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TheStreet Open House

2 Pair Trades for Stocks Under $5

MINNEAPOLIS ( Stockpickr) -- This market is so unbelievably predictable. After another brush with death, stocks rebounded. They have been going up for several days in a row. The Dow is now in positive territory.

Can you say, "Dead cat bounce"? We've seen this story before. Are you going to get sucked into buying stocks now that the carnage is in the rear view mirror? Before you do, think twice. The rally of late began with Warren Buffett making a billion dollar splash by purchasing Bank of America (BAC) preferred stock. That claxon call sounded the all-clear and bulls were off to the raises. Ah, but wait a moment. Are we not in the last days of summer when most professional traders and money managers are on vacation?

What happens after Labor Day when everybody returns to work? Has anything really changed? The answer is nothing much. We are in the midst of a waiting game. Given the heavy speculation about a double-dip recession, investors must collect data to determine if that speculation is correct.

Economies work that way. There is no one single data point to tell us that a recession is here. It will simply take time for the numbers to come in. When the hard truth arrives market participants will be better able to determine fair market value. In the meantime we can expect the market to trade in a tight range.

Related: Must-See Charts: 5 Big Name Trades For September

Instead of riding that roller coaster I have suggested that investors take a different approach to the market by making select pair trades in search of absolute returns. Simply owning a stock long matched against a short position can help you make money no matter what direction the market is heading. The general idea is to own a stock that will go down less in a bear market while making more money in a bull market and vice versa.

This week my pair trades will focus on stocks that trade for under $5 per share. Within this category there is fertile ground to identify winners and losers that can be used for a pair trade. In fact, I find stocks under $5 to be the easiest place to spot stocks that will make it and stocks that won't. More importantly if one is correct in the analysis, big money can be made on both sides of this trade.

In the last two weeks I have seen many stocks trading for under $5 that are getting pummeled in this market. At the same time, some very good companies with share prices below $5 are hanging in their very well in this environment. Here are 2 under $5 stock pair trades:

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