I’ll be on Fox Business tomorrow morning at 8:10 & 8:30 a.m. CST & CNBC Asia at 6:10 p.m. live from the CME in Chicago.
Archive Page 2
I thought this morning we’d look at the market from a real simplistic view. We know since early May (2 months now), the stock market has been churning sideways. But, when you stand back and look at the charts, theres a few things that stick out.
The intensity of the rally has slowed quite a bit and you can tell that by the green line I’ve drawn under the S&P 500. That’s not a moving average but rather just showing you the slope of the rally changing. In addition, the volume continues to get weaker and weaker (especially going into a holiday weekend). It almost seems as though the investors that missed the rally are waiting for a pullback and the ones who did participate are now locking in profits or holding pat. We add to that the head & shoulders pattern developing. Combine this with tons of indicators I watch on the health of the market, I think we’re going lower. I think this will be the first real correction we’ve had. Therefore, I’ve been building a lot of cash and establishing a few short positions.
The first level could be 875-880 on the S&P. If we break that, we could be looking at the 800 level. Coincidentally, that would be giving back about 1/2 of the gains since March 9th. Not out of the question but certainly not something you or I would want to participate in. So, be cautious.
Many of you know I’ve been talking about I call “The Gap Trade” lately. This is where the fundamentals continue to improve but the technicals and stock prices continue to deteriorate. We all know that stocks aren’t every perfectly priced. They are usually over or under valued. It’s like a braid. The job investors have is determining when stocks are over or under valued, either by looking at the entire market or by each stock individually. Clearly in 2000, stocks were overvalued by any stretch of the imagination. However, they kept going up because sometimes something you know is overvalued continues to get more overvalued. Stocks were probably overvalued in 1996 but continued going up for several more years before they came crashing down, very similar to home prices in the past few years. Conversely, stocks were undervalued for several years prior to their early 1980s run. Eventually, the value (or the ridiculous overpaying for stocks) is recognized and the trend reverses.
More data that we follow confirms that indeed the economy continues to improve. In fact, ECRI is showing more improvement in their numbers for growth going forward as well. On Wednesday, durable goods orders came out better than expected and everyone was giddy in the morning because of it. That’s just the tip of the iceberg. The data that’s going to come out over the next few months will continue to astound people. ”How on earth can this data be real? Maybe it’s just a one month blip.” That’s what they’ll say. They won’t believe it. The consistency of the good numbers will begin to get stocks moving back up again though.
In the meantime, the gap will widen because the technicals are looking pretty pathetic. In fact, they’re getting so bad, that I actually initiated some short positions this week. I haven’t had short positions since late February. Most of these are hedges right now for the few remaining positions I keep in the portfolios. But, the rally yesterday was a perfect opportunity to initiate more shorts. The rally looked impressive but was anything but. Since May, the buying has been very lackluster, volume’s continued to weaken, the number of stocks participating in the rallies has weakened, and now the sellers appear to be awakening. If that picks up any steam at all, we could be looking at a quick 10% correction from these levels, especially when the window dressing ends on Tuesday. This will be the first up quarter for many portfolio managers in a while and they want to keep it that way. So, money makes its way into stocks propping up prices. On Wednesday, I’d look out below though. We have the potential to go much lower. Technically speaking, a head and shoulders is forming looking back to early May (left shoulder). This is another potential problem that could have prices falling in the next few weeks.
It’s hard to say how wide the “gap” will get. But, I think it’ll be big enough for us to make a lot of money over the next few months. But, to get from here to there, there may be some pain first and that’s why protection mode is called for right now. Let’s not give any gains back that we’ve worked so hard to get in 2009.
There are a few stocks worth going long for a quick trade. The ones I’m watching closely (and some I have options on) are Lowe’s (LOW), Big Lots (BIG), Verisign (VRSN), & Gamestop (GME). Again, these would be quicker trades.
Biz Radio Power Trading Workshop
On July 9th, Vince Rowe, nationally recognized trader & teacher will join me in San Antonio for an evening of learning and trading tips. We’ll be going over the investments that will actually make you money when inflation comes rolling along. In addition, Vince will show how & why stocks generally fall 3-6 times faster than they rise. What is the big money doing? He’ll show you. It should be a great evening and I’d love to meet you. Just go to www.bizradio.com to register or call 1-877-8BIZRADIO. It’s a FREE evening.
Biz Radio 1130AM Struck Down
I apologize for those in San Antonio. Our tower was struck by lightening multiple times on Thursday knocking out our signal. We’re hoping Monday morning, the transmitter will be replaced and we’ll be back on the air. In the meantime, you can stream the network at www.bizradio.com
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Not Looking Good
Published June 22, 2009 Commodities , Economy , Stock Market 2 CommentsTags: Economy
On June 11th, I wrote a blog piece titled “Unhealthy Reversal”. That was the beginning of of the sell off we’re experiencing right now. Over the past couple of weeks, I’ve been stopped out of a lot of positions. Selloffs are one thing, but a big pullback that makes everyone question the rally is another. A 2-3% pullback in the indices doesn’t scare anybody. But, when you see the indices fall 6-7% and look like they may fall further, that’s when real fear comes in. We’re beginning to see that now. And, that’s just the fuel we need to ultimately go higher.
When I wrote the unhealthy reversal article, I was already beginning to see some negative divergences building. Less and less stocks were participating, bigger volume on down days than up days, and many stocks were flashing red flags. Research In Motion (RIMM) was one that had a lot of red flags before it began going down and now we’re seeing the results. Even when you really believe things should be going up, the red flags mean you should put your stops in place or watch your positions carefully so you can exit quickly.
Everything that has been working all of the sudden isn’t. Those include commodities, emerging markets, technology, etc. That may be profit taking but I’m taking notice and doing the same. Run for cover and wait in the market is the prescription right now. Your charts show you that we’re right at the 50-day and 200-day moving average and the bulls are “hoping” we don’t break through. You & I, the smart money, are trading around. We’re not taking anything for granted. Based on such a crappy day today, I would suspect some sort of a bounce in the next couple of days, but the path of least resistance looks to be down for a while. This is where the opportunity will eventually be. The economy is improving. Since May 1st (ish), which is the level where the market resides today, the economy has improved quite a bit. You now are beginning to see the gap widen where economy keeps improving and the prices of stocks keep declining. I believe that gap will close over the next few months and prices will rise. For now though, don’t be a part of the pullback.
The same stocks & ETFs that lead us up since March 9th will lead us up again. But, that’s where the profits are so that’s where traders are locking in gains. Freeport McMoran (FCX) is a perfect example. The stock went from around $15 to a recent high around $60. A huge move. But, in a few short days, it’s down to $45. I think it falls to at least $40 before resuming upwards.
The Fed rate decision on Wednesday probably won’t tell us a whole bunch but that could be the next event that people blame as to why we’re going down. We’re going down because investors are ready to lock in some gains and wait for the next opportunity. I’m joining them.
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Part 1
http://www.cnbc.com/id/15840232?video=1156312476&play=1
Part 2
http://www.cnbc.com/id/15840232?video=1156317279&play=1
I’ll be on Fox Business this morning at 8:10 & 8:30 a.m. CST and also CNBC Asia this evening at 6:10 p.m.
Why Investing Is So Difficult
Published June 15, 2009 Money & Investing , Stock Market Leave a CommentTags: S&P 500
Today’s one of those days that makes you realize why investing is not a science. It’s more of an art. If it was a science, computers would make all the decisions and we could go play golf instead of look at tons of screens with flashing numbers and lines going all over the place.
The stock market has been humming along and it’s been pretty easy and methodical. There have been some warning signs as of late as we wrote in our weekly newsletter such as fewer and fewer stocks participating in the last couple of weeks, the reversal on Thursday, and of course that dreaded weak volume. But, as I’ve stated before, most of the things we’re currently worried about (like volume) are the same things we were worried about several weeks ago. However, we still can’t assume everything’s great and we’ll just keep moving up forever. So…we trade. We protect ourselves. Today, the market was down from the opening bell all the way to the close and almost all the volume on the NYSE was downside volume. The reason a day like today is so hard is because in just a moment, you have to abandon what’s been working lately and protect yourself. I sold a lot of positions today that as late as Friday I didn’t think I’d be selling. But, if you’re going to buy something, you better know when to sell.
During this entire rally, I’ve never called it a bull market. I think it’s been a longer term bear market rally based on improving fundamentals. I think ultimately that continues. But, I’m not going to watch positions fall and keep telling myself they’ll come back. Don’t take anything for granted. If we get a 10% correction, which we could easily get from these levels, many of the stocks you own will be down 15-20%. That’s painful. Remember that you’re not a pension fund, a mutual fund, or anybody else that has restrictions. You can buy, sell, change your mind, and buy again. Flexibility is the best tool you have.
There are two ways to approach this market. For those that are longer-term investors, averaging into this market is still the best strategy. For the money I oversee that does have some restrictions or has limited options such as 401-Ks, those portfolios are still in a heavier cash position and I’ve been averaging in over the past few months. For the portfolios that have all the options available to them such as a traditional brokerage account, those portfolios have more cash today than they did on Friday. I had several positions get stopped out today. Some were to protect profits and some were to cut losses. The bottom line is that stop losses can protect you. I don’t always use them, but when I do, I typically use conditional stop losses. They aren’t always exact price levels. But after analyzing the market this weekend, it became obvious that there has been some mild deterioration lately so we decided to put some tight stops on various positions. You start with what the market’s telling you and then you work down from there.
I still believe the economy will continue to improve, surprise investors, and that will lead to higher prices. But, my beliefs come in second place to market technicals and the mood of investors. If the technicals begin to break down and investors start running for the exits, we have to react. As far as those technicals, we’re still above the 20-day moving average and the 200-day moving average. The 50-day moving average looks to be a natural support area. That would be around 880-890 level on the S&P 500. If we don’t hold that, then we could be setting up for a much bigger correction.
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