This article is about five short-term trade opportunities that will pay off very highly, in my opinion. The trades are based on the premise that the markets will have a relief rally as heavy macroeconomic and company specific data finishes. The feeling in the market will most probably be that the economic indicators and the European situation is quite bad, but since the stock market is still hanging around its highs, it should be headed even higher. In addition, the Spanish market, which is the main problem in Europe, has sold off quite considerably. While it is probably headed even lower in the medium term, it should be safe to assume that a short term bounce is way overdue on the oversold conditions. Any pick-up in the Spanish market will surely be interpreted as a relief on the European situation by the investors.
My trade suggestions to take advantage of the relief rally that I expect are below:
Morgan Stanley (MS): This stock has become completely detached from its fundamentals and has become almost a perfect proxy for the risk-appetite in the markets. It is also heavily influenced by the European situation as it is perceived that Morgan Stanley is more exposed to the European sovereign debt compared to its peers.
In case of a relief rally, however, Morgan Stanley will be quick to bounce to $18 -$19 and maybe even higher from the current $16.20 level it is trading as of this writing. That would make a very decent 15% profit in about 10 trading days.
EUR.USD (FXE) : My approach toward trading the EUR is that it will not languish. It will either crash down to the 1.22 level or it will experience a relief rally along with the stock market. It should be noted by investors that the percentage move in the EUR that I expect in case of a relief rally is smaller than what would happen with stocks. Therefore, investors need to lever up the EUR long positions to get a decent return. The EUR is a good buy at the 1.3110 level and my price target for it is 1.3410 which would amount to an approximately 2.5% profit. By levering up the position investors can make up to a 30% profit in about six trading days without taking on too much risk.
Green Mountain Coffee Roaster (GMCR) : The obvious reason to go long this stock is the oversold conditions. However, this is a stock that needs further analysis to trade. It is also in a medium-term downtrend and the long trade I suggest is only for a short-term bounce. I have written a more extended analysis of GMCR in a separate article which is below:
First Solar (FSLR) : This is a stock that is trading at a very reasonable valuation. In my opinion, that valuation buffer has started to show itself as the stock does not crash with the release of bad news anymore. My original buy-in target for FSLR is $15 but for investors who don't want to risk missing a relief rally in the stock, $18 is a very reasonable entry level.
LDK Solar (LDK) : This is also an important player in the solar sector, but it is much more levered up compared to First Solar. As a result, the upside move in LDK Solar would be much larger in case of positive investor sentiment toward the solar sector. My buy-in target for LDK is $2,60 but, as in the case of FSLR, investors can choose to buy around $2,95 if they don't want to risk missing a possible rally.
It should also be noted that all of these trades should be closed before late May 2012, as a market swoon led by a deterioration in the European situation is almost inevitable by then.