Looking for Longer-Term Momentum

No doubt the past two years have been tough on investors. My brother's 401(k) keeps dropping, and any new money he contributes disappears right along with the old.

He's not alone. At first glance, short-term momentum players appear immune to the market's recent plunge. But most of us have long-term retirement accounts, too.

Our short-term accounts end each day in cash, which, as traders, is our income. But our long-term money is vulnerable to economic events. So when we see the S&P futures drastically down, I can feel the quiet resentment settling in my trading room, even though this negative momentum may bring short-term opportunity.

A few years ago, after a careful review of the performance records of a few money managers, I decided to handle my own retirement account. By using some common sense and momentum methods to enhance the performance of my portfolio, I felt I could do better. Since taking responsibility for my own retirement portfolio, I have felt a new respect for those who manage funds. The patience and discipline needed to hold stocks long term despite market oscillations creates for me far more pressure than I ever feel with short-term trading.

Nevertheless, I have come to enjoy the longer-term focus, so I thought I would share with you the strategies that have kept my portfolio in the green. Let me also note that I go long only because my retirement plan doesn't allow shorting individual stocks.

During the past few months, I have been sharing with traders my longer-term positions founded on the theories of momentum. Momentum usually begins with a news event. Short-term momentum traders will trade short-term reactions to that news event, taking the daily profit and ignoring the longer-term implications. These traders are more interested in the reactions to the news than in the news itself. But for the long term, the news event is more important because it can be the honey that draws the investing bees, creating a more lasting momentum. The basics of momentum theory still apply, but the money is put to work for a longer period.

In last week's column, I talked about dumpers and how I play stocks that have been discarded by the market in a short period. Usually, the dump is created by a negative news event, and I expect a certain repetitious pattern of overreactions and counterreactions. It is like looking for a diamond in the rough. I enter the trade when the stock is still down and there is clear evidence that value traders are entering, and I take the short-term potential. I apply the same strategy for longer-term trades. Let me explain with a trade we entered this past week.

Many stocks in the financial services sector have been falling for months. Take Providian Financial (PVN Quote), for example, which fell from a high of $50 in August to $2 last week.

Providian Financial's Plunge Its steep fall in only a few months shows the dumper phenomenon

I felt that sooner or later traders would find that the babies had been thrown out with the bath water, and "value" would be the honey to draw investing bees.

Providian Begins to Climb At such a low price, its risk is minimal, while its potential reward looks attractive

I was especially interested in Providian because it was cheap, making the risk/reward ratio quite appealing. On Tuesday the stock gapped up, which is a sign of positive momentum entering, and because of the $2 support price, I called a long-term buy because the bees were beginning to swarm. Entering a long-term position because of a bottoming chart is appealing because the stop loss can be minimal. If $2 is expected to be the bottom, then a stop loss at $1.80 is reasonable and limits the risk. Providian ended the week at about $3, which is a 50% gain in one week.

It doesn't take too many trades of these types to sweeten a portfolio.