Thematic Trading

Brian Hicks

Updated November 3, 2009

Anyone would think the markets were suffering from an onset of schizophrenia by the way they’ve been acting lately.

One second, all is well. . . buyers line up to chase the recovery. The next, buyers are swimming for the exits in a sea of red ink.

Not exactly the kind of "confidence" you’d expect in a recovery, is it?

But while negativity is abundant, a bull market is never far away. . . and you can easily find it by using the three technical indicators I’ve written about before.

Or, by using themes.

I’m going to give you some examples. . .

Resolution Profits

It’s a seasonal phenomenon that many of us are all-too familiar with.

This year is likely to be no different, as millions head into the winter holiday season rummaging through our kids’ Halloween candy, anticipating the traditional Thanksgiving gravy and stuffing, and marking our calendars for December holidays and office parties. . .

The end of the year marks the time when we assess the pounds we’ve packed on from pumpkin pie and eggnog and start worrying about added "baggage" — and promise ourselves that next year will be different.

How do you profit from this predicable trend? You find the stocks, namely ones like (DIET), that have historically risen at the tail end of the year on New Year’s resolutions. The trick to playing this stock is to buy during mid to late November.

The stock should then rise as people begin promising themselves that next year will be the year for weight loss, and sign up for diet and exercise programs.

We haven’t noticed the same run in stocks like Weight Watchers or NutriSystem that we have with (DIET), though:

  • From around mid December 2003 to the start of 2004, DIET ran from about $3.50 to about $6.50.

  • DIET ran from $3.25 to $5.35 from mid December 2004 to the start of 2005.

  • It ran from $4.50 to about $8 between mid December 2005 and January 2006.

  • From mid December 2006 to the start of 2007, DIET sold off after an early November 2006 run.

  • And from the end of November 2007 to the start of 2008, DIET ran from about $4.60 to $6.

DIET is a seasonal — and very predictable — thematic mover, as you can see by most of the posted gains. Buy and hold.

Another way to trade themes is to watch the press. Take H1N1, for example. . .

H1N1: How to Live High on the Hog

It’s all about swine flu these days. Millions of kids have been out of school. Parents are calling out of work sick. People—unfortunately—have died. And multi-billion dollar industries are suffering.

Six months ago, fears that H1N1 might have originated at a Smithfield Foods (SFD) facility in Northern Mexico put the company in crisis mode. And the stock plunged until Mexico said there was no connection to Smithfield’s farms.

There is news that a pig at the Minnesota State Fair tested positive for H1N1 in preliminary tests. But while confirmation is still needed, the "easy money" trade may be to play the downside of stocks, like Smithfield (SFD), Tyson (TSN), and even Hormel (HRL), as this could easily cause panic in the pork industry.

It took only a few cases of mad cow disease to create a wave of panic in the beef industry years ago. Countries — including Japan — banned American beef imports and prices plummeted. And from what we’re seeing now, the damage is far from over. . .

Suffering like they haven’t suffered in years. . .

Things are so bad for pork producers that congressional leaders are drafting a letter to the U.S. Secretary of Agriculture, asking that he buy $100 million in pork for various federal food programs and take more emergency action to help the troubled industry.

Take a look at Smithfield again: The company had record sales of $12.5 billion last year. But thanks in part to H1N1 and high supplies of pigs, they lose an average of $23 on every pig sent to slaughter.

This loss has resulted in a $190 million loss for the year ending May 2009. Other companies are losing an average of $20 to $25 per pig.

Even hog-related commodities have come under pressure, based on fears that pork consumption can cause swine flu. Frozen pork belly futures fell close to 7% in recent months, thanks to swine flu.

So how do you profit from the swine flu theme? You play off the nation’s fears, and short pork-related companies like Smithfield (SFD).

Just imagine what could happen to the $15 billion pork industry bottom lines going into end-of-year holidays, in which pork is normally consumed in high volumes.

It could be bad. . . real bad.

But you can profit from it, even in this schizophrenic market.

Stay Ahead of the Curve,

Ian L. Cooper
Wealth Daily

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