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Window Watching

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In recent years, the end of March has been rough on stocks. Will next week buck the trend? Easter comes early this year; the market is closed next Friday ahead of the holiday. The end of March brings an end to the first-quarter, when money managers get their first opportunity of the year to disseminate quarterly performance reports to their shareholders. Depending on what money managers have been holding, the first-quarter could've been a good or bad one.

The first-quarter's best performing sectors include a lot of cyclical industries. The reasoning is obvious: the positive macro economic data has strengthened the belief that the economy is on the mend; cyclicals respond the quickest to the business cycle. Other performers, however, have included the relatively safe health care space and even the sexy semiconductors. Here's a breakdown of some of the better performing sectors through today's trading:

Sector         Performance QTD (%)
Airlines         (XAL.X)      19.3
Semiconductors   (SOX.X)      14.4
Health Care      (HMO.X)      13.4
Oil Service      (OSX.X)      12.6
Forest & Paper   (FPP.X)      10.0
Home Builders  ($DJUSHB)       9.2 

These sectors, among others, could be targets of end-of-month window dressing -- the practice by money managers of temporarily inflating stock prices near the end of a reporting period in an attempt to bolster performance. It's not an ethical practice; hell, it's illegal. But the end-of-month shenanigans by big money can be exploited by individual traders. Here's how it works:

Morrie The Money Manager is sitting on 1 million shares of KLA-Tencor (NASDAQ:KLAC). Morrie thinks to himself, "Self, my performance sure would be a lot better if KLAC were three points higher at the end of the quarter." Morrie continues, "I could use all that fresh money coming in from last minute IRA contributions to ramp KLAC next week." So Morrie, the big performer that he his, places aggressive orders for KLAC spread among several brokers over the next few days, creating an artifical imbalance in supply and demand.

Morrie is only one among thousands of money managers who has the ability to push stocks around into the end of a reporting period. Multiply one fund with a few million in capital sitting around by a magnitude of several thousand and you can begin to imagine the potential impact.

Like everything else in the market, playing the potential ramp into the end of a reporting period is by no means a sure bet. The market can be influenced by "bigger" things, such as earnings guidance, economic data, and geopolitical events.

We're not seeing much window dressing, or marking-up, in today's session from a macro standpoint; there are some micro mark-ups happening. There exists the potential for more macro buying going into next week's holiday-shortened session.

If you want to exploit such shenanigans, you need to use some simple relative strength analysis within the best performing sectors for the first-quarter. It's best to focus on just a few of the stronger stocks in the strongest sectors and use relatively smaller positions due to the risk involved.

If you don't find a good candidate from sector work, then you can turn to some of the best performing stocks in the first-quarter on a standalone basis. Take Expedia (NASDAQ:EXPE), for example, which was recently added to the Option Investor Call List on the premise of window dressing. The stock is by all means extended, but growing even more so today, due to what looks like a mark-up operation.

Eric Utley
Option Investor

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