Oversold List Shows Market at Tipping Point

NEW YORK ( TheStreet) -- It's a lot easier to pick stocks when the Fed is on your side. The Fed pumping money into the system doesn't lower the investing standards though. Throwing caution to the wind is what put the housing market in the situation it is in now.

An important caveat in the market is "never confuse a bull market with brains." The oversold stocks ready to bounce I found for this article lead me to one stock to buy and one to sell off. Some of the stocks may surprise you.

On Aug. 28, I wrote Four Oversold Stocks Ready To Bounce Higher .

In that article, I picked only four stocks I liked. I will use the closing price on Aug. 28 as the starting price, and the closing price on Tuesday as reference points. All returns are rounded down. Let's see how they performed:
  • Nokia ( NOK) -4.29%
  • Hewlett Packard ( HPQ) +7.9%
  • Brazilian Petroleum ( PBR) +10.5%
  • Radioshack ( RSH) +10%

    The Nokia pick is the worst pick I have had so far, but I believe it remains a buy.

    In my last article oversold article Six Oversold Stocks Ready to Bounce I missed one also.

    I am pleased with the results this time around again. The number of winners (three) outnumbers the trades that lost (one) and all the winners were greater than the one loser. That's a good day's work in my book.

    What I am looking at now:

    SO Chart SO data by YCharts

    Southern Company ( SO)

    Background: Southern Company acquires, develops, builds, owns and operates power production and delivery facilities and provides a broad range of energy-related services to utilities and industrial companies. The company was founded in 1945 and is headquartered in Atlanta, Ga. Southern trades an average of 4.1 million shares per day with a marketcap of $39 billion.

    52 Week Low: $41.00

    Book Value: $21.95

    Price To Book: 2.15

    Analyst opinion is mixed. Most of the analysts surveyed don't believe a buy or a sell should be made at this point. Right now, Southern has one buy recommendation out of 16 analysts covering the company and 13 holds, while two recommend selling. The average analyst target price for SO is $47.35.

    It's common for stocks that are oversold to have analysts distance themselves. Interestingly, analysts will often downgrade a company at or near the bottom (sad, but true).

    The moving averages don't appear intensely negative. The 60- and 90-day averages remain above the 200-day (bullish), although the current price is below the 200-day moving average (bearish). Watch for the price to trade higher above the 200-day near $45.65 as a bullish indication.

    Southern is expected to make about $2.65 this year based on the same analysts who are not in agreement with the company prospects. If correct, the price-to-earnings ratio is 17. Granted a 17 isn't cheap, but the yield is now over 4%.

    Investors are receiving $1.96 in dividends for a -- did I mention? -- yield of 4.4%. Examining the past dividend history is not foolproof, but is at least a reasonable method to help predict the future decisions of the board of directors. In the last three years, the average dividend paid per year was $1.80 per share. Shareholders continue to receive higher dividends. The company's distributions have increased 4.1% a year, during the last five years.

    Short sellers are next to impossible to find. Short interest is so low I only include it to demonstrate the smart money is not betting against this company. One percent of the float is short based on the last reported numbers.

    The next ticker is part of a group that uncomfortably populated my results for the last week: leveraged ETFs. These are not really equities like most stocks. They are financial trading instruments that are more or less Frankensteins of the equity world.

    I am not a big fan of leveraged ETFs, so I rarely mention them; other than warning investors to stay clear. Leveraged ETFs are a great way to make money, if you're the underwriter for them. Otherwise, I consider the product an unintended consequence of SEC pattern daytrader regulations.

    The only way I know of to guarantee making money on Wall Street is to short leveraged ETFs. It's the same reason why it's hard to find shares, and when you do find shares, you can't count on holding on to them when you need to.

    FAZ Chart FAZ data by YCharts

    Direxion Daily Financial Bear 3X ( FAZ)

    Background: The Financial Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Financial Index. Direxion Daily Financial Bear 3X trades an average of 10.2 million shares per day with a marketcap of $680 million.

    52-Week Low: $16.04

    Trying to make sense of the fair value for leveraged ETFs is like asking my three-year-old to figure out Chinese algebra. Unfortunately, my son is likely to give an answer that more closely resembles reality.

    Why is the Financial 3X bear "Faz" showing up if the fair value isn't relevant? On the weekly chart, we have several oversold market timing indications. One is based on a variation of legendary market timer Tom DeMark's TDCombo. DeMark's work can be found in places like Bloomberg, Thomson Reuters, and other professional grade investment sites.

    DeMark is an advisor to SAC Capital Advisors and other big money in the industry. In a nutshell, he isn't the type of trader you want for a counter-party. If you're interested in learning more about his timing indicators, find a copy of DeMark Indicators by Jason Perl or one of the many books DeMark wrote.

    Technically, based on a weekly chart and now on the daily chart, FAZ appears ready to bounce. Since FAZ is a leveraged bear, it trades with an inverse relationship to the financials that are represented. If it moves up, which appears likely, financials are expected to move lower. While FAZ is a 3X product, the actual trading relationship isn't 3 to 1, but the point is the same. Financials may be poised for a breather.

    SDS Chart SDS data by YCharts

    ProShares UltraShort S&P 500 ETF ( SDS)

    Background: SDS trades an average of 17.2 million shares per day .

    52-Week High: $28.16

    52-Week Low: $13.03

    Similar to the love I have for the Faz, I don't believe trading SDS makes a lot of sense other than for intraday trading in accounts that are not able to short. Self-directed IRAs come to mind. Even for those purposes, I question if the edge is positive.

    Also, similar to FAZ, SDS is oversold on the weekly, and on the daily chart. The daily is in a strong downtrend, and despite the transaction friction that causes loss in value, we still have to assume a reversion to the mean with an index product is expected.

    TZA Chart TZA data by YCharts

    Direxion Daily Small Cap Bear 3X ( TZA) AKA "Taz"

    Background: Direxion Daily Small Cap Bear 3X trades an average of 20 million shares per day.

    52-Week Low: $13.35

    Taz is the final leveraged ETF with sirens blaring on my computer. It is based on a theoretical leveraged index of small capitalization companies. Beyond learning that the shares are oversold, keep in mind that they don't have to correlate (inversely) on any given day to the underlying stocks. The underlying index basket is the Russell 2000.

    The weekly chart based on my indicators (hat tip again to Tom DeMark) is an aggressively long buy signal. The daily chart, the chart that I use to time entries based on weekly signals, is slightly oversold and near very oversold (within a few days).

    What does this mean to me? The chart suggests to me that I should anticipate a pullback in the aggressive move higher by small cap stocks.

    IWM Chart IWM data by YCharts

    Another way to view the small cap horizon is to look at the Russell 2000 ETF and see how it compares to the TZA. iShares Russell 2000 Index IWM ( IWM) is the trading ETF to look at. Unlike the leveraged ETFs, the straight "normal" ETFs are in my opinion, perfectly fine to use as part of a portfolio. I especially think they are wonderful when used as a diversification tool.

    The weekly chart isn't what I would consider overextended. Not enough to pull the trigger to short it (the same as buying a bear ETF). On the other hand, the daily chart is indicating to me that a pullback in price is now expected.

    SPY Chart SPY data by YCharts

    For one more reference point, take a look at the SPDR S&P 500 SPY ( SPY)

    Standard and Poor's Depository Receipts trust is involved in the financial services industry. Their holdings are comprised of the 500 stocks in the S&P 500 Index. SPDR S&P 500 ETF trades an average of 126 million shares per day with a marketcap of $111 billion. It's 52-week trading range is $107.43 to $148.11.

    Once again, the weekly chart appears ready to take a pause, and the daily is peering over the cliff looking down at support near $145.50 (or lower). The various index charts and the recently announced Fed's QE3 presents a unique challenge to reconcile the catalysts for market direction.

    The answer is gaining clarity, even with Bernanke refilling the punch bowl, the economy has become like other addicts wanting a fix; a tolerance is building. Physiologically this is the third shot and more money doesn't fix a problem that doesn't lack liquidity.

    I am not shorting the SPY yet, because I think there is a stock that offers a better risk vs. reward.

    AMZN Chart AMZN data by YCharts

    Amazon ( AMZN)

    Background: Amazon seeks to be the world's most customer-centric company, where customers can find and discover anything they may want to buy online. Amazon trades an average of 3.3 million shares per day with a marketcap of $116.6 billion.

    52-Week Range: $166.97 - $264.11

    AMZN Earnings Per Share Growth Chart AMZN Earnings Per Share Growth data by YCharts

    Analysts as a whole like this company. Currently, AMZN has 23 buy recommendations out of 33 analysts covering the company, 10 holds, and none of the analysts give a sell rating. The average analyst target price for AMZN is $266.26.

    I know this will come up in comments, so let me address this ahead of time. I shop and like Amazon (mostly), but that is not relevant to investing capital.

    AMZN Return on Equity Chart AMZN Return on Equity data by YCharts

    The trailing 12- month price-to-earnings ratio is 318, the mean fiscal year estimate price-to-earnings ratio is 337, based on earnings of 77 cents per share this year. It's just crazy and unsustainable. Even if we allow for the full next year estimate of $2.41 in earnings Amazon still carries a multiple of over a 100. That's 100 years of earnings to pay for one share.

    Take it one step further and give the company another double in earnings and round up to $5 a share for the following year. You still have an earnings multiple that requires an oxygen tank to breathe. To suggest Amazon is priced to perfection doesn't quite hit the mark; extreme perfection is required to have a glimmer of hope in this working out well.

    History has shown that stocks with earnings multiples over 20 don't perform as well as the overall market. Always the same story too: this time it's different and "disrupt" this and that and the other thing. In the end, the only thing that matters to investors is they make money. Playing musical chairs using the song "In-A-Gadda-Da-Vida" (17 minutes long) may create the illusion that laws of return on investment don't apply -- they do, but sometimes the market has a cruel sense of humor.

    AMZN Revenue Growth Chart AMZN Revenue Growth data by YCharts

    In 2007, the darling was Crocs ( CROX), in 2008 solar was to change everything, in 2009 and into 2010 it was education stocks, 2011 Netflix ( NFLX) was unstoppable. Is 2012 the year for Amazon, maybe or maybe not, but to argue it isn't going to happen is the same as arguing the earnings will rise from 77 pennies this year up to over $25 a share rather quickly. Good luck with that one, and remember "never confuse a bull market with brains".

    AMZN Operating Margin TTM Chart AMZN Operating Margin TTM data by YCharts

    I use Zacks.com, WSJ.com, Tradestation, and Reuters for my data. PE is generally adjusted PE based on an average number of shares.

    At the time of publication, the author was short Amazon.

    This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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