No Biases

We all have our thoughts on where we think the market is going.  They may be based on gut feelings or your mood or whatever.  That’s fine to have those thoughts because they are natural.  Just please don’t use them when you trade.  Take all the data that has helped you make money and use that to trade.  Even if you don’t like the answer.  Having a feeling about the market makes you begin to rationalize and rationalizing leads to losses.  Sometimes big losses.

Markets rally hard during bear markets.  15%-25% rallies are common.  The moves can be fierce.  The rallies can be convincing.  What we’ve done during this rally is not assume it’s a bear market rally just as we haven’t assumed it’s a bull market rally.  It’s simply a rally that has been pretty good.  Fundamentally, not much has changed.  But, there has been good participation, good volume, and a lot of demand.  But, that’s all we know at this point.  It’s been a rally.  Let’s not waste our time defining what type of rally.  It’s been a rally.  Our job is figuring out if the rally is over or not.  As of Friday, we had most stocks in pretty good uptrends.  In fact, there were too many stocks going up as a matter of fact.  That’s a contrarian indicator.  Secondly, we had the Dow Jones around 7900 which was the previous low for most of January and February.  So, a pullback isn’t a shock.  As I always say, we need to see the quality of the pullback.  So far, it’s been fairly sharp.  That doesn’t mean the rally is over.  But, when the market is overbought and it flinches, we have to jump.  That doesn’t mean running for the hills but I did sell some positions today “just in case”.  It’s called being prudent and not having a bias that the market will move higher. 

If this is just a pullback on the way up, there are plenty of stocks that still look good.  Raytheon (RTN) is a stock I’ve been watching for about a week and it held up very nicely today.  Also, I’ve been watching Baidu (BIDU).  If it’s really strong, BIDU will hold its 20-day moving average.  If not, you could see a move back down to $145. 

The good thing about sharp pullbacks is that it brings some fear into the market (also a contrarian indicator most of the time) and it brings overbought stocks back down to reasonable levels.  The percentage of stocks above their 40-day moving average on the NYSE has fallen back to 50% from 75% just a couple of days ago.  If it drops to 20% or so, we’ll be oversold again.  Markets nowadays move very quickly and you have to be nimble.  There are some positions I bought very recently that I had to sell today.  That’s trading.  That’s life outside the “buy and hold” world which is history. 

We’ll see what tomorrow brings but remain flexible and don’t have any biases.

More Government, Lower Prices?

Is it a coincidence that last week we rallied about 500 points on the Dow Jones after the government announced a plan that involved some incentives for investors?  Tim Geithner’s toxic asset plan involved getting private capital involved with such attractive terms, how could investors not want to get involved?  Is it a coincidence that today we dropped almost 300 points after the government announced it was essentially firing CEO Rick Wagoner from General Motors and putting in one of “their” guys?  Now, the government is running the automobile industry and the financial industry.  Just like we saw the market take a big leg down earlier in the year on government intervention, be prepared for another selloff as more of these types of announcements keep coming out.


1 Response to “No Biases”

  1. 1 Hedge Fund of One March 30, 2009 at 11:07 pm

    It is important to use caution, especially after such a run-up. Looks like some heavy hitters agree with you. On Monday, Morgan Stanley recommended that traders sell the current rally in the S&P 500 after calling it the “steepest” since the 1930s. And Goldman Sachs encouraged their clients to avoid “cyclical stocks” specifically.

    The last time that the government appointed “their guy” was when they inserted Liddy as CEO of AIG. Though they disagreed with his decision to pay bonuses, they could not demonize him because he was their guy. We see the continuing march of socialism as Obama blames only management of the auto manufacturers, saying specifically that their failure has not been the fault of the workers. Certainly, the failure of the U.S. auto industry has not been the fault of individual workers, unless you consider that they voted for and supported their UAW leadership, which had at least as much hand in the failure as management. I find it interesting that Obama did not call for the head of the UAW to step down, after they still did not allow enough concessions. And after all the billions of dollars and talk about how these companies could not be allowed to go into bankruptcy for the sake of the workers, what do we hear President Obama say? Something about everyone having to sacrifice, jobs having to be lost and maybe the companies having to go into bankruptcy. The $10s of billions would have been better burned on an ad campaign to persuade the U.S. public that that cars coming out of Detroit are of better quality than they are perceived to be. They could have hired Spike Lee as exec producer and mobilized liberal actors and musicians to do their patriotic duty to promote autos made in America.

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