Cutting Back on McDermott for Technical Reasons

This is purely a technical trade. I like McDermott (MDR) for the long run but prefer other names this quarter, so I am underweighting MDR for now. McDermott has been under the 50 day moving average for the past 2 weeks or so (under $53). In the past 3 day rally it's moved from $47 to $52, or a nearly 11% move. This now takes it to an important test of the 50 day moving average. This is how I normally always treat stocks in this position. When they get close to this resistance I cut back - from there the stock can either

1. fall back from resistance and sag
2. break through resistance and move upward

From a technical point of view, if the former happens then you made a good sale and you look for either a lower area to re-enter or simply wait for the stock to push back through this resistance area before buying - and if the latter happens the stock is technically in good shape and you can buy back the position you just sold.

Again, it might not make sense to those new to the market to buy at a higher level, but with so many investors in this world using technical levels to trade, you are simply riding the 'wave' if you will. If a stock clears an important hurdle such as the 50 day moving average, all these investors will latch back onto the story. If not, they won't buy. So you want to join when that buying power jumps into the stock. Otherwise you could be sitting on dead money for quite a while.

Compare this to a peer in the group with very similar fundamentals but far superior technicals, Foster Wheeler (FWLT). FWLT only very lately has even broached the 50 day moving average (fallen below it) and even then just barely, and only in the worst of the waterfall selloff. Then when we rebounded, the stock immediately surged back up over this level. So this is a stock the investment world favors right now, so this is a stock I want to be overweight in the near term.

The above thinking is an example of how I view most stocks - I want to own them when they are in good technical shape or very washed out (i.e. a Crocs in mid to upper 30s). The most dangerous place to own is right below a key technical level, because many times those stocks will fall or weaken further from level, costing you capital. There is your technical analysis 101. Again nothing is foolproof. If I am wrong on McDermott and the stock surges, I will be happy because I like the fundamentals in every stock I own in this fund - all I will need to do is buy above $53 - it costs me about 1.25% in return and commission costs if I am wrong. But if I am right it could save me much more by not being overweight if the stock just falls back. McDermott is now at $52.50 so it would not take much to get it back in good shape technically.

Another example of a stock exactly in the same place as McDermott is National Oilwell Varco (NOV) - great fundamentals, but technicals really broke down. The stock has since rebounded and is sitting right below its 50 day moving average - it could go either way from here (1) burst through upward or (2) sag back down. Probably the overall market health will determine this more than anything.

McDermott is now down to less than 1% of my portfolio.

Disclosure: Long McDermott and Foster Wheeler in fund; long Foster Wheeler in personal account

Comments

[Jake2]

Simplistic reasoning. The 50 day moving average is not the only technical indicator an investor should look at. There are many many more, as well as the fundies!

[TraderMark]

Hi Duke
I love the fundamentals, but this is a short term call. And yes it is simplistic - personally I think 95% of Technical Analysis is hocus pocus and over complicates thing. Many times the most simplistic analysis is the one that works. Simply using moving averages catches the majority of moves... for example of if using 1 indicator gives you 90% of the story, but using 12 indicators would give you 95% of the story - I don't see the reason to fuss over the other 11 indicators. The value add degrades quickly.

I like the fundamentals of every stock I own or consider. The technicals help to tell us if the 'rest of the market' is willing to like it as much... when MDR is moving back above its 50 day I will consider that a sign the market is getting back behind (what we both agree to be) a good fundamental story. Capital preservation is always job #1