1. Sell Short Nvidia
(NVDA - Get Report)
on or near the last trading day of the year and cover into January selling pressure. This stock has been going vertical in recent weeks and has now filled a huge July 2008 gap between $13 and $18. This is a natural sell zone that combines with the likelihood of a January pullback in chip stocks, which are now bona fide market leaders.
This is a high-risk play for experienced traders with solid risk management skills. If you're interested in the trade, keep position size small and place a stop loss above this week's high in order to avoid a January "jolt" prior to a decline. This leadership issue shows unfilled gaps near $16 and $14. These holes mark obvious price levels to take profits.
2. Buy a Basket of Small-Cap Losers
I've compiled a list of higher-volume Russell 2000 index components trading over $3 with the weakest relative strength heading into year-end. Buy a basket of three, four or five of these issues to take advantage of small-cap seasonality and the end of tax-loss selling pressure. Keep total dollar exposure in each component uniform to manage risk across the basket.
The basket should be held in one unit into the third or fourth week of January, with a total dollar stop loss, which sells all positions at once if the trade fails. In other words, don't try to time the market and reconfigure the basket because one stock has a bad day. When the target date is reached, close out all positions or keep a few winners to play into February and March.
This list of Russell 2000 losers could make a basket trade worth the risk:
3. Find Small-Cap Winners
The turnaround play is a great way to trade the January market, but an even better strategy is to find the next hot stock while it's still in its embryonic stage, waiting to be discovered by the chat room crowd. For this strategy, I flipped through weekly charts of Russell components, picking out issues that look poised for even higher prices.
These Russell 2000 small-caps could break out in early 2010:
- Uranium Energy (UEC)
- Ulta Salon (ULTA)
- Aruba Networks (ARUN)
- Valassis Communications (VCI)
- China Information Security Technology (CPBY)
- SuccessFactors (SFSF)
- Switch and Data Facilities (SDXC)
- Ticketmaster (TKTM)
- BPZ Resources (BPZ)
- Omnova Solutions (OMN - Get Report)
Happy New Year, everyone!
Please note that due to factors including low market capitalization and/or insufficient public float, we consider NVTL, HURN, ENG, SQNM, CATY, EGLE, ENER, PTRY, UEC, CPBY and OMN to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.