-week, on-line, stock picking competition, each team begins with a hypothetical $100,000 cash position. Trades are real-time, short selling and margin trades are part of the game, and no stocks under $5 are allowed.

Note: The winning entries by CCA all made 40% to 80% in just over two months -- approximately two to four times what any other school was able to achieve in this difficult market. This is CCA's 16th win in the past 17 games we've entered -- a streak that dates back to 1996 and includes every kind of bull, bear, and doldrum market.. (The game is contested twice each school year - fall and spring.)

Now, to learn something from this year's spring game:

In the early days this year's contest (February and early March), the stock market was in free fall largely precipitated by the sub-prime credit problems. What I teach my students is to UNDERSTAND THE DIRECTION OF THE MARKET AND GO WITH IT.

When the market is on its way from 14,165 (Oct. 9, 2008) to 11,740 (March 10, 2008) - a sickening 2,400/17% plunge - the best place to be is hiding in cave with minimal exposure to stocks. Of course,
in a stock game, the object is not to preserve your capital. In a game you must be out there trying to hit home runs. So my advice to my students is to find stocks that are crashing - and sell the farm short.
(I also teach the kids that in real life short selling is inappropriate for most investors most of the time. But that's a topic for another blog.)

A corollary to the above rule ("understand the direction...") is the farther the market goes in one direction, the more careful you must become. The turns in the market are sometimes quick and provide massive dangers and opportunities. After the 11,740 low, the next day the market was up 417 points (March 11)
and has since moved up more than 1,000 Dow points.

Among the stocks that students picked for short selling during the down market were (with their 52-week ranges): Pulte Home (42 to 8), ETrade (26 to 2) and Ascent Solar (26 to 6).

How do we know what the direction of the stock market is? I merely have the students look at a graph from Barrons, Wall Street Journal or online. Most times the direction is clear from the picture presented by the graph. If the market direction is confused, then you get to choose. A more conservative investor or trader might consider the sidelines while someone who is more aggressive and willing to take risk would probably lean more towards being in the market.

But fighting the trend can cost you serious losses, or cause you to miss serious opportunities. And if you are ever in a stock picking competition, swimming against the current will probably land you somewhere in the middle of the final standings - or worse.