Santeria, the three Qs of happiness, and a 402 percent gain

by Christian DeHaemer

Most investors base their trades on the speculative idea of a future increase in demand. They weigh risk and value and search for some factor that will make the shares go up. In other words, the traditional means of picking stocks is speculating that some future catalyst will push share prices higher. That catalyst can be better earnings, new technology, mergers, positive press, or any number of other events.

There is another way
The traditional method has some obvious pitfalls, since predicting the future is an imperfect art. Most pundits would tell you that market timing is a sucker’s game. And it’s true that most market-timers end up losing money because they base their buys and sells on the traditional methods of stock picking — combined, perhaps, with some Zen-like insight, or wax dripping patterns divining the will of Oshzn, the patron saint of money and sensuality.

That’s because most investors realize that the stock market, like any other market, is made up of supply and demand. What they don’t realize is that only supply is knowable.

Donald Trump bought five wives
Take the housing market in places like San Francisco or New York. Geography and bureaucracy limit the number of new homes available. At the same time, demand from people wanting the high-paying jobs in these areas is inexhaustible. Ergo, real estate prices are higher there than anywhere else in the country. Like Will Rogers said, “Buy land; they aren’t making any more of it.”

The stock market is different in that more shares are created all the time, but the basic forces at work are the same. Two years ago, the demand for shares in Internet companies was so high that it forced the market to create new shares. The market obliged — until the demand was met and surpassed.

“Flying V” supply indicator
In the chart below, the bottom indicator shows the number of new shares hitting the market based on lockup expirations. The top line is the NASDAQ.

The new supply of shares coming out of lockups hit an all time high in May of last year. 2.8 billion new shares hit the market in 23 trading days. That represented 6 percent of the daily volume. In June, the market took a nosedive. The same phenomenon occurred in January of this year, when 2.3 billion new shares came out of lockup.

Market timing is possible. If you know when the supply of shares in the market is going to change, then you can make predictions about whether the price of an equity will rise or fall. As the chart shows, the number of new shares hitting the market is set to dry up in June. This would suggest that we are in for a summer rally. And the time to start buying is May.

And just to be certain that I am correct, I have beheaded a chicken and spilt its blood on the altar of Olódùmarè, the “owner of heaven,” while offering praise for his bounty.

Buy the three Qs
The simplest means of benefiting from a summer rally on the NASDAQ is to buy the “triple Qs” (QQQ:AMEX). The triple Qs is a tracking stock for the NASDAQ 100 Index (NDX). It is a tool for buying the top 100 companies on the NASDAQ without actually buying a fund. There are also options available.

The 52-week low is US$33.59. In January of 2000, QQQ was at US$120. From the “Flying V” Supply Indicator, I wouldn’t be surprised if the NDX bounced back to its next major resistance level in the 2,500-2,700 range, which would represent a 56 percent gain over current levels.

Take a fryer
For those among you who want to take on more risk, try buying the 58 September Calls (QQQIF.X:AOE). According to the Black Scholes method, these options will be worth US$6.03 in late August. You can buy them today for US$1.20. That would be a 402 percent gain for those playing the game at home.

Be advised that out-of-the-money calls are a high-risk proposition. Don’t put down more money than you feel you can part with. And if these things are worthless in four months, I don’t want to get any emails telling me you lost Granny’s house and she is now living in your basement next to the sump pump.

That said, if you’re looking for a place to put that big tax return, then by all means buy the 58 September Calls. If you’re looking for a safer bet, simply buy the triple Qs for a projected 56% return over the next four months.

Now if I can just get these damn gizzard stains out of the carpet before my wife comes home...