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
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.
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.
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 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 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 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.