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The Most Consistently Profitable Trading Strategy of My 24-Year Career

By Jeff Clark
Tuesday, May 15, 2007

When a stock behaves well in the face of bad news, then it's probably time to buy it.
 
I know it doesn't make any sense. I know it defies logic. After all, who in their right mind would buy stock in a company that's plagued with bad news?
 
But trading isn't about logic. It's about emotion. More specifically, it's about gauging the level of emotion in a stock and capitalizing on it when it hits extreme levels.
 
When sellers have pushed a stock down to levels so extreme that even a devastating headline can't push it down any farther, then it's a good bet that the sell side has gotten too emotional. This condition often leads to sharp bounces, and buyers can make outsized gains very quickly.
 
Last July, for example, Ford (F) released the worst earnings report in the history of mankind. Revenues and earnings were sharply lower than even the most bearish analyst's forecast. Management guided lower for the next quarter and the next year. And the long-awaited turnaround was pushed back even farther.
 
The stock responded to the news by dropping 10 cents.
 
One dime? One lousy dime?? In the face of the worst earnings report in the history of mankind, Ford shares only lost a dime. Sellers were clearly exhausted. And, even though there was no logical or sound fundamental reason to own the stock, I told S&A Short Report subscribers to buy Ford shares and call options.
 
As you can see from the following chart, Ford shares gained 50% over the next seven weeks…
 
 
It was a terrific example of a stock so beaten up emotionally that there's very little downside and plenty of upside.
 
A similar condition exists today in the homebuilding stocks.
 
Now, before you roll your eyes and tell me I should stop drinking so heavily so early in the morning, try to think of a sector where investors are more bearish. Try to think of a sector that's more beaten down. Try to think of a sector that's been more pummeled by a constant drumbeat of bad news.
 
There's no logical reason to buy housing stocks right now. But there's probably a pretty strong emotional reason to trade them.
 
The new housing starts for April get released before the opening bell tomorrow morning. It's going to be a bad number – perhaps even the worst number in the history of mankind.
 
Pay attention to how housing stocks respond. If they can rally in the face of bad news, then it'll likely signal the start of a new bull phase for the sector. And you'll do well to jump on board.
 
Best regards & good trading,
 
Jeff Clark




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Market Notes
Soybean oil at five-month high on back of biodiesel demand. Palm oil at eight-year high.
 
More strength in semiconductors… new highs for Applied Materials and Texas Instruments.
 
Blue chips at new highs: Nokia, Verizon, Apple, Chevron, DaimlerChrysler, Bristol-Myers Squibb, and Valero.
 
Fast-food stocks hitting new highs: McDonald's, Chipotle, Burger King, and Jack in the Box.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%