Should Investors Trade Behind Big Money Managers?

Toni Turner |

Buying with the "smart money" has always been a popular approach for many investors. Yet, with money managers becoming more and more prominent as media personalities and larger-than-life characters, the piggybacking strategy certainly carries a significant amount of risk, especially when the market is approaching a potential top. In this week's interview with Toni Turner of TrendStar Trading Group, we discuss the pros and cons of trading on this type of catalyst, as well as other areas of the market that warrant attention right now.

EQ: There have been some interesting developments and storylines regarding major money managers over the past few months. Carl Icahn’s tweet sparking an Apple pop is the most recent, and of course, there’s the whole Herbalife saga. 13F filings are due this week. What are your thoughts on traders and investors trying to piggyback on these big money moves?

Turner: If an experienced trader can catch an updraft in stocks like Apple ($AAPL) and Herbalife ($HLF) that are fueled by big investors buying or shorting them like Carl Icahn or Bill Ackman, then I say go for it. Personally, I would only enter these positions as trades, and I would only enter them if they met my own personal set up criteria. We have a setup that works very well in Toni’s Market Club, and it’s very exact. So the companies involved would have to meet my fundamental criteria as well for me to want to trade them.

On top of that, I would have to be able to enter at an appropriate price because these types of stocks tend to take off once the news is out. I would trail a stock underneath the price move, and again, I would treat it as a trade. The trouble with these trades is if stocks propelled by this kind of news fall—and they do—many traders who get into them don’t have the experience to know when to take profits. If they meet unexpected headwinds, they can ultimately get crushed. You must  have discipline and experience to know how to trade the price action. Plus, I doubt that Icahn or Ackman are going to ring a bell and let traders know when they decide to sell these shares.

EQ: A good example of that would be the 13F filings, which is actually for the period ending on June 30. So there is a good month and a half of action that you just won’t know about.

Turner: Right, and that is the danger in that. I would only do it if it has fulfilled my criteria, and I would trade it as though I would not follow the news anymore, because you get too emotionally involved and you don’t know what these gentlemen are doing in the background.

EQ: And obviously their investment profile is nowhere near that of a typical investor. So it’s always good to know your own investment profile. Moving on to gold, it’s been seeing some action lately, and a couple weeks ago, you mentioned that gold miners and the Market Vectors Gold Miners ETF ($GDX) warranted some attention at around $26. Are you still watching this group right now or has that move run its course?

Turner: I am still watching it. The GDX rose nicely Wednesday, getting very near $29. It moved up because James Bullard, the President of the Federal Reserve Bank of St. Louis said that we can see high inflation in the future. The word “inflation” always has the power to send gold higher. I intend to hold the GDX as long as it stays in an uptrend on a daily chart, making higher highs and higher lows.

EQ: The iShares Russell 2000 Index ($IWM) has fallen below $104 on an intraday basis for the last several trading sessions but managed to close above that level. Is this group still treading on thin ice?

Turner: It is to me now, for a couple of reasons. Three of the top components in this group are CoStar Group Inc. ($CSGP), AthenaHealth, Inc. ($ATHN), and The Ultimate Software Group, Inc. ($ULTI).

When I want to track an ETF, what I typically do is keep an eye on the top three components, even though in this case they make up a very small percentage of the fund. If you look at all three of these components, they are really trading in nosebleed territory and may be ripe for a pull back.

Also, from a sector standpoint, the biggest holdings in the IWM are Financials, Consumer Discretionary and Technology. So we can keep an eye on those three sectors as well to get a hint of where it will go. If it breaks lower here, I can see it moving down to $102 to $100, which is right around the June highs. Also, right now we see the 14-day relative strength indicator (RSI) in a negative divergence, so I think that “thin ice” is a good description

EQ:  What sectors or industry groups stand out to you right now?

Turner: I am watching the iShares Dow Jones US Oil Equipment Index ($IEZ), I am only watching it. If the price of oil spikes, then I suspect that the IEZ will go higher. Right now, the volume is lacking as it is in so many other asset classes.

I’m also watching the PowerShares DB Agriculture ($DBA), which is taxed differently. This is a commodities-based ETF. If you trade it in your IRA, it won’t matter, but if you trade it in a traditional account then the taxation—although favorable—is different than that of an equities position. The top components in the DBA are live cattle, cocoa, soy beans and sugar. Those have come off an apparent bottom recently and, of course, if inflation is to go higher then this plays into that.


 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
HLF Herbalife Ltd. 48.16 -0.07 -0.15 342,288
ATHN athenahealth Inc. 95.23 2.82 3.05 664,176
AAPL Apple Inc. 109.67 0.18 0.16 15,930,110
ULTI The Ultimate Software Group Inc. 191.12 -4.28 -2.19 337,238
CSGP CoStar Group Inc. 182.05 1.76 0.98 174,246
SBOTD Stellar Biotechnologies n/a n/a n/a n/a

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