Trading Yield in This Market
Stockscores.com Perspectives for the week ending November 15, 2008
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In this week's issue:
I have traded the stock market for nearly 20 years and I have never seen a market condition similar to the one that we have right now. The volatility in large cap stocks is quite irrational; how can the market capitalization of company like GE change by $26 Billion from the morning to the afternoon? This is what happened this past Thursday. That sort of price movement is common across all classes of stocks, creating penny stock like performance in the world's largest companies.
While the typical buy and hold investor will say that this is the worst market they have ever seen, I am quite enjoying it. The price volatility and the emotion that comes with it create trading opportunities that are unparalleled in history. But it requires an approach to the market that is different than what most people would consider.
This week, I want to provide some ideas on how to make money in this market for those that don't have a lot of time to monitor stocks. If you are only able to take a look at the market in the evenings, consider a trade where you invest in stocks that pay a yield.
The larger companies pay dividends, a cash distribution to shareholders as a share of the company's profits. This distribution relative to the share price is referred to as Yield. A stock trading at $10 that pays out $0.50 a year in dividends is yielding 5%.
Since stock prices have gone down so much over the past couple of months, yields are abnormally high. What is in question, of course, is whether these companies will be able to continue to pay out the same dividends if their business contracts in an economic slowdown.
For example, General Electric, generally regarded as the larges company in the world, currently has a yield of 7.74%. This is more than double what it was at the end of 2007. If you had held GE since the end of last year, you would be down 56.8% on the stock, which is why the yield has gone up so much.
Now, the idea is that stocks, by historical standards, will not continue to yield this high amount because eventually their share price will rise to bring the yield back in to line with what is normal.
The concern in buying these stocks is that there is no guarantee that they will continue to pay the same dividends. General Motors, which at the end of 2007 was yielding about 4% is now yielding 0% because they have stopped paying their dividend. With their financial difficulties they are not only unable to pay their shareholders but their stock has also fallen by 88%.
So, how do you pick the high yielding stocks with the best potential? I always believe you trust the market's opinion. Plan to buy any of the high yielding stocks when they show some sign of optimism. This can occur with a bounce off of support, a break of the downward trend line or a break from a rising bottom.
I would focus on the largest companies, perhaps on the highest yielding stocks on the Dow. Here is a ranking of them as of Friday:
Pfizer (PFE) - 7.86%
Bank of America (BAC) - 7.80%
General Electric (GE) - 7.74%
Citigroup (C) - 6.72%
Alcoa (AA) - 6.27%
Verizon (VZ) - 6.13%
Dupont (DD) - 5.98%
AT&T (T) - 5.79%
Merck (MRK) - 5.56%
Caterpillar (CAT) - 4.55%
I think the best way to take a longer term position in these stocks is to watch their two year, daily charts and buy them when their long term downward trend lines are broken, putting support at the inflection point low before the breakout.
The shorter term trade is to buy these stocks when they have really run far away from the downward trend line and then give a bounce signal, something like a dead cat bounce candle or a bounce from support. A dead cat bounce candle is one where the stock hits a new low in the morning but then comes back to close above the open, making the candle green. We had that signal on Thursday on many of these stocks.
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I went through the Dow stocks and looked for examples of the trades that I describe above. There were a few stocks that met the criteria of the second, shorter term trading strategy and a few that are worth watching for the longer term strategy because they are close to their long term downward trend line. Consider the following:Back To Top
1. PFE
PFE has been in a pretty linear downward trend, unlike many of the Dow stocks which are in a parabolic downward trend. This means that stabilization in the market and some buyer interest may allow these stocks to be the first to break their downward trend. I like PFE for this because it is the closest to achieving a break of the trend. It is not ready yet, but put this stock on a watch list for a break of the long term downward trend line on the two year chart.
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2. GE
GE is a high yielding stock that has fallen away from its downward trend line. On Thursday, it came back from morning weakness to close above its open. This is a short term signal that the stock should be able to rally back up to its long term downward trend line. That puts resistance at about $22.50. After the pull back on Friday, the risk reward is a bit more favorable with support at $14.50.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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