Where to Make Money in the Markets Today

So where to look to make money in today’s market?

What I often do is just look for extremes. I look for areas of the market where the rubber band seems stretched. These are usually good places to look for making money as you play the snapback of that rubber band. It doesn’t always work. Sometimes the rubber band breaks. But it’s a fairly reliable way to make good money in markets.

Today I have a few extremes that I’d like to set up for you. Each of them leads to a potentially profitable idea.

The First Extreme: Insider Sales.

I always troll the insider buys and sells. It’s a great place to get ideas. When I see a big insider lay down a big bet on his own stock, that usually makes me want to take a look at why. Insiders buy for only one reason: They think the stock is going to go up.

Insider selling is not as reliable. There are always more insider sales than buys. Insiders sell stock for all kinds of reasons – diversification, for example. They also typically get a lot of stock options, which they naturally cash in from time to time.

However, what we’re interested in is the extremes. We’re not interested in modest insider buys or modest insider sells.

Today, we see extreme selling. In fact, the ratio of insider sales to insider buys is over 30 times. Normally, a ratio of over 20-to-1 is seen as a bearish sign. A ratio of under 12-to-1 is bullish. It’s not a bad indicator – or at least it’s been pretty good this year.

Last time we had an insider sales ratio of over 30 times was in April, just before the markets went kaput for awhile. (The so-called “Flash Crash.”) Then the ratio went under 12 for long stretches during June through September. During this time the market has generally been rising.

In October, we had a spike in insider selling. This indicates that at least as far as insiders go, stocks look fully priced. I look over the insider sales and I see massive selling. At McDonald’s, six insiders sold $40 million worth of stock. At Netflix, five insiders dumped $36 million worth of stock. Other big sellers include two at AutoZone ditching $35 million, three at Safeway selling $27 million and five at EMC letting $24 million go.

I don’t know how investors can feel good about these names with so many insiders selling with such gusto.

On the other side of the ledger, we have a few insider buys. One that sticks out is Alfred Mann’s $5 million buy at MannKind, a biotech firm. According to Yahoo, MannKind, “a biopharmaceutical company, focuses on the discovery, development and commercialization of therapeutic products for diabetes and cancer.”

The ticker is MNKD. Mann is its 84-year-old, founder, CEO and chairman. He must really like the stock. Biotech is a bit out of my bailiwick, but the stock is worth looking into. Mann paid an average of $7.15, above the stock’s current price of $6.38. So you get a chance to buy at an even better price than Mann.

These ideas, by the way, simply come from looking at the insider transactions as reported by Barron’s every week. It’s a simple way to build an interesting list of names, as I discuss in my book Invest Like a Dealmaker: Secrets From a Former Banking Insider.

The Second Extreme: Volatility

The second extreme is the low volatility. The VIX, often called the “fear gauge,” is down 54% since May. This means investors are not very fearful. The VIX is a contrarian indicator – when it is low, that can mean investor complacency and foretell a bad spill. When it is high, investors are fearful and perhaps the market will rise.

Again, we’re interested in extremes. And it looks like volatility is very low. It hasn’t been this low since April. When the Flash Crash hit, the VIX soared. It nearly tripled in May.

So one way to play a rebound in the VIX is the through the iPath S&P 500 VIX Short-Term Futures ETN. The ticker is the VXX. And it is at all-time lows.

VXX iPath vs. S&P 500

Last time I mentioned this trade – on April 12, actually – the VXX rose more than 50% the following week. If you are worried the market is going to crack, the VXX is a way to gain a little insurance.

Third Extreme: Grain Prices

A lot of people are now hopping on the bandwagon that grains are going higher. We’ve been on this for at least a year. And they have already moved a great deal. My mind runs counter to the consensus. I train myself to do so. There is no money in following the crowd.

And so I am starting to think the best upside is not in the grains, but in the names that suffered the most while grains were rising.

I’m talking about the producers of meat.

In the short-term, say, for the rest of this year, I think the grains still have legs. There are already rumors that the USDA will have to revise downward (yet again!) its estimate for the corn harvest. The next report is due Nov. 9. We could see corn spike as it did on Oct. 8, the last time the USDA released its report.

While I think the environment supports higher-than-average grain prices, I doubt the soaring corn and wheat prices are sustainable. The prices of both grains have soared about 50% since the summer.

Prices like these will inspire a lot of planting for next year. Whether the crop actually hits the bins or not is beside the point. The news alone will drive grain prices down by the spring. That’s my guess.

The best bets to play the reversal are the meat producers, because grains such as corn, which they feed to their livestock, are one of their biggest expenses.

Since peaking in April, the shares of some of the biggest meat producers are down pretty hard. Tyson (NYSE:TSN), one of the biggest, is down 20%, for instance. And Pilgrim’s Pride (NYSE:PPC) is down 50%.

Corn Price vs. Pilgrim's Pride vs. Tyson Foods

“While all of us are concerned about higher grain prices and the uncertain economy,” CEO Don Jackson explains, “there are several encouraging signs heading into next year. Given the reduction in beef supply and the higher prices that are expected for beef and pork, chicken should be attractively positioned with consumers who are looking for the best value. As a result, many of our customers are planning to feature chicken more prominently on their menus or in their stores next year. We are already seeing an increase in food service demand for next year.”

Time will tell, but I like this play, and there’s lots of upside. The stock was $13 in April. It’s $6.70 today.


Chris Mayer
for The Daily Reckoning