A Speculative Bet on a Bounce

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Obama’s broadside against big banks, news that mounting opposition in the Senate could derail Federal Reserve Chairman Ben Bernanke’s reappointment, combined with growing nervousness about China, led to investors dumping positions. Nevertheless, this was an extreme move. During the past two decades, the S&P 500 has had three straight days in which it lost 1% or more only 28 times. That works out to an average of less than 1.5 times a year.

You were stopped out of your positions in iShares MSCI BRIC Index ETF (BKF) for a gain of 68.82%, SPDR S&P Emerging Markets Small Cap ETF (EWX) for a gain of 18.32%, and Market Vectors Brazil (BRF) for a loss of 2.91%. On the other hand, your two “diversifying” bets in the Global Bull Market Alert portfolio worked as advertised, with both the UltraShort Euro ProShares (EUO) and iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) rising on the week.

My own view is that this is a short-term hiccup. This week’s Global Bull Market Alert pick — Russia’s steel giant Mechel (MTL) — is a bet that global stock markets are set for a bounce.

And from a trading perspective, this is all about playing the odds. After the S&P 500 has had three straight days in which it lost 1% or more, it has posted an average return of 0.97% on the following day. And, it’s posted a positive return 65% of the time. Over the next week, the S&P has posted an average gain of 1.6%. And over the next month, that average gain has been 2.76%.

So based on this, I was tempted to recommend buying a double leveraged exchange-traded fund (ETF) like the Ultra S&P500 ProShares (SSO) or a triple leveraged UltraPro S&P500 ProShares (UPRO). But these leveraged ETFs have numerous problems owing to the way that the returns are calculated.

In contrast, Mechel (MTL) of Russia offers a volatile opportunity to play a strong bounce. You can find the fundamental case for Mechel in this Global Bull Market Alert, dated Sept. 28. Suffice it to say, that if global markets bounce strongly, you can expect MTL to bounce two to three times as much. Of course, the reverse is also true. So, this is not a pick for the faint hearted.

Buy Mechel (MTL) at market today, and place your stop at a relatively tight $18.50. That means that if I am wrong on this call, your downside should be relatively limited. I’m not recommending options on this pick, because the huge volatility in the stock has inflated the price of options to such a degree, that it would be tough to make money on the options even if Mechel bounces strongly.

Portfolio Update

China Yuchai International Limited (CYD) fell as China’s markets sold off. With the stock closing above its low on Friday, the strong fundamentals of CYD keep it at a BUY.

The iShares MSCI Chile Investable Market Index (ECH) also fell back last week. With its stop of $55.50 a ways off, ECH remains a BUY.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) pulled back last week. Technically oversold, Israel remains a BUY.

India’s ICICI Bank (IBN) experienced extraordinary buying support at the $35+ level, and did not hit its tight stop. Some big players must be seeing serious value in this stock. Nevertheless, I am keeping IBN at a HOLD.

UltraShort Euro ProShares (EUO) rose 4.2% this past week, proving its role as a diversifier in the portfolio. With this position having broken out on the upside, I am moving this bet against the euro back to a BUY. Tighten your stop to $18.00.

iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) hit a record high of $82.60 last Tuesday, and closed the week up 3%. With the sugar crisis still in full force, I am moving this position back to a BUY. Tighten your stop to $76.50.

Vimpel-Communications (VIP) dropped back slightly this week, though not exorbitantly so. I am keeping this bet on Russian telecoms a BUY.

P.S. I’ve scheduled a special private meeting for my subscribers of Global Stock Investor and Global Bull Market Alert on Friday, Feb. 5, at this year’s MoneyShow in Orlando, where I’ll reveal special techniques and "tricks of the trade" that I use in investing. This is the kind of hands-on training that I can only offer you in person. I’ll also discuss my secret technique for choosing customized exit prices, as well as an easy-to-implement formula on how much of each pick to buy to maximize your returns. I’ll also discuss where I think the biggest returns for 2010 will be found. Please join me at the Orlando Money Show, Destin room, on Friday, Feb. 5, from 3:30 to 4:30 p.m. by registering here.

P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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